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The New Year has dawned with new hopes of seeing the economy cruise along a path of sustainable growth. That said, the road leading to sustainable trend-like growth isn't likely to be smooth, given the prudence that central banks have to exit from ultra-loose monetary policies embraced in the aftermath of the financial crisis in order to avoid more asset bubbles. A hasty unwinding of stimulus measures puts the fledgling growth at risk. Therefore, it is imperative that all concerned should exercise utmost care to safeguard the economy, as it emerges slowly and steadily out of one of the most severe recession since the Great Depression.
Although central banks may relinquish ultra low interest rates, they may still hold firm to accommodative monetary policy conditions, as a sharp upward revision to interest rates may lead to undesirable headwinds such as currency appreciation and reduced policy traction in asset markets.
Morgan Stanley forecasts 4% global growth in 2010, with emerging economies leading the way with 6.5% growth, while advanced economies such as the U.S. are expected to tread along with a much more muted recovery. The developing economies are apparently reaping the benefit of a rebalancing towards domestic demand-led growth. In contrast, the G10 economies comprising the advanced economies are likely to show 2% growth, as credit and job markets take more time to normalize.
That said, the Federal Reserve may not have much leeway to maintain interest rates at the current extremely low levels. Rising inflation expectations and the narrowing of slack in the economy will force the Fed to rethink their strategy in the middle of 2010. According to Morgan Stanley, the central bank will implement exit strategies in two stages, first by beginning to drain reserves when asset purchase programs end and secondly by raising fed funds futures rate in the third quarter.
Even as deliberations around exit strategies have become loud, things are still hazy. Last week, the ISM-Chicago's manufacturing survey revealed that its index of manufacturing activity rose to 60 in December from 56.1 in November, with a reading above 50 indicating growth in the sector. The increase came as a surprise to economists, who had expected the index to edge down to a reading of 55.1. A turnaround in employment contributed to the improvement in the sector, with the employment index jumping to 51.2 in December from 41.9 in November.
Housing market data corroborated the upward momentum in the economy. The S&P Case-Shiller survey showed that the 20-city home price index fell 7.28% year-over-year in October, with the decline coming in line with expectations and slowing from the previous month. All 20 regions showed year-over-year price declines, while 7 out of the 20 regions saw monthly gains.
Meanwhile, consumers seem to be warming to the idea of a turnaround in economic conditions. The Conference Board's survey revealed that the consumer confidence index rose to 52.9 in December compared to a revised reading of 50.6 in November. The expectations index rose 5.3 points to its highest level since December 2007, while the present situation index slipped 2.4 points to its lowest level since February 1983. Reflecting soft labor market conditions, those that said jobs are plentiful fell to the lowest level since December 1982.
After two weeks of fairly light news flow on the economic front, action picks up on Main Street, with several key first-tier economic reports scheduled to be released in the unfolding week.
With the tidings from the job market turning out to be less downbeat, traders are now reconciled to the idea of seeing a slow and steady improvement in labor market conditions. Against this backdrop, the week's monthly non-farm payrolls report, weekly jobless claims report and the ADP's private sector employment survey assume importance. Additionally, traders may also stay focused on the employment components of the Institute for Supply Management's national manufacturing and non-manufacturing surveys.
The results of the ISM's manufacturing and services sector surveys for December, the National Association of Realtors' pending home sales index for November, the results of the Treasury auctions of 3-year notes, 10-year notes and 10-year Treasury Inflation Protected Securities all due to be announced at 11 AM ET on Thursday and 30-year bonds (due to be announced at 9 AM ET on Thursday) are likely to offer additional clues about how the economic environment is panning out.
Traders may also pay attention to the Fed speeches scheduled for the week and the minutes of the December FOMC meeting to be released on Wednesday. The construction spending report, the factory goods orders report and the wholesale inventories report all for November and the Federal Reserve's consumer credit report for November are also likely to be on the radar.
Services activity is expected to have rebounded in December, helped partly by improving freight activity and the continued positive momentum in the financial markets. Consequently, the ISM's non-manufacturing index is likely to move back into expansion territory.
The positive data points from the labor market have increased hopes for a cessation in the job losses that began in January 2008. That said, the unemployment rate could continued to be elevated for some time, as the workers who had previously given up on job search are likely to come back to the labor force when they see the improvement in the market.
Monday
The results of the manufacturing survey of the Institute for Supply Management, which are based on data compiled from purchasing and supply executives nationwide, are due out at 10 AM ET. Economists expect the index to show a reading of 54 for December.
The manufacturing sector expanded at a slower pace in November, with the manufacturing index falling to 53.6 in November from 55.7 in October. Economists had expected a more modest decline to 55. The production index fell to 59.9 from October's 63.3, but the new orders index rose 1.8 points to 60.3.
Although the employment index fell 2.3 points to 50.8, it remained in expansion zone for the second straight month. The inventories index continued to decline, showing that there was no respite from destocking.
The Commerce Department's construction spending report to be released at 10 AM ET is expected to show a 0.5% decline in spending for November.
Construction spending remained unchanged in October from the previous month. A 0.3% increase in private construction spending was offset by the 0.4% slippage in public construction spending. In the private category, spending on residential construction climbed 4.4% compared to a 2.5% drop in spending on non-residential construction.
Atlanta Federal Reserve Bank President Dennis Lockhart is scheduled to speak on government crisis response to the American Economic Association conference in Atlanta at 10:15 AM ET.
Tuesday
Individual automakers are scheduled to release their monthly U.S. sales results for the month on Tuesday. The data will reveal the unit sales of domestically produced cars and light duty trucks, including sports utility vehicles and mini-vans, during the month.
The Commerce Department is due to release its report on factory goods orders for November at 10 AM ET. Orders for manufactured goods are likely to have increased 0.5% in the month.
Durable goods orders, which make up the bulk of factory goods orders, rose 0.2% month-over-month in November, with the increase helped a 3.7% surge in orders for computers and electronic products. Excluding transportation, orders climbed 2%. Shipments of durable goods rose 0.3%, but unfilled orders fell 0.7% and inventories edged down 0.2%. On a positive note, shipments as well as new orders of non-defense capital goods orders rose during the month.
Data on Pending Home Sales, which is a leading indicator of housing market activity released by the National Association of Realtors, is due out at 10 AM ET. A pending sale is one in which a contract was signed but not yet closed. Normally, it takes four to six weeks to close a contracted sale. The index is expected to show a decline of 3% for November.
The pending home sales index rose 3.7% month-over-month in October to its highest level in about three and a half years. Economists had estimated a 1% drop. Barring the West, where the index fell 11.2%, the remaining three regions saw strong gains. Annually, the index was up 28.6%.
Wednesday
The ADP National Employment report, which sheds light on non-farm private employment, is scheduled to be released at 8:15 AM ET. The report is usually released two days prior to the Labor Department's employment report. The private sector is expected to have lost 75,000 jobs in December.
The ISM is scheduled to release the results of its non-manufacturing survey at 10 AM. The non-manufacturing index is likely to show a reading of 50.5 for December.
The November non-manufacturing index fell to 48.7 from 50.6 in October. Economists had estimated an increase in the index to 51.5. The business activity index slipped below the '50' level to 49.6, down 5.6 points, while the new orders index edged down 0.5 points to 55.1. The order backlogs index declined 5 points to 48.5 compared to a 0.5 point-slippage in the employment index to 41.6.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET.
In the week ended December 25th, crude oil inventories fell by 1.5 million barrels to 326 million barrels, although they were near the upper limit of the average range for this time of the year.
Gasoline inventories edged down by 0.3 million barrels, but yet remained above the upper limit of the average range. Distillate inventories also fell, dropping by 2 million barrels. Despite the decline, inventories remained above the upper boundary of the average range. Refinery capacity utilization averaged 80.3% over the four weeks ended December 25th compared to 80.2% in the previous week.
The Federal Reserve is scheduled to release the minutes of its December 15th-16th meeting at 2 PM ET.
The FOMC statement released last month following the end of a 2-day meeting did not show any significant change. The central bank retained its assessment that economic activity has continued to pick up, while it turned modestly positive on the labor market. The Fed commented that the deterioration in the labor market is abating. The Fed dropped its reference to businesses cutting staff and noted reluctance on the part of the firms to add to payrolls.
As expected, the Fed maintained its stance of keeping interest rates at extremely accommodative levels for an extended period.
Thursday
The Labor Department is due to release its customary weekly jobless claims report for the week ended January 2nd at 8:30 AM ET. Economists expect claims to have increased to 445,000 in the recent reporting week.
Jobless claims fell to 432,000 in the week ended December 26th from the previous week's revised figure of 454,000. The decrease came as a surprise to economists, who had expected jobless claims to edge up to 460,000 from the 452,000 originally reported for the previous week.
Continuing claims, which measure the number of people receiving ongoing unemployment help, also continued to decline, falling to 4.981 million in the week ended December 19th from the preceding week's revised level of 5.038 million.
Kansas City Federal Reserve Bank President Tom Hoenig is scheduled to speak on the economic outlook at the Central Exchange in Kansas City at 1 PM ET.
Friday
The Labor Department is scheduled to release its monthly non-farm payroll report at 8:30 AM. The report sheds light on the number of paid employees working part time or full time in the nation's business and government establishments, the number of hours worked in the non-farm sector, the basic hourly rate for major industries and the number of unemployed as a percentage of the labor force. Economists estimate that the U.S. economy neither added nor lost jobs in December, although they look for a slight uptick in the unemployment rate to 10.1%.
The U.S. economy lost 11,000 jobs in November, notably lower than the 111,000 jobs shed in the previous month. . Economists had estimated a loss of 114,000 jobs. October's job loss was initially estimated at 190,000.
In November, the servicing providing sector added 58,000 jobs, with professional and business services sector adding a total of 86,000 jobs. There was an addition of 40,000 jobs by the education and health services sector. The goods producing sector lost 69,000 jobs, weighed down by job losses in the manufacturing sector, which shed 41,000 jobs.
At the same time, the unemployment rate edged down to 10% in November from 10.2% in October. Average hourly earnings rose 0.05% to $18.74.
The Commerce Department is due to release its wholesale inventories report at 10 AM ET. Economists expect wholesale inventories at the end of November to show a 0.3% decline.
Wholesale inventories at the end of October were up 0.3% compared to the 0.5% decline expected by economists. The increase was supported by a 1.5% increase in inventories of non-durable goods, while durable goods inventories acted as a drag, dropping 0.4%. At the same time, business sales rose 1.2%, leaving the inventory-to-sales ratio at 1.16 compared to 1.17 in September.
Richmond Federal Reserve Bank President Jeffrey Lacker is due to speak to the Maryland Bankers Association "First Friday" Economic Outlook Forum in Baltimore at 1:35 PM ET.
The U.S. Federal Reserve is expected to release its monthly consumer credit report at 3 PM ET. Consumer credit for November is likely to show a decline of $5 billion.
Consumer credit outstanding fell by $3.5 billion to $2.483 trillion yen in October. September's decline was revised to a drop of $8.8 billion from the $14.8 billion decline estimated initially. Revolving credit slipped by $7 billion, while non-revolving credit rose by $3.4 billion. The continued drop in consumer credit outstanding reflects tighter lending standards, consumers' desire to pay down debt and the moderate pace of consumer spending.
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