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Economic data released over the past week was encouraging in the sense that they supported the 'stabilization' theme and precluded backsliding. The data coupled with the Federal Reserve's express move in raising the discount rate paved way to rampant speculation that rate hikes may not be far off. However, the Fed clarified that the announcement does not signal any change in its outlook for the economy or for monetary policy. According to the Fed, the revision, along with other modification in the terms of its discount window lending programs, was implemented due to the improvement in financial market condition.
BNP Paribas commented that the increase seems to be the first step towards normalization. The increase in the spread the discount rate has with the Fed funds rate is now widened to 50 basis points, giving the central bank more maneuvering room to set the rate of return on reserves that it wants at least through the transition period.
Among the other data released during last week, inflation readings were mixed. The producer price index rose 1.4% month-over-month in January, bigger than the 0.8% increase in the previous month. Much of the increase was due to an 11.5% jump in gasoline prices. Even after food and energy prices were excluded, core producer prices rose a larger-than-expected 0.3%. Despite the monthly spike, the core inflation rate was up only 1% year-over-year.
At the same time, consumer prices rose at a slower than expected rate. The headline consumer price index edged up 0.2%, while the core consumer price index rose fell for the first time in about twenty years, dropping 0.1% month-over-month. Consumer prices and core consumer prices rose at an annual rate of 2.6% and 1.6%, respectively.
Initial jobless claims rose to 473,000 in the week ended February 13th from 442,000 in the previous week. The four-week moving average, a statistic that flattens out week-to-week fluctuations in the data, slipped 2,000 to 467,500. Continuing claims remained unchanged at 4.563 million.
The manufacturing sector readings continued to be upbeat, with the Philadelphia Fed's survey showing that its headline-manufacturing index rose to 17.6 in February from 15.2 in January. The new orders surged up 19 points to 22.7 and the shipment index rose 8 points to 18.7.
The employment indices in the Philly Fed report were mixed. The number of employees index rose 1.3 points to 7.4, but the index of average work slipped to 1.9 from the month-ago's 4.2. The outlook index showed some pessimism about the future, slipping to 35.8 in February from 43.3 in January.
The New York Federal Reserve reported that regional manufacturing activity expanded at a faster than expected rate. The headline-manufacturing index rose to 24.91 in February from 15.92 in the previous month. The new orders and the shipment indexes declined 12 points and 6 points, respectively to 8.78 and 15.14. On a positive note, the inventories index rose to 0 from -17.3 in January and the employment index inched higher to 5.6 from 4.
Additionally, the leading economic indicators index compiled by the Conference Board continued to show improvement for the 10th straight month. The leading indicators index rose 0.3% month-over-month in January, although this represented the slowest increase in a 10-month winning streak. Out of the 10 components, 5 contributed positively to growth, with treasury yield and vendor performance being the biggest contributors. On the other hand, money supply, building permits and initial jobless claims were among the biggest negative contributors.
The housing market is in a stabilization mode. The National Association of Home Builders' housing market index rose 2 points to 17 in February. Economists had expected a more modest improvement to 16. The index measuring sales expectations rose 1 point to 27 compared to a 2 point-gain in the index measuring current sales conditions. The index measuring prospective buyer traffic remained unchanged at 12.
U.S. housing starts rose 2.8% month-over-month December following a 0.7% decline in the previous month, which represented a significant upward revision from the 4% drop estimated earlier. Apparently, the extension of the first time homebuyers' credit is supporting the housing market. However, building permits slipped to 621,000 from 653,000 in the previous month. When all is said and done, any recovery in the housing front will likely be modest at best, given the stimulus-dependent rebound we are seeing in residential construction.
Adding to the optimism, the Federal Reserve's industrial production report showed a 0.9% month-over-month increase in industrial output in January, better than the 0.7% increase in the previous month. Output by motor vehicle & parts industry increased by 4.9%. Excluding auto production, output was still up a solid 0.8%. Business equipment output rose 0.9%, extending the 1.2% growth in December. Mining as well as utility output increased by 0.7%. Capacity utilization rose to 72.6%, marking its highest level since December 2008, although off its high of 81.2% reported in August 2006.
Meanwhile, the minutes of the January FOMC meeting released last week suggested that the Fed did not see a perceptible difference in economic conditions in January. The FOMC members noted that the pace of inventory liquidation has slowed considerably. The minutes also revealed that Kansas City Federal Reserve President Thomas Hoenig had dissented due to his belief that the Fed should express an expectation that the fed funds rate would be low for some time rather than exceptionally low for an extended period. According to Hoenig, the change would give the Fed flexibility to begin raising rates moderately.
The unfolding week's calendar is dominated by housing reports that would help to unravel further the strength and the vulnerabilities of the sector, which has been thriving on the back of stimulus measures. Traders may keep a close watch on the National Association of Realtors' existing home sales report for January, the Commerce Department's new home sales report for January, the S&P Case-Shiller's house price index for December and the Federal Housing Finance Agency's house price index for December.
Federal Reserve Chairman Ben Bernanke's testimony before Congress and speeches by Fed officials are also likely to be on the radar, as market participants seek more clarity on the interest rate environment, especially after last week's increase in the discount rate. Traders may also pay attention to the Conference Board's consumer confidence index for February, the weekly jobless claims report, the results of the ISM-Chicago's manufacturing survey for February and the durable goods orders report for January. The series of announcements concerning Treasury auctions of 2-year, 5-year and 7-year notes could also be of interest to the markets.
Existing home and new home sales should see a rebound in January following steep declines in the previous month. The extension of the first-time homebuyers' credit may till April may have supported demand and in turn sales. That said, a sustainable recovery would materialize only when job growth kicks in and foreclosures peak.
Both the consumer confidence readings of the week may see a slight pullback, given the fact that equity markets turned hostile in February. However, the recent sharp declines in job losses should support the index in the near term.
Meanwhile, durable good orders are expected to show decent growth. Going by the regional manufacturing surveys, the industrial sector has been faring fairly well due to debilitated inventory levels, as manufacturers trimmed stocks to bring them in alignment with sales, and an upturn in exports. However, order growth in the transportation sector may have been weak due to a decline in orders reported by Boeing (BA).
Monday
San Francisco Federal Reserve President Janet Yellen is scheduled to speak at the University of San Diego at 10:30 AM ET.
Ben Bernanke is scheduled to appear before the House Financial Services Committee hearing on "Prospects for Employment Growth: Is Additional Stimulus Needed?" at 11 AM ET.
Tuesday
The S&P/Case-Shiller home price index, which tracks monthly changes in the value of residential real estate in 20 metropolitan regions across the U.S., is scheduled to be released at 9 AM. Economists expect a 3.1% year-over-year decline in the 20-city composite house price index for December.
The index declined 5.3% year-over-year in November, slightly worse than the 5% drop expected by economists. However, the decline was the smallest since September 2007. Four cities, Denver, Dallas, San Francisco and San Diego saw year-over-year gains.
The Conference Board is scheduled to release its consumer confidence report for February at about 10 am ET. The report, which is based on a survey of 5,000 U.S. households, is expected to show that the consumer confidence index rose to 55 in February.
The consumer confidence index rose to 55.9 from 53.6 in December, with the latest month's reading representing the highest level since September 2008. The present situations index rose about 5 points to 25, while the expectations index increased by 0.6 points to 76.
St. Louis Federal Reserve Bank President James Bullard will speak on regulatory reform to the Chartered Financial Analysts Virginia Society in Richmond, Virginia at 5 PM ET.
Wednesday
Bernanke is due to present his semi-annual monetary policy report to the House Committee on Financial Services at 10 AM ET.
The Commerce Department is due to release its new home sales report for January at 10 AM ET. The consensus estimate calls for an increase in new homes sales to 355,000.
In December, new home sales declined to a seasonally adjusted annual rate of 342,000 from an upwardly revised 370,000 rate in November. Economists had estimated new home sales of 366,000 for the latest month. Inventories measured in terms of months of supply rose to 8.1 from 7.6 in November, rising to the highest level since June 2009, while in absolute terms new home inventories fell to their lowest level since 1971. The median sales price of a new home declined 3.6% compared to the year-ago period, while it rose 5.2% from the previous month to $221,300.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended February 19th at 11 AM ET.
The oil inventory report for the week ended February 12th showed a 3.1 million barrel increase in crude oil stockpiles to 334.45 million barrels. Inventories remained above the upper limit of the average range.
Gasoline inventories also increased, rising by 1.7 million barrels in the recent reporting week, with stockpiles above the upper limit of the average range. However, distillate inventories declined by 2.9 million barrels, but were above the upper boundary of the average range. Refinery capacity utilization averaged 78.8% over the four weeks ended February 12th compared to 78.4% last week.
Thursday
Cleveland Federal Reserve Bank President Sandra Pianalto will speak to the Dayton Area Chamber of Commerce Government Affairs Breakfast at 8:35 AM ET. Bernanke will deliver the semi-annual monetary policy report before the Senate Committee on Banking, Housing and Urban Affairs at 9 AM ET.
The Commerce Department is set to release its durable goods orders report, which gives the value of orders placed for goods designed to last for more than 3 years, at 8:30 AM ET. Economists look forward to a 1.5% increase in durable goods orders for January.
In December, durable goods orders rose following two months of declines, rising 1% month-over-month. The bulk of the increase was due to a strong 6.6% increase in machinery orders. Shipments of durable goods climbed 2.8%, while unfilled orders slid 1%. Inventories edged down 0.2%.
The Labor Department is due to release its customary jobless claims report for the week ended February 20th at 8:30 AM ET. Economists expect a decline in claims to 460,000.
First-time claims for unemployment benefits unexpectedly increased in the week ended February 13th. Initial jobless claims rose to 473,000 from the previous week's revised figure of 442,000. The increase came as a surprise to economists, who had expected jobless claims to edge down to 438,000 from the 440,000 originally reported for the previous week.
The Federal House Finance Agency-FHFA is set to release its house price index for December at 10 AM ET. The index is a weighted, repeat-sales index, which measures average price changes of single-family houses in repeat sales or refinancings on the same properties.
In November, the index rose 0.7% month-over-month following a revised 0.6% increase in the previous month. Economists had expected a more modest improvement of 0.2%. On a year-over-year basis, the Federal Housing Finance Agency's house price index increased 0.5%.
Bullard is also scheduled to speak to an economic forecast luncheon at Texas A&M University-Texarkana at 12.30 PM ET.
Friday
The Bureau of Economic Analysis is due to release its preliminary fourth quarter GDP report at 8:30 AM ET. The report is likely to show that the U.S. economy expanded at a 5.7% rate in the quarter.
Advance estimates showed that U.S. GDP rose at a better than expected annual rate of 5.7% in the fourth quarter compared to the previous quarter. Economists had expected a more modest 4.7% GDP growth. The growth was the biggest in about six years.
The increase in GDP reflected positive contributions from private inventory investment, exports and personal consumption expenditures. Consumer spending rose at a 2% rate and a smaller rate of decline in inventories contributed notably to growth.
The results of the Institute of Supply Management-Chicago's business survey for February are scheduled to be released at 9:45 AM ET. Economists expect the business barometer index based on the survey to come in at 59.
In January, the business barometer index rose to 61.5 from 58.7 in December. The production index rose 2.4 points to 66.6 and the new orders index increased 2 points to 66.4. The index of order backlogs also climbed, advancing 2.3 points to 54.3. Reflecting the pick up in pace of inventory rebuilding, the inventories index rose about 10 points to 48.7. The employment index increased 12.2 points to 59.8, rising to its highest level in about 5 years.
The Reuters/University of Michigan's final report on the consumer sentiment index for February is scheduled to be released at 9:55 AM ET. The consumer sentiment index is expected to be revised up to 74 from the mid-month of reading of 73.7.
The National Association of Realtors is scheduled to release its report on existing home sales for January at 10 AM ET. Economists estimate existing home sales of 5.45 million for the month.
Existing home sales fell 16.7% month-over-month to a seasonally adjusted annual rate of 5.45 million units in December compared to 6.54 million units in November. Economists had estimated a more modest decline to 5.90 million units. Inventories as measured by months of supply rose to 7.2 months from 6.5 months. The median sales price of an existing home rose 1.5% year-over-year and moved up 4.9% month-over-month to $178,300.
Chicago Fed President Charles Evans and Fed Governor Daniel Tarullo are due to speak at an annual U.S. Monetary Policy Forum in New York.
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