It’s a busy week ahead and two hours before Monday’s opening bell investors are optimistic.
Dow futures are up 41 points to 10,058 and S&P 500 futures are up 4.25 points to 1,074.75. Commodities are also higher with WTI Crude oil up 30 cents to $73.19 per barrel and Spot Gold trading 85 cents higher at $1,081.70.
Key Events This Week:
Monday:
8:30 ― The Personal Income & Spending report is expected to show both categories continuing to rise in December while inflation remains benign. Income, after rising o.3% in October and 0.4% in November, is expected to post a 0.3% gain. Consumption should also see a boost in the 0.3% range, a slower pace than the 0.6% advance in October and the more recent 0.5% increase. Meantime, the Fed’s preferred rate of core inflation is set to rise a tame 0.1%, following a flat reading in November.
“Consumer demand is picking up momentum,” said economists from BBVA. “The trend could be explained by personal income, which has risen over the past five months and is expected to increase again in December. Nevertheless, upward wage pressures are expected to be low due to ongoing weakness in the labor market. As a result, PCE is expected to recovery at a moderate pace.”
10:00 ― The influential ISM Manufacturing index, which gauges manufacturing growth across the nation, is set to advance for the sixth consecutive month in January with a score of 55.0 (anything above 50 suggests growth). Regional reports have generally been positive this month and the forward-looking new orders component hit 65.5 in December. Economic forecasts range from 54.0 to 57.0, according to analysts polled by Bloomberg.
“The headline index has been broadly steady over the past three months, after rocketing from a low of 32.5 in December 2008 to 55.2 in October,” noted Ian Shepherdson from HFE. He argues that recent strength in new orders implies that other components will now be in catch-up mode, which should help the headline rise to 56.5. That being said, he also thinks the index gives too much emphasis to big business and overstates gains in the economy.
Economists from IHS Global Insight said the key components to watch are exports and inventories ― major contributors to GDP growth last quarter.
“The ISM score for December inventories was still underwater at 43, and export orders cooled a tad to 54.5; solid readings for both would be a major plus for the outlook,” they added.
10:00 ― Less closely watched is the Construction Spending report, which is anticipated to see a 0.5% cutback in December due to cold weather issues and large overhang and supply. The December levels follow a 0.6% loss in November, but if previous months are any indication that could be revised.
Economists at IHS Global Insight said to expect single-family home spending to be flat and all other categories to be in decline.
“Nonresidential construction and multifamily construction will be in the red, and single-family construction, which posted strong gains during June through November, will be flat,” they wrote. “Government construction might eke out a small gain. Altogether, we project that construction spending dropped 0.8% in December.”
Ian Shepherdson from HFE said should the report not be published at all.
“In recent months the revisions to the data have been so big that the initial estimates for any given month are more or less useless,” he said. “All we can with any confidence is that the underlying trend in non-residential construction spending is now massively downwards, while housing activity has been supported in recent months by the first-time buyer tax credit.”
Treasury Auctions:
- 11:30 ― 3-Month Bills
- 11:30 ― 6-Month Bills
Tuesday:
10:00 ― Pending Home Sales are currently 15.5% above previous years levels even after the index dropped 16% in November. The decline was a result of the surge in previous months owed to the government tax credit for first-time home buyers, which was then extended to April 30, 2010.
“The original November 30th expiry of the first-time home buyers tax credit had a huge dampening impact on housing activity (check out the recent data on new and existing home sales along with the homebuilders’ and mortgage bankers’ indices),” said economists at BMO Capital Markets.
“The announced extension and expansion of the credit was apparently no match for the powerful pull-forward effect. This was probably the case for pending home sales as well; we expect them to drop 1.6% in December (note that the consensus call is for a slight increase).”
10:00 ―Tim Geithner, Treasury Secretary, testifies before the Senate Finance Committee on the 2011 budget. He is joined by former Fed chairman and Obama advisor Paul Volcker, who will be addressing regulations to high-risk bank activities.
Treasury Auctions:
- 11:30 ― 4-Week Bills
Wednesday:
8:15 ― The ADP Private Employment Survey should be an important look-ahead at what kind of results should be expected in Friday’s official government report. Last month the report posted a loss of 84,000 private jobs, the smallest number March 2008. This month the number should be lower but is not expected to be positive. The official numbers on Friday, however, should show overall growth because unlike ADP the BLS numbers include growth in the public sector.
“Our forecast for a decline of 40k in private nonfarm employment implies a decline of about 90k in ADP payrolls,” wrote analysts at Nomura Global Economics, who are more pessimistic than the consensus. “The ADP measure of job growth has underestimated the BLS count by an average of 84k per month over the last six months.”
10:00 ― The ISM Non-Manufacturing index, which covers services, construction, and finance, has been less impressive than its cousin manufacturing index. To start the new decade the index is anticipated to see a 51.0 score, just one point above the breaking point for growth. In December the index rose 1.4 points to 50.1.
Economists at BBVA imply that like the ADP survey, this release could have an impact on predictions for the month’s employment report.
“While the goods producing industry is leading the recovery in output, the services sector is leading that of employment. An increase in activity could indicate further improvement in the employment situation,” they said.
1:00 ― Federal Reserve Governor Kevin Warsh delivers a speech on regulatory reform to the New York Association for Business Economics.
Thursday:
8:30 ― The Jobless Claims report has been disappointing in recent weeks as the four-week moving average has actually gone up for the past two weeks, most recently by 9,500 to 456,250. Initial claims averaged 456k in the past four weeks, only 4k lower than the 460k in December. Earlier the downtrend had been much clearer, as seen by recent monthly averages: 481k in November, 524k in October, and 549k in September.
Economists from Nomura explain that recent data has been unreliable: “Initial jobless claims took a surprising turn in mid-January when an under-staffed processing center in California belatedly filed claims that built up over the holiday season.”
Going forward they expect the distortion “to gradually fade from the data, with claims falling by 10-15k per week over the next few weeks.”
A sustained pace below 400k is consistent with overall labor growth in the economy.
8:30 ― With GDP rising nearly 6% in the final quarter of the year, it should be no surprise that that Q4 Productivity & Costs report is expected to show productivity rising 7.0%, with some estimates looking for a figure as high as 8.1% ― the rate seen in Q3. Unit Labor Costs, meanwhile, are set to decrease 3.8% following a 2.5% cutback in Q3.
“As demand rises, businesses are taking advantage of their existing labor force to handle the additional inflow, rather than hiring new workers, thus increasing productivity,” said economists from BBVA. “Furthermore, the productivity growth is helping to keep labor cost low, which is one of the assumptions behind our baseline expectation of low core inflation in 2010.”
Economists from IHS Global Insight that the prior two quarters have seen spectacular productivity gains, but those rates won’t be sustainable as labor growth returns to the market.
“While these spectacular increases are cyclical, they are stronger than what we have seen in previous recoveries,” they said. “Going forward, productivity will decelerate significantly as companies ramp up their hiring. The strong productivity reading will result in labor costs falling 4.8%”
8:30 ― The seldom-noticed Factory Orders report is expected to rise 0.3% in December after posting a 1.1% gain in November. Estimates are based on the durable goods report which saw a 0.3% increase.
“Non-durable inventories could be a source of revisions to Q4 GDP growth,” said analysts from Nomura.
Friday:
8:30 ― The month’s most important economic release, Nonfarm Payrolls, may once again disappoint. The consensus from economists is a cautious zero (that is, no growth or decline is expected.) But estimates range from 40k losses to a gain of 75k jobs. The report follows the disappointing 85k loss in November and the slight gain in October.
“The oscillating behavior between job loss and job gain, which is typical at turning points in the labor market, is an encouraging sign that consistent jobs growth will be here soon,” said Ellen Zentner, senior macroeconomist at BTMU.
Meantime, most analysts are expecting the Unemployment Rate to tick up one-tenth to 10.1% in January due to technical differences between the household employment numbers and nonfarm payrolls.
3:00 ― Consumer Credit took a nosedive in November, contracting by $17.5 billion in the month to mark the 10th straight subtraction. The month’s decline is the largest drop on record and a rebound isn’t expected just set.
“In general, US households are still deleveraging and we expect outstanding consumer credit to continue to dwindle for some time,” said analysts from Nomura.
The consensus for consumer credit to shed another $8.4 billion in December, in large part because of revolving credit.
