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Domestic Strength Vs. Overseas Worries


Late 2011 ushered in a defining point for the U.S. economic recovery, with almost all macroeconomic indicators pointing to a recovery that is slowly and steadily getting entrenched. Consumer spending, the labor market and manufacturing and non-manufacturing conditions are all seeing revival. However, the woes are far from over. It is very tough to maintain the momentum, given the debt turmoil in Europe and the prospects of normalizing interest rates domestically after enjoying the stimulatory impact of near zero interest rates for quiet some time.

Europe for sure can now be described as a millstone around the neck of the global economy. Despite numerous attempts by European leaders to resolve the debt crisis, a solution proves elusive. According to BNP Paribas, the financing needs, including debt redemption and deficit funding, for European Monetary Union countries will be around 1.7 trillion euros in 2012. The firm is of the view that the region's GDP will contract by 0.4 percent sequentially in the fourth quarter. The fiscal consolidation and the ongoing efforts to reduce private sector credit will strain growth throughout 2012.

Meanwhile, the U.S. labor market recovery is on the right track, with most indicators vouching for the fact. Last week, the all important non-farm payrolls report showed that the U.S. economy added 200,000 jobs, while the unemployment rate based on the household survey ticked down to 8.5 percent, the lowest since February 2009.

However, there are some areas of concerns too. State Street Advisors noted a drop in temporary hiring, considered a precursor for overall hiring, for the first time since June. Additionally, the firm noted that rapid hiring in couriers and messaging boosted service sector hiring, which it views as unsustainable.

The ADP private sector employment report released earlier last week showed a solid 325,000 increase in private non-farm payrolls, marking a record gain. The service providing sector added 273,000 jobs compared to a more modest 52,000 jobs added by the goods producing sector.

The Institute for Supply Management said its manufacturing purchasing managers' index rose to 53.9 in December from 52.7 in November. The index was at the highest level since June. The new orders index rose 1 point to 57.6 and the order backlogs index climbed 3 points to 48, while the production index was up 3.3 points to 59.9. The employment index also increased by 3.3 points to 55.1.

Meanwhile, the service sector survey for December showed that the sector continued to expand at a slightly faster rate. The non-manufacturing index rose to 52.67 in December from 52 in November. The business activity index remained flat at 56.2 and the new orders index edged up 0.2 points to 53.2, while the order backlogs index slipped 2.5 points to 45.5. The employment index, though up 0.5 points to 49.4, suggested a contracting job market.

A Commerce Department report showed that construction spending increased by 1.2 percent in November, although the previous month's 0.8 percent growth was downwardly revised to a 0.2 percent drop. Private sector construction sending rose 1 percent compared to a steeper 1.7 percent increase in public sector construction spending.

Additionally, the Commerce Department said factory goods orders rose 1.8 percent month-over-month in November. Orders, excluding transportation, were up 0.3 percent.

The minutes of the December FOMC meeting showed that the central bank will further enhance its communication strategy, with the FOMC agreeing to include in its quarterly summary of economic projections for the first time members' projections of appropriate future monetary policy.

Consumer spending data, Beige Book, the weekly jobless claims report and a host of Fed speeches are likely to lend color to an otherwise muted economic calendar of the unfolding week. The Commerce Department's retail sales report for December, which encompasses the key holiday selling season, the Reuters and the University of Michigan's preliminary consumer spending report for January and the Beige Book are among the key economic reports traders are likely to focus on.

Traders may also sift through the several Fed speeches scheduled for the week, the results of the Treasury auctions of 3-year and 10-year notes and 30-year bonds and the Commerce Department's trade balance report for November. The Federal Reserve's consumer credit report for November, the Commerce Department's wholesale and business inventories reports both for November, the Treasury Budget for December and the Labor Department's import and export prices for December round up the economic events of the week.

The retail sales report for December is expected to reinforce the vibrancy of consumer spending, given the improvement seen in the labor market and consumer confidence. Unless the uptick seen in the job market becomes sustainable, retail spending growth may slacken in 2012, as most consumers have fallen back on their savings to finance their holiday season spending. BMO Capital Markets estimates that the core retail sales that strips off autos, food, gasoline and building materials may have risen 0.2 percent.

The Beige Book could emphasize on the uneven growth that has come to be characterize the recovery. According to BMO Capital Markets, ongoing worries about Europe, a decelerating global economy and the payroll cut squabble in Congress may have weighed down on sentiment.


Atlanta Federal Reserve Bank President Dennis Lockhart is due to speak on the economic outlook to the Rotary Club of Atlanta at 12:40 am ET.

The U.S. Federal Reserve is expected to release its monthly consumer credit report at 3 pm ET. Consumer credit for November is expected to show an increase of $7.6 billion.

The outstanding consumer credit rose $7.7 trillion or 3.7 percent in October, with revolving credit edging up 0.6 percent and non-revolving credit climbing 5.3 percent.


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 0.5 percent increase.

Wholesale inventories rose 1.6 percent in October, notably higher than expectations for a 0.4 percent increase.

San Francisco Federal Reserve Bank President John Williams will speak to Clark County Economic Forecast breakfast in Vancouver, Washington, followed by media roundtable at 10:30 am ET.

Kansas City Federal Reserve Bank President Esther George is scheduled to speak on the economic outlook at the Central Exchange in Kansas City at 1 pm ET.


Chicago Federal Reserve Bank President Charles Evans will speak to the Rotary Club of Lake Forest and Lake Bluff, Illinois at 8:40 am ET. Lockhart is due to speak on the economic outlook to the Georgia Center for Nonprofits in Atlanta at 9 am ET. Additionally, Philadelphia Federal Reserve Bank President Charles Plosser is scheduled to speak on the economic outlook to business leaders in Rochester at 12:30 pm ET.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended January 6th at 10:30 am ET.

Crude oil inventories rose by 2.2 million barrels to 329.7 million barrels in the week ended December 30th. Inventories were in the upper limit of the average range for this time of the year.

Distillate stockpiles increased by 3.2 million barrels, remaining in the middle of the average range. Gasoline inventories also increased, rising by 2.5 million barrels and remaining above the upper limit of the average range. Refinery capacity utilization averaged 84.8 percent over the four-weeks ended December 30th compared to 85.5 percent over the previous four weeks.
The Federal Reserve is due to release its Beige Book, a compilation of anecdotal evidence on economic conditions from each of the 12 Federal Reserve districts, at 2 PM ET. The report is normally released about two weeks before the monetary policy meeting is held.


The Labor Department is due to release its customary jobless claims report for the week ended January 7th at 8:30 am ET. Economists expect claims to edge up to 375,000 from 372,000 in the previous week.

The jobless claims report for the week ended December 31st showed that the number of individuals claiming unemployment benefits fell by 15,000 to 372,000. The previous week's reading was upwardly revised to 387,000 from 381,000. The four-week average was at 373,300, the lowest level since mid-2008. Continuing claims for the week ended December 24th edged down to 3.60 million.

Retail sales of food and retail companies with one or more establishments that sell merchandise and associated services to final consumers are slated to be released at 8:30 am ET. For December, economists estimate a 0.4 percent increase in retail sales as well as the retail sales that exclude autos.

Retail sales rose 0.2 percent month-over-month in November compared to an upwardly revised 0.6 percent increase in October. Excluding autos, retail sales were up by a similar magnitude. Gasoline sales fell 0.1 percent compared to a 0.4 percent drop in October. The core retail sales that exclude autos, gasoline and building materials rose 0.2 percent.

Electronic and appliance store sales were up 2.1 percent and sporting goods sales also rose 0.3 percent. However, sales of food and beverage, health and personal care and building material and garden equipment all declined.

The Commerce Department is scheduled to release its business inventories report for November at 10 am ET. The report summarizes the results from the monthly retail trade, wholesale trade and factory goods orders surveys. The report is expected to show a 0.5 percent increase in business inventories for the month.

Business inventories rose a better than expected 0.8 percent month-over-month in October. Business sales increased 0.7 percent. The business inventories to sales ratio was at 1.27 compared to 1.29 in the year-ago period.

The Treasury Budget, a monthly account of the surplus or deficit of the federal government, is due to be released at 2 PM ET. The budget is considered an indicator of budgetary trends and the thrust of fiscal policy. Economists expect a deficit of $79 billion for December compared to a deficit of $137.3 billion for November.


The trade gap data for November is due out at 8:30 am ET. Economists estimate that the trade gap widened to $45 billion in the month. The trade gap measures the difference between imports and exports of both tangible goods and services.

U.S. exports of goods and services were estimated at $179.2 billion for October, a 0.8 percent drop from September levels. However, imports fell by a full 1 percent to $222.6 billion, resulting in a decline in the trade deficit to $43.5 billion, 1.6 percent below the revised September deficit of $44.2 billion.

The export & import price indexes for December, which gives the changes in the prices of non-military goods and services traded between the U.S. and the rest of the world, are due out at 8:30 am ET. The consensus estimates call for a 0.1 percent month-over-month increase in import prices and a steeper 0.3 percent increase in export prices.

Reversing the drop in prices seen in the three previous months, U.S. import prices rose by 0.7 percent in November following a 0.5 percent decrease in October.

Most economists had predicted that import prices would rebound, though the consensus had forecast a larger 1.2 percent increase. Prices for U.S. exports ticked up slightly, rising by 0.1 percent following a steep 2.1 percent drop in October.

The preliminary report of the Reuters/University of Michigan's consumer sentiment survey for January is scheduled to be released at 9.55 am ET. The consumer sentiment index is expected to rise to 71.5 from December's 69.9.

Richmond Federal Reserve Bank President Jeffrey Lacker will speak to the Risk Management Association of Richmond on the economic outlook at 12:45 pm ET.

Evans will also speak to the Indiana Bankers Association on the economic outlook, in Carmel, Indiana at 1 pm ET.

by RTTNews Staff Writer

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