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Growth Hitting A Soft Patch?


Economic fears worsened last week, with the release of incremental negative data raising the specter of a soft patch. That said, there were some promising pieces of economic evidence too. Surprisingly, consumers continued to be resilient, while the housing and job market recoveries have seemingly become sour. Economists are now bracing for a modest slowdown in growth in the first quarter. Along with the domestic setback, the simmering European debt concerns are also weighing down on market sentiment.

Housing market readings released last week were bordering on the negative. The National Association of Home Builders reported that its housing market index unexpectedly fell 3 points to 25 in April, marking the first drop since September 2011 and the biggest decline since June 2011. The current sales conditions index slid to 26 and the future sales expectations index declined 3 points, while the index measuring prospective buyer traffic declined a steeper 4 points.

Existing home sales unexpectedly fell 2.6 percent month-over-month to an annualized rate of 4.48 million units in March. Sales of single-family homes declined 2.5 percent compared to a 3.8 percent drop in condominium and other multi-family home sales. Inventories fell 1.3 percent in absolute terms to 2.37 million units, while inventories measured in terms of months of supply held steady at 6.3 months. The median price of an existing home rose 5.3 percent to $163,800.

Meanwhile, the housing starts report was mixed. Housing starts fell a steep 5.8 percent month-over-month in March to a seasonally adjusted annual rate of 654,000 units, dragged down by a 16.9 percent plunge in multi-family starts. Starts are now at their lowest level since October 2011. Meanwhile, building permits unexpectedly jumped 4.5 percent to 747,000, the highest reading since September 2008.

Consumers are apparently alive and kicking. U.S. retail sales rose 0.8 percent month-over-month in March, according to a report released by the U.S. Commerce Department. Even after auto sales were excluded, sales were still up 0.8 percent. Electronics and appliance sales growth quickened to 1 percent, while furniture and home furnishing sales rose 1.1 percent, reversing the 1 percent drop in February. Gas station sales growth slowed to 1.1 percent from February's 3.6 percent.

Excluding autos, gasoline and building materials, retail sales rose a healthy 0.5 percent. The month may have been benefited from the early Easter holidays this year.

Manufacturing activity seems to be losing momentum. The results of the New York Federal Reserve's manufacturing survey showed that its general business conditions index fell to 6.6 in April from 20.2 in March, marking the lowest reading since November 2011. The new orders index was little changed at 6.4 and the order backlogs index fell 6 points, while the shipment index dropped 12 points to 6.4. While the employment index rose 6 points to 19.3, the average workweek index slid 6 points to 19.3. The future business conditions index declined 4 points to 43.1.

Also, the Philadelphia Federal Reserve's survey showed that its diffusion index of activity in the sector fell to 8.5 in April from 12.5 March, while economists had expected a more modest decline to 12. The new orders index slipped 0.6 points to 2.6 and the shipments index fell by 0.7 points to 2.8. The employment indexes were mixed, with the number of employees index rising 11.1 points to 17.9, while the average employee work week index declined 5 points to -2.3. Meanwhile, the future business conditions index rose about a point to 33.8.

The Federal Reserve's industrial production report was a disappointment. U.S. industrial output was flat in March compared to the previous month. Manufacturing output fell 0.2 percent, while production by the mining and utilities industries rose 0.2 percent and 1.5 percent, respectively. Capacity utilization edged down slightly to 78.6. Construction supplies, tech equipment and consumer durable output all weakened from the month-ago levels, while motor vehicle and parts production rose 0.6 percent.

A Commerce Department report showed that business inventories rose 0.6 percent in February. Business sales were up 0.7 percent. The business inventories to sales ratio remained steady at 1.28 compared to the year-ago period.

Meanwhile, the Conference Board's leading economic indicators index rose 0.3 percent month-over-month in March, the sixth straight months of gains. Building permits, higher stock prices and lower jobless claims supported the index. The coincident economic index was up 0.2 percent and the lagging economic index advanced 0.3 percent.

The FOMC meeting is likely to headline the economic events of the unfolding week, as traders anxiously await the Fed's view on the recent turn of economic events and the central bank's economic outlook.

The Commerce Department's new home sales report for March, the National Association of Realtors' pending home sales index for March, April consumer conference readings based on separate surveys by the Conference Board and Reuters and the University of Michigan, the durable goods orders report and advance first quarter GDP estimates are among the other economic reports that could draw attention.

The S&P Case-Shiller house price index, the Federal Housing Finance Agency's house price index, the Labor Department's employment cost index for the first quarter and the Treasury auctions of 2-year, 5-year and 7-year notes round up the economic events of the week.

The FOMC statement is unlikely to see much alteration, with the central bank expected to reiterate its view of soft growth. At the same time, the Fed is unlikely to signal any further quantitative easing, given its rationale that additional stimulus is warranted only if labor market deteriorates further.

Meanwhile, the Conference Board's consumer confidence index may see a small dip, given the volatile financial market performance in the wake of the recent soft data point. BMO Capital Markets expects deterioration in the current situation index, while the expectations index may hold up.

The GDP growth for the first quarter is set to see a slowdown from the 3 percent pace seen for the fourth quarter. Fairly robust consumer spending, the recent improvement in the housing market and trade could have supported growth, while public spending is expected to remain weak. Additionally, the end of accelerated bonus and depreciation allowance may have impacted spending on machinery and equipment.


There are no important economic reports due out on Monday.


A 2-day FOMC meeting is scheduled to begin on 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 seasonally adjusted 0.1 percent month-over-month increase in the 20-city composite house price index for February.

The index fell a seasonally unadjusted 0.8 percent in January. However, after adjustments, house prices were flat. On a year-over-year basis, house prices were down 3.8 percent.

The Commerce Department is due to release its new home sales report for March at 10 am ET. The consensus estimate calls for new homes sales of 318,000.

New home sales unexpectedly fell for the second month in February, declining by 1.6 percent to a seasonally adjusted annual rate of 313,000. This represents the lowest level since October.

Inventories measured in terms of months of supply rose to 5.8 months in February from 5.7 months in January. That said, the median sales price of a new home rose 8.3 percent month-over-month to $233,700.

The Conference Board is scheduled to release its consumer confidence report for April at 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 dipped to 69.7 in April.

The consumer confidence index declined 1.4 points to 70.2 in March from an upwardly revised reading for February. The expectations index slipped 4.6 points to 83, while the present situation index rose 4.6 points to 51.

The Federal House Finance Agency, or FHFA, is set to release its house price index for February 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. Economists expect a 0.1 percent month-over-month increase in the house price index after prices remained unchanged in the previous month.

The Richmond Federal Reserve's manufacturing index due to be released at 10 am ET is expected to see a 1-point increase to 8 in April.


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 expect a 1.5 percent drop in durable goods orders for March. Excluding transportation, orders may have risen 0.4 percent.

In February, durable goods orders rose 2.4 percent month-over-month, reversing from a 3.5 percent drop in January. Transportation equipment orders climbed 3.9 percent. With Boeing (BA) reporting 53 commercial aircraft orders for March compared to 237 for the previous month, expectations for durable goods orders for the month of March is muted.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended April 20th at 10:30 am ET.

Crude oil stockpiles rose by 3.9 million barrels to 369 million barrels in the week ended April 13th and remained in the upper limit of the average range for this time of the year.

Distillate inventories fell by 2.9 million barrels and were in the middle of the average range, while gasoline stockpiles declined by 3.7 million barrels but remained in the upper limit of the average range. Refinery capacity utilization averaged 84.7 percent over the four weeks ended April 13th compared to 84 percent over the previous four weeks.

The Federal Open Market Committee, the monetary policy-setting arm of the Federal Reserve is due to release the post-meeting policy statement at 12:30 am ET followed by the release of the FOMC forecasts at 2 pm ET. Chairman Ben Bernanke will address a press briefing at 2:15 pm ET.

The post-meeting policy statement released following the March meeting noted a moderate expansion in overall economic activity, further improvement in labor market conditions and a notable drop in the unemployment rate. The central bank also made a reference to rising crude prices while discussing inflation. The Fed's assessment of economic growth over the coming quarters was upgraded to 'moderate' from 'modest.'

As expected, the central bank maintained the fed funds target rate at 0-0.25 percent and repeated its intention to maintain rates at exceptionally low levels at least until 2014. The Fed also expressed its commitment to continue with its asset purchase program.


The Labor Department is due to release its customary jobless claims report for the week ended April 21stat 8:30 am ET. Economists expect claims to decline to 375,000 in the recent reporting week.

Unemployment claims for the week ending April 14 came in at a seasonally adjusted level of 386,000.That marks a 2,000 decline from the previous week's revised level of 388,000 new unemployment claims. Most economists had expected the level of new claims to fall from even the initially reported figure to a level of 365,000 for the week ending April 14.

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 have risen 1 percent in March.

The U.S. pending home sales fell 0.5 percent month-over-month in February, while economists had been expecting a 1 percent increase. Pending home sales were lower in all regions except the Mid-west. Meanwhile, pending home sales were about 9.2 percent higher than a year ago.


The Bureau of Economic Analysis is due to release its advance estimate of first quarter GDP at 8:30 am ET. Economists expect the GDP growth of 2.5 percent for the quarter.

Fourth quarter GDP increased at an annual rate of 3.0 percent, unchanged from the previous estimate and in line with economist estimates. The GDP growth in the fourth quarter still reflects a notable acceleration from the 1.8 percent growth seen in the third quarter.

The Labor Department is scheduled to release its report on the employment cost index for the first quarter at 8:30 AM ET. Economists expect a 0.5% in the index for the quarter.

In the first quarter, the employment cost index rose 0.4 percent sequentially, with wages and salaries making up 70 percent of compensation costs increasing 0.4 percent and benefits making up 30 percent of compensation rising 0.6 percent.

The Reuter and the University of Michigan's final report on the consumer sentiment index for April is scheduled to be released at 9:55 am ET. The consumer sentiment index is expected to be upwardly revised to 75.8 from the mid-month reading of 75.7.

by RTTNews Staff Writer

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