The markets seem to be trading on hopes that the EU meeting scheduled for this weekend will work out a magical solution for the debt crisis plaguing the eurozone. If the eurozone has to stay intact and avoid any potential disintegration, a tighter European integration and greater stability in the region's financial system is considered essential. BNP Paribas is of the view that this calls for integrated oversight of the European banking system and the introduction of a deposit guarantee system.
In the meantime, the global economy is on track for a period of sub-par growth. Contagion threat is increasing in the eurozone, with Italy considered to be the next casualty of the debt crisis. Germany, the big brother of the region, has taken an intransigent stance. The biggest of the eurozone economies in no mood to relent to the frantic calls for euro bonds unless control with regional budgets is centralized. Since there is uncertainty about the degree of sovereignty, the eurozone nations are willing to give up, a fiscal union could remain only a pipe dream at least in the near to medium term.
Against the backdrop of trouble intensifying in the eurozone and the marked slowing of global growth, efforts should be initiated on war footing to prevent the return of the global economy to recession. The Fed did its bit by announcing last week an extension of its 'Operation Twist' program, though expectations were for much more radical measures. The markets are also fervently hoping for speedy and effective actions by Asian and European central banks.
Domestically, a survey conducted by the National Association of Home Builders released last week showed that its housing market index rose to a 5-year high of 29 in June from a downwardly revised reading of 28 in May. The present sales conditions index rose 2 points to 32, but the sales expectations index and the index measuring prospective buyer traffic remained unchanged.
Housing starts came in at a seasonally adjusted annual rate of 708,000 in May, while April's starts were upwardly revised by 27,000 to 744,000, the best reading since October 2008. Single family starts rose to a 5-month high of 516,000, while the volatile multi-family starts fell by 52,000. Building permits rose to 780,000, the highest level since September 2008.
A report released by the National Association of Realtors showed that existing home sales fell 1.5 percent month-over-month to a seasonally adjusted annual rate of 4.55 million units in May. Single-family home sales declined 1 percent, while condominiums and co-ops sales fell 5.7 percent. Inventories as measured by the months of supply rose to 6.6 months from 6.5 months in April. The median price of an existing home rose 7.9 percent year-over-year and were 5.1 percent higher compared to the previous month. First time buyers accounted for 34 percent of the total.
Meanwhile, the Philadelphia Fed's survey showed that the manufacturing sector in the region contracted at a faster rate in June. The manufacturing index fell to -16.6 from -5.8 in May. The new orders index declined 17.6 points2' to -18.8 and the order backlogs index moved down by 6.9 points to -16.3. The employment indexes were mixed, with the number of employees index rising 3.1 points to 1.8, while the average workweek index declined to -19.1 from -5.4. The inventories index slumped 13.2 points to -8.7. However, the 6-month outlook index rose 4.5 points to 19.5.
The FOMC statement released last week showed that the central bank assesses the economy having expanded moderately. The Fed acknowledged the slowing of employment compared to its view in April that labor market conditions have improved. The Fed also said household spending was rising at a somewhat slower pace than earlier this year.
The Committee decided to extend the Operation Twist program till the end of the year in a bid to put downward pressure on longer-term interest rates.
Updating its economic forecasts, the Fed lowered its GDP forecast and increased its unemployment rate forecast while also seeing slower inflation. The central tendency GDP forecast for 2012 was lowered to 1.9-2.4 percent from 2.4-2.9 percent and the unemployment rate forecast was upwardly revised to 8-8.2 percent from 7.8-8 percent. The inflation forecast was lowered to 1.2-1.7 percent. The growth estimates for 2013 and 2014 were also lowered. In the press briefing that followed, Ben Bernanke persisted with his assurance of additional stimulus if conditions warranted.
With the Fed decision now behind us, the focus shifts back to economic data in the unfolding week. The Commerce Department's new homes sales report for May, the National Association of Realtors' pending home sales index for May, the Conference Board's consumer confidence index for June and the revised consumer sentiment index compiled by the Reuters and the University of Michigan are among the market moving reports of the week.
Traders may also focus on the weekly jobless claims data, the results of the ISM-Chicago's manufacturing survey for June, the Commerce Department's personal income and spending report for May and the durable goods orders report for May. A few regional manufacturing indexes, the S&P Case-Shiller house price index for April, the final first quarter GDP report and the Treasury auctions of 2-year, 5-year and 7-year notes round up the economic events of the week.
The consumer sentiment index may have declined in June, as the softening of labor market conditions and volatile equity markets offset the optimism stemming from a retreat in gas prices. Additionally, the fluid global macroeconomic environment could also weigh on consumer sentiment.
Durable orders may have seen a rebound, as reflected by the new orders component of the Institute of Supply Management's national manufacturing survey. Excluding aircraft and defense orders, order growth may have been fairly decent. That said, BMO Capital Markets expects only modest growth in capital spending in the second quarter, in line with the trend in the first quarter, as the eurozone debt crisis is delaying new orders and business capital expenditure.
The Commerce Department is due to release its new home sales report for May at 10 am ET. The consensus estimate calls for new homes sales of 350,000.
New home sales rose 3.3 percent month-over-month to a seasonally adjusted annual rate of 343,000 units in April, while March's reading was upwardly revised to 332,000 units. Inventories rose 1.4 percent, while the months of supply fell to 5.1 months. Meanwhile, the median price of a new home rose 5 percent year-over-year and was 0.7 percent higher than in the previous month.
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 0.4 percent month-over-month increase in the 20-city composite house price index for April.
The Conference Board is scheduled to release its consumer confidence report for June 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 declined to 63.5 in June.
In May, the consumer confidence index fell to 64.9 from 68.7 in April. The expectations index declined 2.8 points to 77.6 and the present situation index fell 5.3 points to 45.9. The May survey showed that consumers' outlook for the labor market was also less positive.
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 0.4 percent increase in durable goods orders for May. Excluding transportation, orders may have risen 0.8 percent.
In April, the durable goods orders rose by a smaller than expected 0.2 percent month-over-month. Excluding transportation, orders were down 0.6 percent. Orders for general machinery, computers/electronics, computer-related, communications, electrical appliances all declined during the month. Non-defense capital goods orders, excluding aircraft, fell 1.9 percent.
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 1.2 percent in May.
The pending home sales index fell 5.5 percent to 95.5 in April. Economists had expected a modest increase.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended June 22nd at 10:30 am ET.
Crude oil inventories rose by 2.9 million barrels to 387.3 million barrels in the week ended June 15th. Inventories were above the upper limit of the average range.
Gasoline inventories edged up by 0.9 million barrels, remaining in the lower limit of the average range. Distillate stockpiles climbed by 1.2 million barrels and were in the lower limit of the average range. Refinery capacity utilization averaged 91 percent over the four weeks ended June 15th compared to 90 percent over the previous four weeks.
The Bureau of Economic Analysis is due to release its final estimate of first quarter GDP at 8:30 am ET. Economists expect GDP growth to be left unrevised at 1.9 percent.
Preliminary estimates revealed that GDP increased at an annual rate of 1.9 percent in the first quarter compared to the initial estimate of 2.2 percent growth. The downward revision to the pace of growth came in line with expectations.
The Commerce Department said the revision to the pace of growth reflected downward revisions to private inventory investment, state and local government spending and consumer spending as well as an upward revision to imports, which are a subtraction in the calculation of GDP.
The Labor Department is due to release its customary jobless claims report for the week ended June 23rd at 8:30 am ET. Economists expect claims to edge down to 385,000 in the recent reporting week.
Initial jobless claims fell to 387,000 in the week ended June 16th from an upwardly revised reading of 389,000 for the previous week. Meanwhile, the four-week average increased to 386,000 from 383,000, while continuing claims for the week ended June 9th remained unchanged. The fact that claims remained above 380,000 for four weeks now points to the slowing of the labor market.
The Bureau of Economic Analysis is due to release its personal income & outlays report for May. Economists expect the report, which is due out at 8:30 am ET, to show that personal income rose 0.3 percent, while personal spending is expected to have remained unchanged.
In April, personal income edged up by 0.2 percent in April following a 0.4 percent increase in March. Economists had expected income to increase by about 0.3 percent. Meanwhile, personal spending rose by 0.3 percent in April after climbing by 0.2 percent in March. The increase matched the expectations of economists.
The results of the Institute of Supply Management-Chicago's business survey for June are scheduled to be released at 9:45 am ET. Economists expect the business barometer index based on the survey to improve to 53.1.
The May survey showed that the ISM-Chicago's business barometer index declined 3.5 points to 52.7, marking the third straight month of declines and the lowest reading since September 2009. The production index fell by 7.1 points to 50, the new orders index slipped 4.5 points to 52.9 and the order backlogs index moved down about 10 points to 46.3. Additionally, the employment index slid 1.7 points to 57.
The Reuters and the University of Michigan's final report on the consumer sentiment index for June is scheduled to be released at 9:55 am ET. The consumer sentiment index is expected to be left unrevised at 74.1.
by RTT Staff Writer
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