The quirky reaction of the markets to stimulus announcements from the central banks last week reflected their pessimism that growth could get back on track with these measures. Their deductions are not ill founded. Given the fact that the eurozone is the epicenter of the current crisis plaguing the global economy, a 25 basis point cut in interest rate by the European Central Bank is seen only as a symbolic gesture and is unlikely to bring about any material change in the lending habits of banks.
According to BMO Capital Markets, the key to unlock the debt crisis is to further action to strengthen competitiveness and restore public finances among the peripheral eurozone nations. The firm believes that Germany may not agree to eurobonds or additional German subsidization until it sees substantial market reforms such as privatization of state-controlled enterprises, flexible labor markets etc.
Meanwhile, the rate cut announced by China last week is not seen as a one-off measure. More easing could follow in the form of further interest and bank reserve requirement cuts. Inflation data released earlier today also supports the cause for further monetary policy easing. The annual rate of consumer prices fell to a 22-month low of 2.2 percent in June compared to 3 percent in May.
Domestically, the economy is not a bed of roses either. The non-farm payrolls report released last week showed that the economy continued to add jobs at an anemic pace for the third straight month in June. The private sector added merely 84,000 jobs, marking the weakest performance since August 2011. If the labor market does not show a sustainable uptick, there is the danger of the unemployment rate spike from its already elevated level.
Meanwhile, the ADP report released ahead of the non-farm payrolls report showed that the economy added a better than expected 176,000 private jobs in June. May's increase was upwardly revised by 3,000 to 136,000.
The results of the Institute for Supply Management's national manufacturing survey showed that manufacturing conditions activity contracted in June. The manufacturing purchasing managers' index slipped to 49.7 in June from 53.5 in May. The new orders index declined sharply to 47.8, marking the weakest level since April 2009, and the order backlogs index fell by 2.5 points to 44.5. The production index also slipped, dropping 4.6 points to 51, and the employment index edged down 0.3 points to 56.6. Of the 18 industries surveyed, 7 industries reported growth and 2 reported little change, while the rest contracted.
Meanwhile, the firm's service sector index fell to 52.1 in June from 53.7 in May, marking the lowest level since January 2010. The business activity index slipped to 51.7 from 55.6 and the new orders index also declined about 2 points to 53.3. The order backlogs index slipped into recession zone, dropping 5.5 points to 47.5. On the other hand, the employment index rose 1.5 points to 52.3.
At the same time, construction spending rose a better than expected 0.9 percent month-over-month in May, while annually, construction spending was up 7 percent. Private construction spending rose 1.6 percent month-over-month compared to a 0.4 percent drop in the spending on public construction. Among private construction, spending on residential construction climbed 3 percent and spending on non-residential construction improved a more modest 0.4 percent.
The onus of offering clarity on the economic outlook now falls on the unfolding week, as the past week's economic data left traders increasingly apprehensive. The focus is likely to be on the weekly jobless claims data, the Reuters and the University of Michigan's consumer sentiment survey and the minutes of the June FOMC meeting.
Traders may also closely watch the Commerce Department's trade balance report for May, the Labor Department's produce prices report for June, the Federal Reserve's consumer credit report for May and some Fed speeches scheduled for the way. Treasury auctions of 3-year and 10-year notes and 30-year bonds, the Commerce Department's wholesale inventories report for May, the Labor Department's import and export price indexes for June and the Treasury Budget for June round up the economic events of the week.
The trade balance report is expected to show a narrowing of the deficit in May, given the increases in new export order components of the Institute for Supply Management's manufacturing and non-manufacturing surveys. At the same, lower oil prices and slacker consumer spending may have impacted imports. However, the export strength may be tested in the near future due to the uncertainties surrounding the global economic outlook.
The FOMC minutes may also draw some attention, as traders could evince interest in the options the monetary policy committee of the Federal Reserve could have discussed before deciding on extending 'Operating Twist.'
San Francisco Federal Reserve Bank President John Williams is scheduled to speak to the Oregon, Idaho and Nevada Bankers annual joint convention at 11:55 am ET.
The U.S. Federal Reserve is scheduled to release its monthly consumer credit report at 3 pm ET. Consumer credit for May is expected to show an increase of $8.5 billion.
U.S. consumer credit rose by $6.52 billion or 3 percent in April, with a $10 billion increase in non-revolving credit helping to offset a $3.4 billion drop in revolving credit.
St. Louis Federal Reserve President James Bullard is due to deliver the OMFIF Golden Series Lecture, in London.
The trade gap data for May is due out at 8:30 am ET. Economists estimate that the trade gap narrowed to $48.7 billion in the month. The trade gap measures the difference between imports and exports of both tangible goods and services.
In April, the U.S. exported $182.9 billion worth of goods and services, while imports were tallied at $233 billion, resulting in a trade deficit of $50.1 billion. Revisions to March figures put the trade deficit for that month at $52.6 billion, somewhat wider than the $51.8 billion initially reported. Total exports for April fell by 0.8 percent from March levels, while overall import levels dropped by 1.7 percent.
The Commerce Department is due to release its wholesale inventories report at 10 am ET. Economists expect wholesale inventories at the end of May to show a 0.3 percent increase.
U.S. wholesale inventories increased by a more than expected 0.6 percent in April, while wholesale sales also increased. On a year-over-year basis, U.S. wholesale inventories were up 8.2 percent from April 2011 levels. Meanwhile, wholesale sales climbed 1.1 percent and were up 6.8 percent from April 2011 levels. The inventories-to-sales ratio held steady in April at 1.17.
The Federal Reserve is due to release the minutes of its June 19th and 20th meeting at 2 pm ET.
The FOMC statement released following the June meeting 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.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended July 6th at 10:30 AM ET.
Crude oil stockpiles fell by 4.3 million barrels to 382.9 million barrel in the week ended June 29th. Inventories remained above the upper limit of the average range.
Distillate inventories fell by 1.1 million barrels, remaining below the lower limit of the average range. Meanwhile, gasoline stockpiles rose by 0.2 million barrels, yet remained below the lower limit of the average range. Refinery capacity utilization averaged 92.1 percent over the four weeks ended June 29th compared to 91.9 percent over the previous weeks.
The Labor Department is due to release its customary jobless claims report for the week ended July 7th at 8:30 AM ET. Economists expect claims to edge up to 375,000 from 374,000 in the previous week.
There were a seasonally adjusted 374,000 new claims for unemployment for the week ending June 30. This marked a notable drop of 14,000 from the previous week's revised figure of 388,000 and comes in well below the 386,000 level predicted by most economists. The previous week's figure was revised up slightly from the 386,000 initially reported.
The export & import price indexes for June, 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 1.9 percent month-over-month decline in import prices and a 0.2 percent decline in export prices.
U.S. import prices fell by 1 percent in May, marking the largest single month drop since June 2010. Most economists, however, had expected a somewhat higher, 1.1 percent decline in the costs of imported goods. Export prices, which had increased 2 percent over the first four months of the year, fell 0.4 percent in May, the first monthly decline of 2012.
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 $75 billion for June compared to a deficit of $124.6 billion for May.
Williams will also speak to the Community Leaders Luncheon sponsored by the San Francisco Federal Reserve Bank in Portland, Oregon at 3:40 pm ET.
The U.S. Labor Department is scheduled to release its report on the producer price index for June at 8:30 am ET. The index measures the average change over time in the prices received by domestic producers of goods and services. Economists expect the headline index for June to have declined by 0.4 percent but the core producer price index may have increased by 0.2 percent.
In May, producer prices fell by 1 percent month-over-month, the steepest drop since July 2009. The decline was due to a 4.3 percent plunge in energy prices and a 0.6 percent drop in food prices. Excluding food and energy, core producer price growth was in line with expectations at 0.2 percent.
The preliminary report of the Reuters/University of Michigan's consumer sentiment survey for July is scheduled to be released at 9.55 am ET. The consumer sentiment index is expected to have edged up to 73.5 from 73.2 in the previous month.
Atlanta Federal Reserve Bank President Dennis Lockhart is scheduled to speak to the Mississippi Economic Council in Jackson at 1:20 pm ET.
by RTT Staff Writer
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