The double whammy of the eurozone debt crisis and the domestic slowdown was more than what the markets could chew. Promptly, we found large-scale exodus into safe haven assets, including the dollar, the yen and the treasuries. The domestic slowdown was accentuated by more than one data last week. Consumer spending has taken a turn for the worse, with retail sales declining for the third month in running. Since consumer prices have risen on annualized basis in recent months, the decline probably reflects a decline in sales volume.
While pointing out that retail sales account for only a small portion of consumer spending, BNP Paribas commented that consumer spending may have still risen, albeit at a slower pace. The firm estimates consumer spending growth of 1-1.5% in the second quarter, reducing its contribution to GDP growth to less than 1 point from 1.9 points in the first quarter.
BMO Capital Markets sees very little signs of a pick up in growth in the third quarter. The manufacturing sector has wobbled slightly, with weak new orders components of regional manufacturing surveys suggesting tough times ahead for the sector. The housing market, which has recently shown signs of rejuvenation, may slowly start feeling the pinch due to weak employment prospects and higher home prices.
Across the Atlantic, the picture is getting murkier with the passing of each day. The yield on the benchmark 10-year Spanish government bonds is currently at uncharted territory, as fears of a full-fledged Spanish bailout loom large. Bank of Spain's preliminary estimates reveal a 0.4 percent sequential GDP decline in the second quarter on a preliminary basis. Annually, GDP is estimated to have declined 1 percent compared to a 0.4 percent drop in the previous quarter.
Greece is also another millstone around the neck of the markets. The company has to embark on an austerity drive if it has to appease the Troika. Such stringent measures may stifle any kind of economic revival and put further pressure on the economy.
Meanwhile, the Commerce Department said last week that U.S. retail sales fell 0.5 percent month-over-month in June, marking the third straight month of declines. April's decline was downwardly revised to 0.5 percent. The declines witnessed in June were broad based. Excluding autos, sales were down 0.4percent and sales, excluding autos, gasoline and building materials, used in the GDP calculation edged down 0.1 percent.
Auto sales fell 0.6 percent, building material & garden equipment store sales were down 1.6 percent and gas station sales dipped 1.8 percent. Sales at sporting goods, hobby and music stores were also down 1.6 percent.
The housing readings released last week were mixed. Housing starts rose to a seasonally adjusted annual rate of 760,000 in June from 711,000 in May, reaching the highest level since October 2008. Single-family and multi-family starts rose from the month-ago levels. Meanwhile, building permits, considered an indicator of future starts, fell to 755,000 from 784,000.
Homebuilder sentiment improved to 35 in July from 29 in June, according to the results of a survey by the National Association of Home Builders. The reading represented the best level since March 2007. The present conditions index rose 6 points and the sales expectations index jumped 11 points, while the index measuring prospective buyer traffic was up 6 points.
On the other hand, the National Association of Realtors said existing home sales fell 5.4 percent month-over-month in June to a seasonally adjusted annual rate of 4.37 million units. Single-family sales declined 5.1 percent and condominium sales were down 7.8 percent, while sales were down in all the four geographical regions. Inventories measured in absolute terms declined, while the months of supply at the current sales rate rose slightly to 6.6 months from 6.4 months in May. Meanwhile, the median price of an existing home rose 5 percent month-over-month to $189,400.
The manufacturing sector continued to suggest slackening of activity. The New York Federal Reserve's survey showed that its general business conditions improved 5 points to 7.4. Meanwhile, the new orders index slipped 5 points to -2.7, retreating into negative territory for the first time since November. However, the shipments index improved 5 points to 10.3.
The employment indexes were mixed, with the employment index rising 6 points to 18.5, while the average workweek index slipping 3 points to zero. The futures general business conditions index declined 3 points to 20.2.
The Philadelphia Federal Reserve's manufacturing survey showed that manufacturing activity contracted at a faster than anticipated pace in July, although improving from month-ago levels. The diffusion index of manufacturing activity rose 3.7 points to -12.9. The new orders index improved to -6.9 from -18.8, the unfilled orders index increased to -9.5 from -16.3 and the shipments index rose to -8.6 from -16.6. However, the4 number of employees index fell to -8.4 from 1.8.
Meanwhile, the Federal Reserve's industrial production report showed a 0.4 percent month-over-month increase in output for June following a 0.2 percent decline in May. Manufacturing output climbed 0.7 percent, with motor vehicle and parts production rising 1.9 percent and business equipment output improving by 1.6 percent. Mining output rose 0.7 percent, while utilities output declined by 1.9 percent.
The Commerce Department's business inventories report showed a 0.3 percent month-over-month increase in business inventories for May. Annually, inventories were up 5.2 percent. At the same time, business sales edged down 0.1 percent month-over-month, but rose 5.1 percent annually. The inventories to sales ratio came in at 1.27, flat with the year-ago period.
The Beige Book released by the Federal Reserve showed that overall economic activity continued to expand at a modest to moderate pace in June and early July. Most Federal Reserve districts reported an increase in retail sales and largely positive housing market activity. That said, manufacturing was reported as expanding slowly in most districts. Most districts also reported easing pricing pressure. While residential construction remained positive, the commercial real estate market saw a mixed performance.
At the same time, the Conference Board's leading economic indicators index for the U.S. fell 0.3 percent month-over-month in June following a 0.4 percent increase in May and a 0.1 percent decline in April. At the same time, the coincident economic index and the lagging economic indicators index climbed 0.2 percent each.
A trio of housing market reports, the first read of second quarter GDP, the results of a consumer sentiment survey and the weekly jobless claims report are among the key economic reports due for the unfolding week.
Traders may stay tuned to the Commerce Department's new home sales report for June, the National Association of Realtors' pending home sales index for June, the Commerce Department's durable goods orders report for June, advance estimate of first quarter GDP and the final reading of the consumer sentiment survey by Reuters and the University of Michigan. The Federal House Finance Agency's house price index for May, a few regional manufacturing reports and the Treasury auctions of 2-year, 5-year and 7-year notes round up the economic events/data of the week.
New home sales may have remained nearly flat in June, as the positive impact of record low mortgage rates and resurgence in demand is offset by tight lending standards and weak labor market conditions.
Higher aircraft orders for Boeing bode well for durable goods orders for June. However, excluding transportation, order growth may have slackened, as the eurozone debt concerns and domestic fiscal concerns have dented business confidence and spending.
The results of a survey by the Chicago Federal Reserve are due to be released at 8:30 am ET. The national activity index compiled based on the survey is expected to improve slightly to -0.33 in June from -0.45 in May.
The Federal House Finance Agency, or FHFA, is set to release its house price index for May 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 0.3 percent increase in the house price index compared to a 0.8 percent increase in April.
The Richmond Federal Reserve's manufacturing index due at 10 am ET is expected to come in at 0 for July compared to -3 in June.
The Commerce Department is due to release its new home sales report for June at 10 am ET. The consensus estimate calls for new homes sales of 370,000.
U.S. new home sales rose 7.6 percent month-over-month to a seasonally adjusted annual rate of 369,000 in May from 343,000 in April. Region-wise, new home sales were higher in the Northeast and South but fell in the Midwest and South.
Inventories of new homes as measured in terms of the months of supply fell to 4.7 months from 5 months in the previous month. The median price of a new home rose 5.6 percent year-over-year, although it fell 0.64 percent month-over-month to $234,500.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended July 20th at 10:30 am ET.
Crude oil stockpiles edged down by 0.8 million barrels in the week ended July 13th to 377.4 million barrels. Inventories remained above the upper limit of the average range.
Gasoline inventories fell by 1.8 million barrels and were in the lower limit of the average range. Meanwhile, distillate stockpiles rose by 2.6 million barrels, remaining in the lower limit of the average range. Refinery capacity utilization averaged 92.3 percent over the four weeks ended July 13th, flat with the levels in the four weeks ended July 6th.
5-year note auction
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 0.6 percent increase in durable goods orders for June. Excluding transportation, orders may have risen 0.2 percent.
Durable goods orders rose 1.3 percent month-over-month in May following two straight months of declines. Transportation equipment orders rose 2.7 percent. Shipments of durable goods rose 0.8 percent and inventories were up 0.5 percent, while unfilled orders fell slightly. Boeing (BA) reported at its website that it has secured 24 commercial aircraft orders for June compared to 8 in May.
The Labor Department is due to release its customary jobless claims report for the week ended July 21st at 8:30 am ET. Economists expect claims to edge down to 380,000 in the recent reporting week.
Jobless claims rose sharply to 386,000 in the week ended July 13th, after claims showed a steep drop in the previous week due to fewer number of auto plant shutdowns. Meanwhile, the four-week average edged down to 376,000 from 377,000. Continuing claims calculated with a week's lag were little changed.
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 0.9 percent in June.
The pending home sales index surged up 5.9 percent month-over-month in May. The index was up 13.3 percent from the year-ago period. Pending home sales rose in all four regions.
The Kansas City Federal Reserve is due to release the results of its manufacturing survey for July at 11 am ET. The manufacturing index based on the survey is expected to improve to 4 in July from 3 in June.
The Bureau of Economic Analysis is due to release its advance estimate of second quarter GDP at 8:30 am ET. Economists expect GDP growth of 1.2 percent for the quarter.
The first quarter GDP increased at an annual rate of 1.9 percent compared to the 3.0 percent growth seen in the fourth quarter. Downward revisions to exports, consumer spending, and private inventory investment were offset by an upward revision to non- residential fixed investment and a downward revision to imports, which are a subtraction in the calculation of GDP.
Reuters and the University of Michigan are due to release the final report on the consumer sentiment index for July is scheduled at 9:55 am ET. The consumer sentiment index is expected to be left unrevised at 72.
by RTT Staff Writer
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