Monetary Actions Raise Hope of Recovery

(RTTNews) - U.S. Treasury Secretary Timothy Geithner's proposal to remove toxic assets from the banks' balance sheets and roadmap for reviving the banking sector in the U.S are likely to determine the course of the markets. Investors turned skeptical about U.S Federal Reserve's announcement to pump in an incremental $1.2 trillion to unclog the credit markets on fears that it might stoke higher inflation fears in the economy.

The Fed extended another lifeline to the famished financial sector in a bid to help them come out clean. Along with an announcement to keep interest rates unchanged at exceptionally low levels following its one-day FOMC meeting, the Fed said it would purchase $300 billion worth of longer-term securities over the next 6 months. Additionally, the Fed said it will buy an incremental $750 billion worth of mortgage-backed securities and $100 billion of government sponsored enterprises - GSE debt. The Fed also said it intends to add $100 billion to its purchases of agency debt.

Commerzbank is of the view that the massive expansion of bond purchases will lead to a considerable decline in yields. Some economists have expressed concerns over the central bank's benevolence. Peter Boockvar, the equity strategist at Miller Tabak, commented that the unwinding of all these actions would lead to an inflationary environment. Wachovia Securities also raised the issue of too much much liquidity and monetization of Treasury debt, which may result in higher inflation premiums and a weaker dollar in the long run.

Among the economic reports released last week the housing starts data surprised to the upside, while most other reports continued to exude pessimism. The Commerce Department stated that Housing starts unexpectedly rose 22 percent to an annual rate of 583,000 in February from a revised January estimate of 477,000. Economists had expected starts to fall to 450,000 from the 466,000 originally reported for the previous month.

Meanwhile, the New York Federal Reserve revealed that the index of activity in the state's manufacturing sector unexpectedly decreased to a fresh low of negative 38.2 in March from a negative 34.7 in February, with a negative reading indicating a contraction in the sector. Economists had expected the index to edge up to a negative 32.0.

The Federal Reserve, in its report on industrial production and capacity utilization for month of February, reported that Industrial production fell by 1.4 percent in February following a revised 1.9 percent decrease in January. Economists had expected production to fall by 1.3 percent compared to the 1.8 percent decrease originally reported for the previous month.

The Labor Department, in its report on producer price inflation in the month of February, showed that the producer price index edged up 0.1 percent in February following a 0.8 percent increase in January. The increase came in below economist estimates of a 0.4 percent increase in prices. A 1.6 percent decrease in foods prices helped to limit the upside for prices, partly offsetting a 1.3 percent increase in energy prices.

A host of Fed speeches along with February housing markets reports are likely to take the spotlight in the upcoming week. With the Fed having formally announced its move towards quantitative easing, traders may show interest in learning from the Fed officials further details on the central bank's plan to buy longer-dated securities.

Additionally, traders may also focus on the Commerce Department's durable goods orders for February, the final reading of the Reuters/University of Michigan's consumer sentiment index for March, the February personal income and spending report and the final fourth quarter GDP report of the Bureau of Economic Analysis.

Notwithstanding the resurgence seen in the housing starts, existing and new home sales are likely to continue to show bleakness. Although inventories are falling, which is a positive, sales are falling just as fast as inventories, thereby keeping inventories excessively high. Going by the 7.7% decline in pending home sales index in January, one can expect existing home sales to fall further. That said, new homes sales may have seen a small bounce due to the rebound in housing starts.

The market is bracing for another lackluster durable goods orders report, as vehicle orders and investment goods orders are likely to remain weak. Orders may also take a hit from cancellation of aircraft orders. According to IHS Global Insight, domestic demand will bottom out late this year. But the firm is of the view that foreign demand will not turn around until late 2010.

Economists expect a further revision in GDP numbers, which would make the contraction the worst since the second quarter of 1980. The downward revision is premised on lower inventories and lower non-residential construction than had been initially estimated.

Monday

The National Association of Realtors is scheduled to release its report on existing home sales for February at 10 AM ET on Monday. Economists estimate existing home sales of 4.45 million for the month.

In January, existing home sales declined 5.3% to a seasonally adjusted annualized rate of 4.49 million units, marking a 12-year level. Single-family home sales fell 4.7% and condominium and co-operative sales declined 10.2%. While total home inventories fell, the months supply at the current sales rate rose to 9.6 months from 9.4 months due to the decrease in sales.

The median sales price of existing homes declined 14.8% year-over-year to $170,300 in January, marking the lowest price levels since March 2003. The association noted that about 45% of the total sales were due to foreclosure sales, which explains the price declines.

Tuesday

Chicago Federal Reserve Bank President Charles Evans is due to participate in a panel discussion on "Central Banking in Times of Crisis Active Player or Passive Observer?" at the Czech National Bank's European Banking and Financial Forum in Prague at 6 AM ET on Tuesday.

Wednesday

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 on Wednesday. Economists look forward to a 2% decline in the durable goods orders for February.

In January, durable goods orders fell for the sixth straight month, with orders dropping $7.8 billion or 4.5% to $164.9 billion. The January decline was mainly die to a 9.3% slump in transportation equipment orders. Shipment of durable goods fell 4%, while unfilled orders declined by 1.7%. Inventories also moved to the downside, edging down 0.8%, after rising 16 consecutive months prior to this.

The Commerce Department is due to release its new home sales report for February at 10 AM ET on the same day. The consensus estimate calls for a decline in new homes sales to 300,000.

New home sales fell 10.2% month-over-month in January to an annualized rate of 309,000 units, which marked a record low reading. The supply of new homes rose to 13.3 months from 12.2 months in the previous month, while the median sales price of a new home fell to $201,000 in January from $223,200 in December.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET the same day.

Crude oil stockpiles rose by 2 million barrels in the week ended March 16th and were above the upper limit of the average range for this time of the year. Gasoline inventories climbed by 3.2 million barrels and were in the upper half of the average range. Distillate inventories edged up 0.1 million barrels and are above the upper limit of the average range.

The EIA also noted that total products supplied over the four-week period ended March 13th fell by 3.2%. On the demand side, demand for gasoline averaged 9 million barrels per day over the four weeks ended March 13th, up 1.1% from the year-ago period, while distillate fuel demand over the four-week period declined 9.3% year-over-year to 3.8 million barrels. Capacity utilization averaged 82.3% in the four weeks ended March 13th compared to 82.4% last week.

Cleveland Federal Reserve Bank Sandra Pianalto is due to deliver a speech on forces for economic recovery Regional Growth Partnership luncheon in Maumee, Ohio at 12:20 PM ET on Wednesday. On the same day, San Francisco Federal Reserve Bank Janet Yellen is scheduled to deliver a speech to the Forecasters Club of New York on the U.S. economic situation and policy responses in New York at 12:30 PM ET.

Thursday

Atlanta Federal Reserve Bank Dennis Lockhart is scheduled to make remarks on panel on Food, Water, Inflation and Monetary Policy at the Global Interdependence Center's Conference at 5 AM ET on Thursday. The Bureau of Economic Analysis is due to release its final fourth quarter GDP report at 8:30 AM ET on Thursday. The report is likely to show that the U.S. economy contracted by a 6.6% rate in the quarter.

The preliminary GDP report that the U.S. GDP shrank at an upwardly revised pace of 6.2% in the fourth quarter. The contraction was worse than the 0.5% GDP decline witnessed in the third quarter and the 5.4% decline expected by economists. On a year-over-year basis, fourth quarter GDP declined by 0.8% compared to 0.7% growth in the third quarter.

The decline in fourth quarter GDP compared to the previous quarter reflected negative contributions from personal consumption expenditures, exports, equipment and software and residential fixed investment that were offset to some extent by positive contributions from federal government spending and private inventory investment.

The Labor Department is due to release its customary weekly jobless claims report for the week ended March 21st at 8:30 AM ET on the same day.

Jobless claims unexpectedly decreased in the week ended March 14th compared to an upwardly revised reading for the previous week.

The report showed that jobless claims fell to 646,000 from the previous week's revised figure of 658,000. Economists had been expecting claims to edge up to 655,000 from the 654,000 originally reported for the previous month.

Treasury Secretary Timothy Geithner is scheduled to testify on financial regulation reform before House Financial Services Committee in Washington at 10 AM ET on Thursday. On the same day, Dallas Federal Reserve Bank President Richard Fisher is due to speak to students as part of the ninth annual Redefining Investment Strategy Education Forum at the University of Dayton at 12 PM ET.

Richmond Federal Reserve Bank President Jeffrey Lacker is scheduled to be the keynote speaker for the 2009 Economic Outlook Conference and luncheon of the Charleston Metro Chamber of Commerce, in Charleston, South Carolina at 12:40 PM ET on Thursday, while Minneapolis Federal Reserve Bank President Gary Stern would speak at a luncheon of the Economic Club of Minnesota in Minneapolis on "Better Late Than Never: Addressing Too-Big-To-Fail" at 1 PM ET.

Friday

The Bureau of Economic Analysis is due to release its personal income & outlays report for February on Friday. Economists estimate the report, which is due out at 8:30 AM ET, to show that personal income fell 0.1% during the month. On the other hand, personal spending is expected to have risen 0.3% in the month.

In January, personal income rose by 0.4% following a 0.2% decline in December. Meanwhile, personal spending rose 0.6%, reversing some of the 1% decline in the previous month. Economists had estimated a 0.2% decline in personal income, but a 0.4% increase in personal spending.

Spending on durable goods edged up 0.1% in January after declining by 0.9% in December, while spending on non-durable goods rose 1.3%. Spending on services edged up 0.3% in January after rising 0.2% in the previous month. The price consumption expenditure index rose at a 1.5% rate, tamer than the 1.7 % rate in December.

The final reading of the University of Michigan's consumer sentiment index for March is due to be released at 10 AM ET on Friday. The report is expected to show that the consumer sentiment index edge down to 56 from the mid-month reading of 56.6.

For comments and feedback: contact editorial@rttnews.com Copyright(c) 2009 RTTNews.com, Inc. All Rights Reserved

More News:   Market Updates | Stock Alerts | All Trading News | Stock Index