Last week, quarterly earnings, the FOMC meeting, mixed economic indicators and international economic activities were on investors' radars. Strong earnings and mixed economic indicators kept investors on their toes. In the first half of the week, investors were disappointed by manufacturing readings from France and Germany and only slightly improved Chinese manufacturing output. However, things started picking up right after the FOMC meeting minutes were released. The Fed maintained its stance in terms of keeping the low Fed rate policy in place until the end of 2014. In a follow-up to the FOMC statement, Fed chairman Bernanke hinted that further quantitative easing was not off the table. The rest of the FOMC statement was the same as the last meeting. The Fed added 20 basis points to its forecasts for 2012 GDP, with expectations of between 2.7 and 3.1 percent.
All major indices ended in positive territory at the end of the week. The S&P closed at 1,403 while the Dow ended the trading week at 13,228. In major economic indicators released last week, to investors' disappointment, Durable Goods Orders for March dropped by 4.2 percent; excluding Auto Goods, orders were down by 1.1 percent. For the month of April, Consumer Sentiment was within the range of market expectations. However, first quarter economic growth disappointed investors as growth came in at 2.2 percent compared to expectations of 2.5 percent. The drop in government spending was the big negative factor in the slow growth; however, accelerated Consumer Spending reversed some of this. In the earnings sector, two energy giants, Chevron and Exxon Mobil posted earnings, with the latter missing investors' estimates.
The Ten-Year Treasury yield was down 3 basis points and ended the week at 1.93 percent. Towing the same line, mortgage rates were also down a bit last week. At the end of the week, the Conforming Fixed 30-year rate leveled out at around 3.68 percent, while the Conforming Fixed 15-year rate finished at around 2.93 percent. Standard 5/1 ARM rates were hovering around 2.75 percent. Even with persistent low rates, the housing market is still in somewhat of a flux. For the month of March, Pending Homes Sales showed some improvement while New Home Sales were less than the previous revised month's sales.
This week investors will be busy with heavy economic data. In other major economic indicators, manufacturing sector health will be gauged from the ISM manufacturing index release on Tuesday and Factory Orders on Wednesday. The ADP employment report and other employment reports on Wednesday and Friday respectively will further clarify for investors as to whether or not the economy is moving in the right direction
Mel
Information provided by NYCB Capital Markets.
The movement of Apple's stock price this year somewhat summarizes the sentiments of the U.S. Economy. It began with euphoria, but is now likely slowing down into a correction phase. There's nothing to suggest any kind of hard-stop for the economy, but the news has turned from solid in the early two months of the year to more mixed in the most recent two. The Fed has noted that growth in the fourth quarter of 2011 was "moderate" at best, but it seems that further moderation has happened in the first quarter of 2012. Unfortunately, it looks as though we have entered an economic soft patch of sorts, and that the kind of upward momentum needed to move us from "recovery" to "expansion" isn't happening quickly enough. Financial markets seem to swing daily on speculation about what the Federal Reserve is going to do next. On any given day, investors expect the Fed to launch a new bond-buying program to reduce long-term interest rates and boost growth and the next they expect it to raise short-term interest rates sooner than planned to restrain inflation. Investors have been uncertain about growth momentum, and flight to Treasuries continues with 10-year Treasury yields well below the 2.0 percent level.
It was another mixed economic picture in the U.S. this week. On the positive side, we saw rising Retail Sales, falling oil and gasoline prices, rising bank earnings, positive leading indicators, and an expanded outlook for world GDP this year. However, the optimism was dragged down by rising initial claims for unemployment, declining Housing Starts, Existing Home Sales, a slowdown in the growth rate in U.S. manufacturing, and further problems in the Eurozone. The stock market feels "heavy" and interest rates remain low.
The changing forecast and durability of growth will be one of the most important topics of discussion at the Central Bank's policy meeting on Tuesday and Wednesday, when officials will update their quarterly economic projections. The outlook arguably has not shifted enough that would support new initiatives to boost economic growth. The new forecasts could project a little more inflation in 2012 than the Fed forecast in January, thanks in part to a recent rise in gasoline prices. It could also project a little less unemployment for 2012, thanks to recent declines in the jobless rate. But the overall growth outlook for 2012 doesn't seem to have changed much from several months ago. The economy looked at times in the first quarter as though it was gaining momentum, but it finished with a whimper... which will likely reinforce Fed officials' worries about the recovery's durability. That should also mean their projections for 2013 and 2014 won't change much until they get more evidence about the ever-evolving recovery. Whereas we don't expect any significant changes to the Fed statement, member economic projections could shift slightly, reflecting a lower unemployment rate and higher inflation.
Apple reports quarterly earnings results tomorrow and the market is expressing nervousness prior to the release. The stock is up 40 percent year-to-date but down 6 percent for April and nearly 10 percent since hitting all-time highs just two weeks ago. The official estimates are for earnings of $9.95 on just north of $36 billion in revenue. Any positive surprise may provide a little fresh boost to the market - which is currently weighing heavily on news from Europe.
The Fed is meeting on Tuesday and Wednesday and will pretty much set the tone for the week. A few important upcoming data releases include New Home Sale on Tuesday, Jobless Claims due to be released on Thursday and the GDP Report on Friday. Consensus estimates a deceleration in activity to perhaps a 2.2 percent rate for the quarter.
Information Provided by NYCB Capital Markets
Twelve rock star sized mansions or four of the top Major League baseball teams (by annual salary) or six top Hollywood movie productions or two White Houses or 182,857,143 boxes of Girl Scout Cookies is what $640 million can buy. Friday's Mega Millions drawing was the largest lottery the United States has ever witnessed. What would you buy with a payout from a $640 Million jackpot?
While many Americans dreamed of winning the largest lottery, others went back to work. The number of Americans who filed for jobless benefits fell by 5,000 last week. The four- week average fell to 365,000, a decrease of 3,500. While this is a four-year low, Ben Bernanke started the week by saying that the improvement in employment may not be sustainable. He admitted that he does not fully grasp what is going on in the employment market. He believes that what is happening is a reaction to the excessively large layoffs that have occurred during the recession. Further improvement may depend on faster economic growth. He advised to, "...remain cautious and see how the economy develops."
As unemployment continues to fall, personal spending continues to rise. Personal Spending rose .8 percent in February while Personal Income only increased .2 percent. Most of the increase in spending is due to higher energy costs. The increase in spending also lowered the Personal Savings rate in February to 3.7 percent from 4.7 percent in December of 2011. As we all know, spending cannot continue to outpace income. Spending constitutes 70 percent of the nation's growth, so income better catch up in order to sustain the recovery; much to Mr. Bernanke's point earlier in the week. The price index for Personal Consumption Expenditures increased 0.3 percent. This caused disposable income to fall .1 percent. The core Personal Consumption expenditures, which excludes food and energy, only rose .1 percent. This is the number the Federal Reserve examines when deciding whether or not to raise interest rates. Another positive sign for the economy is that Durable Goods Orders rose 2.2 percent in February. Orders have increased 13.5 percent over the past year. This shows healthy demand across most American industries.
Mortgage Applications fell this week, but Purchase Applications rose. For the week ending March 23, new mortgage applications fell by almost 3 percent. Purchase loans accounted for 28 percent of all new application, the highest since July of 2011. ARMs accounted for just 5.4 percent of new applications. The National Association of Realtors' index of Pending Home Sales jumped 9.2 percent in February from a year ago. Investor purchases of foreclosed homes are greatly fueling this increase.
Senator Sherrod Brown, D-OH, proposed legislation to make banks respond to short-sale requests within 75 days. The new bill would require the banks to accept, reject, or make a counter-offer in writing within 75 days. The Consumer Financial Protection Bureau will issue a final rule by the end of June to define what constitutes a "qualified mortgage." This is important because residential loans will need to meet an "ability to repay" standard (Qualified Mortgage) test. The QM standard will effectively define the broader market for residential loans, with QRM (Qualified Residential Mortgage) loans being a narrower subset of the overall market.
With a light economic calendar in hand last week, investors preferred to play it safe and book some profits while pausing to review the slowing global economy. PMI data from Europe was short of investors' expectations, while the Chinese economy points to PMI data on a somewhat downward trajectory. Volatile oil prices, which settled at $106.86 per barrel last week, didn't help the cause either. Talks of a military attack on Iran's nuclear sites subsided in the last couple of weeks and should help to stabilize oil prices. However, gas prices hanging around $4 per gallon will continue to be a big pinch on consumers' wallets.
All of the major indices ended up losing ground last week. By week's end, the S&P closed at 1,370 while the Dow ended the trading week at 12,169. As the first quarter of 2012 comes to a close, the S&P and NASDAQ have already gained 11 percent and 17 percent respectively. The tech sector and the financial sector have played a major role and have gained nearly 20 percent for the quarter. The improving labor market continued last week as weekly jobless claims were at 348K, the lowest threshold in the last couple of years. Treasuries were on a roller-coaster ride the entire week, hitting a high of 2.41 percent and a low level of 2.21 before settling at 2.24 by the end of week.
The Housing sector received the major share of economic news last week. The housing data came in more or less in line with investors' expectations. Housing Starts were at an annualized rate of 698,000 units in February, slightly lower than revised previous month's rate, but Building Permits were higher than consensus. New Home Sales for February were down by 1.6 percent, while the inventory level remained unchanged. At the end of the week, the Conforming Fixed 30-year rate leveled out at around 3.85 percent, while the Conforming Fixed 15-year rate finished at around 3.14 percent. Standard 5/1 ARM rates were last seen hovering around 2.8 percent.
This week, investors will be busy with heavy economic data as well as closing their books for the first quarter. In other major economic indicators, consumer outlook will be gauged from Consumer Confidence and Consumer Sentiment releases on Tuesday and Friday respectively. Durable Goods Orders on Wednesday, GDP on Thursday and Chicago PMI on Friday will be yet another indication of future economic growth and outlook.
Information provided by NYCB Capital Markets
In addition to the Dow recently exceeding 13,000, a level not seen since May of 2008, the S&P 500 also broke through the 1,400 threshold. During the depths of the global financial crises three years ago, the Dow declined to a low point of 6,440. Since then, we've seen an average annual GDP growth of approximately 2.5 percent (ranging from -6.7 to +3.9 in different quarters), we've seen government debt grow 1.5 times and the unemployment rate decreased to 8.3 percent after touching double digits briefly. Should we believe that the equity markets are reasonably priced at this point?
The FOMC met this past week and issued a statement that the condition of the economy is stable, while soft spots in the forms of continuing high unemployment, a depressed housing market and fragile growth remain a concern. The Committee decided to keep rates at the extraordinary low level of 0-0.25% at this time while a majority of the committee members agreed that economic conditions will likely warrant an extension of that level of rates possibly as far as late 2014.
The new U.S. Jobless Claims reported last week fell to a seasonally adjusted 351,000, setting a 4-year record low, giving hope that economic growth will ultimately, and once again, become self-sustaining.
Mixed readings on business activities support cautious positive outlook. January Business Inventories were reported on Tuesday at 0.7 percent growth, above an expected 0.5 percent. However, the ratio of stock-to-sales remained unchanged since sales grew at the same pace. Last Thursday, the March Empire State Manufacturing Survey and Philadelphia Fed Survey composite business condition measures improved, while both reports point to the weakness in orders which may be a leading indicator of future slowness in manufacturing activity. The Industrial Production report for February disappointed, demonstrating no growth after a revised positive 0.4 percent in January.
Rising oil prices once again were considered a threat to unstable economic growth worldwide. The U.S. and Britain are reportedly in talks, and even in agreement, on the release of strategic oil reserves in an effort to prevent a further slowdown. There was more economic news on prices this past week: import and export prices went up, growing moderately at 0.4 percent, within the consensus range in February, partially offset by the downward revisions of the previous months' readings. Producer Price Inflation jumped in February to 0.4 percent, up from a prior level of 0.1 percent, but still below analysts' expectations. The Consumer Price Index released a day later, was exactly in line with producer's prices. Not surprisingly, consumers' inflationary expectations rose and Consumer Confidence fell in March, as reported this past Friday. Retail sales for February, nevertheless, posted nice gains of 1.1 percent after a January growth of only 0.6 percent revised.
During the past week, the results of the Fed's new stress test of the 19 biggest banks became public, earlier than expected, shortly after Chase announced their passage reportedly 2 days before the scheduled official release of results. The announcement reportedly had Citi admit that they almost passed, but in fact, failed the test. The results of the tests are considered positive as the majority of the tested institutions demonstrated sufficient capitalization and that is undoubtedly great news for the financial system, markets and taxpayers alike.
Mel Samick
There was a lot of volatility at the start of last week. The week started with a lower growth report from China and more suspense with respect to the Greece debt crisis. However, a couple of good news items started to settle the markets down. With the support of major banks and pension funds, Greece was successful at clinching a debt swap deal. Reluctantly, Israel has agreed that diplomacy with Iran and their potential nuclear threats is the route to go at the moment which, in turn, has eased any near term instability. By the end of the week, light sweet crude was trading at $107.50 per barrel while gold traded at $1,710 per ounce. Any negative impact from high commodity prices was offset by a modest economic recovery rate and strong economic indicators. For the week, all of the major indices ended flat. By week's end, the S&P closed at 1,370 while the Dow ended the trading week at 12,922.
The economic recovery gained momentum last week as the soft labor market showed a vital sign of improvement in the month of February. To investors' pleasant surprise, 227,000 new jobs were added to the economy, beating the market estimate of 204,000. However, the unemployment rate was unchanged at 8.3 percent. Private-sector employment was stronger than overall, adding 257,000 jobs against expectations of 220,000. Also, Wages and Hourly Work Hours were seen trending higher. In addition, unemployment claims for the week ended Feb 26 dipped to 351,000. In other economic news, the Trade Deficit increased in January to $52.6 billion mainly due to expensive petroleum imports. In another indication of a growing service sector, the Institute for Supply Management's indicator rose to 57.3 in February, the highest level over the last year. Also, Consumer Borrowing increased to $17.8 billion in January, reflecting the continued strength in auto sales and installment lending activities.
The Ten-Year treasury yield was up 5 basis points and ended the week at 2.04 percent after fluctuating the entire week on Greece debt uncertainly and European economic growth. However, mortgage rates moved in the opposite direction and were down last week. At the end of the week the Conforming Fixed 30-year rate leveled out at around 3.69 percent, while the Conforming Fixed 15-year rate finished around 2.93 percent. Standard 5/1 ARM rates were last seen hovering at around 2.75 percent.
This week investors will be looking towards the Fed meeting for any hint on QE3 and interest rates, which are expected to remain unchanged. In other major economic indicator releases, look for Retail Sales and Business Inventories on Tuesday and Producer Prices and Consumer Prices Indexes on Thursday and Friday respectively. These will provide yet more good indications surrounding current economic growth.
It appears that the warmer than normal temperatures around the country helped keep home sales on the rise. Home Sales were up 4.3 percent in January and inventories were at a 7 year low. December's sales were revised downward. Instead of a 5% gain, as was initially reported, sales actually were down .5 percent. First-time home buyers accounted for 33 percent of all sales and distressed sales accounted for 35 percent of all transactions. Median Sales Prices declined by 2 percent to $154,700. FHFA reports that Home Prices increased .7 percent in December. New House Sales slipped a little in January, but that was due mainly to the December numbers being revised higher. New Home Sales were 321,000 in January compared to 324,000 in December.
Another driver of home sales is employment. The statistics keep pointing to a recovering job market. Jobless claims remained unchanged for the week; however, the four week average fell by 7,000 to 359,000. That is the lowest level since March 2008. Continuing claims fell by 52,000 for the week ending February 11th with 7.5 million people receiving either state or federal unemployment benefits.
The political strife with Iran is causing oil prices to spike. On Friday, oil was trading above $109 a barrel. Even though it seems unlikely that Iran can cause any kind of sustainable disruption in world oil supplies, investors are trading on that fear. The increase in oil prices could also cause problems for the Fed and other world Central Banks as they are trying to sustain growth and keep inflation low.
The EU is also worried about the proposal for the Volcker Rule that U.S. bank regulators introduced. The proposal would prohibit big, insured banks from proprietary trading i.e. trading stocks and derivatives with their own money. One of the provisions state that trading of U.S. securities would be allowed while trading in non-U.S. sovereign debt would be prohibited. The regulators outside the U.S. fear the effect the rule would have non-U.S. foreign capital markets.
The Dow closed the week at 12,982 after crossing the 13,000 barrier several times. As energy prices continue to climb further, consumer spending will likely see a decline. Any company that relies on discretionary income spending will likely take a hit. U.S. Futures slipped Monday morning as G20 leaders did not agree to increasing funding for the International Monetary Fund.
The week ahead is a busy one. We start Monday with the Pending Home Sales Index. On Tuesday, Durable Goods Orders, Case-Shiller Home Prices, and Consumer Confidence will be reported. Wednesday will feature the GDP and the Chicago PMI. Thursday will be the busiest day with Jobless Claims, Personal Incomes, Consumer Spending, Core PCE Price Index, Construction Spending, and Motor Vehicle Sales releases.
Stocks closed mixed in thin trading last Friday ahead of the three-day holiday weekend, but all major averages logged robust gains for the week following some positive economic news and amid optimism that Greece would soon find a solution to its debt crisis. The Dow finished just shy of the psychologically important 13,000 level closing the week at 12,949, up 1.2 percent for the week. The S&P and NASDAQ logged their sixth positive week in seven. The NASDAQ closed at 2,951, up 1.7 percent for the week while the S&P finished at 1,361 up 1.4 percent for the week. Typically, the stock market pauses towards the end of earnings season as the market digests the results. According to Thomson Reuters data, 404 of the S&P 500 companies have reported results, with 64 percent beating expectations.
Fears of a sharp slowdown in the U.S. economy have faded in recent weeks amidst signs that the job market is picking up and that manufacturing is accelerating. New claims for unemployment benefits unexpectedly fell last week to a near four-year low, a government report showed on Thursday, suggesting the labor market was finally strengthening. New jobless claims have declined for three straight weeks. Last week's drop pushed claims below the 350,000 level, the lowest level since March 2008, which economists normally associate with sustained strength in the labor market. Job gains have exceeded 200,000 for two straight months and the unemployment rate dropped to a three-year low of 8.3 percent in January. Equity markets have tended to react positively on progress in helping Athens avoid chaos.
Optimism in Europe grew last week after German officials gave up plans to pressure Greece by withholding part of the bailout. The countries that use the euro pulled Greece back from an imminent and potentially catastrophic default on Tuesday, when they finally stitched together a 130 billion euro ($170 billion) rescue they hope will also provide a lifeline to their common currency. The finance ministers from Greece and the other 16 countries that use the euro wrangled until the early morning hours over the details of the rescue, squeezing last-minute concessions out of private holders of Greek debt. Greece has been in debt reduction discussions that could have seen private creditors take losses of around 70 percent on their Greek bonds. The eurozone and the International Monetary Fund, which will be providing the money for the new bailout hope the new program will eventually put Greece back into a position where it can survive without external support and secure its place in the euro currency union. Including Greece's first bailout worth 110 billion euro ($146 billion), the new deal means every Greek man, woman and child will owe the eurozone and the IMF about 22,000 euro ($29,000). Despite the promise of new rescue loans, the other 16 euro countries made it very clear that their trust in Greece is running low. Before Athens will see any new funds, it has to implement a range of promised cuts and reforms.
Much of the news last week revolved around Greece again. On Sunday, protestors took to the streets to denounce more and tougher austerity measures. The measures would cut wages, pensions, and jobs by 3.3 Billion Euros for this year alone. The Finance Minister of Greece said that the citizens would face even deeper cuts if they choose to leave the EU. Germany is reluctant to support a bailout even with these cuts in place. The Greeks need support from the EU (led by Germany) and the IMF to avoid default by March 20, 2012. They have 14.5 billion Euros in bonds coming due in March.
The employment numbers continue to get better in the United States. Job openings climbed to 3.38 million in December. The biggest increases came from professional and business services and the largest decreases came in the education and health-care fields. The weekly unemployment numbers continued to be encouraging. Jobless Claims fell by 15,000 last week and the four-week average dropped by 11,000. That is the lowest level since April 2008.
While the employment picture is improving, Consumer Credit is shooting up. For the second consecutive month, consumer credit increased, by $19.3 billion in December. In 2011, Consumer Credit was up 3.7%, the largest increase since 2007. Non-revolving debt, such as auto loans and student loans, increased 11.8% in December. Credit card debt was up 4.1%. The increase in Consumer Credit reflects increasing consumer confidence, as well as banks willingness to lend money. Hopefully, that will spill over into the housing market.
At the International Builders Show in Orlando, economists were predicting that the housing market will improve this year; but will still be less than what would be desired. Frank Nothaft, chief economist for Freddie Mac, said, "We're talking about housing sales increasing 2% to 5% off a very low level, so we're moving in the right direction. But it won't feel like a robust market."
Another sign that the economy is improving is reflected in Wholesale Inventories which were up 1 percent in December. However, analysts believe that businesses will not restock their inventories in the first-quarter. They expect the growth to slow down.
The Federal Reserved decided not to vote on the acquisition of ING's online banking division by Capital One this week. This is the first major bank merger to be considered under the new requirement that regulators consider costs to the financial system if the combined firm were to fail. The deal would make Capital One the fifth largest bank in the U.S. by deposits and the 11th largest by asset size, with over $3 billion in assets.
There was good news out of Washington this week as the House voted to approve a ban on congressional insider trading. The ban would prohibit lawmakers and their families and staffs from buying and selling securities based on their knowledge of nonpublic information. The Senate passed similar legislation last week.
This week, there are numerous report releases. Tuesday, the NFIB will release its small business report; Retail Sales, Inventories and Import Prices will be reported as well. Wednesday, the Empire State Index, Industrial Production, Capacity Utilization, and the FOMC minutes will be released. Thursday, the Producer Price Index, Core PPI, and Housing Starts releases. Friday, Leading Indicators, Consumer Price Index, and Core CPI will be made available.
Information provided bt NYCB Capital Markets
Last week, more quarterly earnings releases, the FOMC meeting, mixed economic indicators and the Fed's economic forecast were on investors' radars. Mixed earnings and mixed economic indicators kept investors on their toes throughout the week. In the absence of any major economic news in the first half of the week, trading was on the slow side; however things started picking up from the FOMC meeting outcome. The Fed decided to extend the low Fed rate policy until the end of 2014 from mid-2013 and also hinted at additional quantitative easing. The rest of the FOMC statement was the same as that of the last meeting. The Fed for the first time released, in its forecasts, a projection for the Fed Funds Rate and timing for when the next rate move is to be expected. The recent average forecast for the rate at the end of 2014 is a little over 1 percent. The Fed also lowered its forecasts for GDP growth, the unemployment rate, and inflation. Unexpectedly, at the same time as the release of these forecasts, the Fed essentially announced a long-run inflation target of 2 percent.
All major indices ended up in positive territory, with the exception of the Dow which ended slightly lower than the neutral line. The S&P closed at 1,315 while the Dow ended the trading week at 12,720. In major economic indicators released last week, and beating market expectations, Durable Goods Orders for December rose by 3 percent; excluding Auto Goods, orders were up by 2 percent. For the month of January, Consumer Sentiment came in higher than market expectations. Also, the Leading Indicators Index jumped up in December. However, fourth quarter economic growth disappointed investors with 2.8 percent GDP compared to the expected 3.2 percent. In the earnings sector, Netflix and Caterpillar surprised most market watchers. Netflix published growth in its subscriber base, while Caterpillar announced a great quarter and bullish demand guidance for 2012. However, P&G and Chevron earnings releases disappointed investors.
The 10-year Treasury yield was down 17 basis points and ended the week at 1.90 percent. Towing the same line, mortgage rates were also down last week. At the end of the week the Conforming Fixed 30-year rate leveled out at around 3.69 percent, while the Conforming Fixed 15-year rate finished at around 2.93 percent. Standard 5/1 ARM rates were last seen hovering at around 2.86 percent. Even with these declining and persistently low rates, the housing market is still in somewhat of a slump. For the month of December both New Home Sales and Pending Home Sales were on a downward trajectory.
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