Housing, Inflation & Production Keys
Housing, Inflation & Production Keys
Housing, Inflation & Production Keys
Earnings Preview 6/11/10
The first quarter earnings season is effectively over. There will be just 33 firms reporting next week, and some of those will be reporting second quarter earnings, not first quarter (we define fiscal periods ending in May, June and July as being second quarter). However, among the 33 total are five S&P 500 firms. These are Best Buy (BBY), Discover Financial (DFS), Kroger's (KR - Analyst Report), S.J. Smucker (SJM) and Federal Express (FDX). The Fed Ex report should be particularly interesting in that its shipment volumes are a telling clue as to how the rest of the economy is doing.
With the week light on earnings reports, most of the attention will be focused on the economic data coming out. It will be a very heavy week for data, but it will all be packed into the three days in the middle of the week. The data will include two regional Fed indexes that are sort of like mini-ISM numbers, key inflation reports and one of the most underrated and very important reports, the one on Industrial Production and Capacity Utilization.
Oh, and we also get Housing Starts and Building Permits. Thus, even without a lot of earnings news there will be more than enough to keep the markets from getting bored.
Monday
* No reports of significance.
Tuesday
* The Empire State Manufacturing index, which is a Fed indicator of the strength in Manufacturing in New York State. It is similar to the ISM survey except that the dividing line between expansion and contraction is 0, not 50. It is expected to show further improvement to 19.9 for June, from 19.1 in May. That is a very strong showing, but manufacturing in New York State is a very small part of the overall economy.
Wednesday
* A heavy data day starts out with Housing Starts. They surged in April to an annual rate of 672,000, which was up a very strong 40.9% from a year earlier. However, much of that strength was likely related to the end of the homebuyer tax credit at the end of April. That effect will show up more quickly in data related to new homes than for used homes since new homes sales (and housing starts are clearly related to new home sales since many are sold before construction starts) because new home sales are recorded at the signing of the contract, while used home sales are recorded at the closing. Thus, Starts are expected to fall back to an annual rate of 655,000 in May. That would still represent a substantial year-over-year increase, but from extremely depressed levels. Residential investment is usually a key driver in pulling the economy out of recessions, but it has largely been derailed in this recovery, despite significant government support for the industry.
* The best indicator for future housing starts is building permits. They fell sharply to an annual rate of 606,000 in April, and are expected to rebound to 655,000 in May. That would be pretty good news about the future direction of housing starts and residential investment. Each new house built generates an enormous amount of economic actively that ripples through the rest of the economy. However, if one includes the shadow inventory, there is more than enough housing available in the country, so in the long term it does not make a lot of sense to building a lot more of it at this point.
* We should get more evidence that inflation is not a problem when the Producer Price Index (PPI) comes out. It is expected to drop 0.4% in May, that comes on top of a drop of 0.1% in April. Declining energy prices are expected to play a major role in the decline. Core PPI, which excludes food and energy, is expected to increase just 0.1% -- down from a 0.2% increase in April. Right now, it looks like deflation is a greater threat than inflation, and the low inflation rate will allow the Fed to keep short term rates low for a very long time. Indeed a very good case could be made that they need to be aggressively easing monetary policy, but since short-term rates are already near zero, that would require quantitative easing.
* Industrial Production is expected to increase by 0.7% in May on top of a 0.8% increase in April. Factories have been leading the comeback in the economy, but they are still climbing out of a deep hole. The total industrial production figures also include the output of mines and utilities. The utility numbers often are as influenced by the weather as by the state of the economy, so make sure to look at the manufacturing only numbers as well, which have been up 1.0% in each of the last two months.
* The Industrial Production report also contains data on Capacity Utilization, which is sort of like the employment rate for physical capital. In April, total capacity utilization rose to 73.7% from 73.1%. It is up nicely from the low of 68.3% hit in June of last year, but remains well below its long-term average level of 80.6%. It is expected to increase further to 74.2% in May. As with the Industrial Production numbers, the total can be distorted by the weather in the utility numbers. The manufacturing-only numbers were lower at 70.8% in April, but have been showing greater improvement than the overall number. It fell all the way to 65.2% last June.
Thursday
* Weekly initial claims for unemployment insurance come out. They fell 3,000 in the last week, to 456,000. After a huge downtrend from mid-April through the end of 2009, initial claims have become very erratic so far in 2010. Look for them to fall next week. Longer term, we have made progress, but not good enough. We probably need for weekly claims (and the four-week moving average of them) to get down to closer to 400,000 to signal that the economy is adding enough jobs to make a dent in the unemployment rate. We are a lot closer now than we were last spring when they were running north of 640,000 on a consistent basis, but we still have a ways to go.
* Continuing claims have also been in a steep downtrend of late. However, that is in part due to people simply exhausting their regular state benefits, which run out after 26 weeks. If one factors in the extended claims paid by the federal government as part of the Stimulus Program, claims soared last week. Looking at just the regular continuing claims numbers is a serious mistake. They only include a little over half of the unemployed now, given the unprecedentedly high duration of unemployment figures. Last week regular continuing claims were 4.462 million, down 255,000 from the previous week. Extended claims (paid from federal ARRA funds) were 5.390 million, an increase of 69,500. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks.
* Inflation at the consumer level is also very tame. The headline CPI is expected to match its April decline of 0.1%, in part due to lower gasoline costs. Excluding food and energy, prices are expected to have risen by just 0.1% in May after having been unchanged in April. Consumer price inflation, both headline and core, has been virtually non-existent over the last six months. Inflation simply is not a threat right now, nor is it likely to be any time soon. Policy makers' fear of a non-existent threat is preventing them from tackling very real problems like unemployment and low capacity utilization.
* The Index of Leading Economic Indicators is expected to have increased by 0.4% in May after declining 0.1% in April. Given the decline in the S&P 500 during May, which is one of the most important of the indicators, a 0.4% increase would mean a very strong showing for the rest of the indicators. Building permits are another one of the indicators, so if they come in stronger than expected on Wednesday, then look for a positive surprise in the LEI on Thursday; ditto if they disappoint.
* The Philly Fed index, which is similar to the Empire State index released on Tuesday but covering the Mid-Atlantic states, is expected to show growth in June, but at a slower rate than in May. The consensus expectation is for a reading of 17.0, down from 21.4 in May. Any reading over 0 indicates expansion, and 17.4 is still a very healthy reading.
Friday
* No reports of particular significance.
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