If you look at the most recent U.S. jobs and manufacturing data summarized below as well as better retail earnings this morning (WSJ, IBD), it’s a picture of modest improvement. Normally this would mean higher rates as investors shift out of safe bets into riskier assets. But the overhang of the Eurozone debt crisis proves to be too much.

It doesn’t help that Bernanke implied the U.S. could be Greece in his testimony this morning. Read the link for why it’s really not, but that doesn’t matter on short-term sentiment. The bond rally continues on this, and of course the week’s hot Eurozone topic: Greece, which is still trying to get private investors to agree on a debt deal.

The deal calls for Greek bond investors to exchange outstanding bonds for new ones with coupons as low as 3.6-3.75%, and take losses of about 70% in the process. If most private investors don’t agree, it could trigger credit default swaps (CDS) on these securities, leading a European bank liquidity issue, which is really a global issue.

That plus the fact that the deal may not save Greece is why investors are seeking refuge in MBS and Treasuries (which are yielding 1.84 right now, also staggeringly low).

And now for the stat/chart rundown…

Jobless Claims
-367,000 for week ended January 28, seasonally adjusted
-Down 12,000 from previous week’s revised 379,000 (was 377k)
-4-week moving average was 375,750, down 2,000
-The 4-week average translates into 1,637,000 Jobless Claims/month
-While this week’s data is modestly better, this is not an indication of a healthy jobs market. It is healthier that it was but still not well. Tomorrow’s BLS Employment Situation Report will give another look.

Challenger Job-Cut Report
-Announced layoffs for January were 53,486 up from previous month’s 41,785

ISM Manufacturing Index (January 2012)
-ISM Manufacturing Index 54.1. Previous was 53.9.
-50 is dividing line between expansion and contraction
-This is the 30th straight month of (albeit modest) expansion
-The data are consistent. The wholesale part of the economy seems unaware that consumer spending had flattened. Either Consumer Spending will increase or manufacturing will decrease. The last GDP report showed significant growth in inventories.

The point is that this is perilous for 1Q2012 GDP. If Consumer Spending is flat and Government Spending is down and the Investment part of GDPis down because inventories are too large then GDP will be flat or even negative.

Here’s a summary of all ISM Manufacturing trends:

Worker Productivity and Costs (4thQ2011)
-Nonfarm productivity – Quarter/Quarter change +0.7%
-Unit labor costs – Quarter/Quarter change (seasonally adjusted, annualized) – +1.2%
-Productivity growth slowed (it was +2.3% in the previous Q/Q comparison) while compensation rose 1.9% after falling 0.3% in 3rdQ2011.

ADP January 2010 Jobs Report
-ADP showed +170,000 new private jobs
-Previous was +325,000, Consensus was +172,000
-These are private sector jobs only: +170,000 private jobs is not an indication of economic growth and just barely keeps pace with population growth.

Mortgage Applications Week Ended January 27
-Purchase Index, Week/Week -1.7%
-Refinance Index, Week/Week -3.6%
-Composite Index, Week/Week -2.9%

- Purchase Index, 4-week Moving Average +4.11%
- Refinance Index, 4-week Moving Average +4.22%
- Composite Index, 4-week Moving Average -2.9%

-Full mortgage app report.

Construction Spending (December 2011)
-Construction Spending, Month/Month +1.5%
-Construction Spending, Year/Year +4.3%
-New single-family construction was 1.5%

by Julian Hebron & Dick Lepre

New Home Sales (December 2011)
-New Home Sales for December were 307,000 (seasonally adjusted, annualized)
-Previous was 315,000. Consensus was 320,000
-Down 2.2% since November, Down 7.3% since December 2010
-Average sale price $266,000
-Estimated 302,000 new homes were sold in 2011, down 6.2% below the 2010 figure of 323,000
-Full report
-No surprise here – this is still weak.

Leading Economic Indicators
-Leading Indicators, Month/Month change +0.4%.

Forget the data here. What is notable is that money supply has been removed from LEI. This goes hand-in-hand with yesterday’s FOMC announcement that short-term rates would stay where they are for at least 2 more years. This is an admission that monetary policy has been ineffective as a stimulation force on the economy. That is, to me, an astonishing admission.

Durable Goods Orders (December 2011)
-New Orders, Month/Month 3.0%
-Ex-transportation, Month/Month +2.1%
-This is indicative of continued growth in manufacturing.

Chicago Fed Index of National Activity
-Index level was +0.17 for December

Kansas City Fed Regional Manufacturing Index
-Level was +7 for December

GDP
I want to correct what I wrote yesterday about the forecast for GDP. The Consumer Metrics index spiked in June-July. Since this seems to lead GDP by three month this indicates a fairly strong (3.5% or more) increase in 4Q2011 GDP. The subsequent slide down in the Consumer Metrics Index indicates a weak 1Q2012.

Jobless Claims
-352,000 for week ended January 14, seasonally adjusted
-Down 50,000 from previous week’s 402,000 (was 399k)
-4-week moving average was 379,000, down 3,500
-Biggest weekly drop since September 24, 2005
-Lowest jobless claims since April 2008
-But job market still not adding jobs fast enough
-More analysis/charts from Bespoke

Housing Starts & Building Permits (December 2011)

Housing Starts (December)
-Housing Starts 657k seasonally adjusted, annualized. Below previous (685k) & consensus (678k)
-Construction (measured by Starts) down 4.1% in December
-Single family starts up from 450k to 470k, highest since April 2010 when homebuyer tax credit boosted production
-Multifamily home constructions down from 13% from 215k (Nov) to 187k (Dec)
-Single family starts ended 2011 at 428,600, worst year on record.

Building Permits (November)
-Building Permits 679,000, seasonally adjusted, annualized
-Permits are a measure of future construction
-Up 0.1% from November
-Flat month

There should be 1,500,000 annual Housing Starts to keep pace with population growth and scrappage. Relaxed mortgage underwriting led to increased supply and the recession has created more supply (foreclosures) and lower demand leading to still decreasing home prices. The housing market is not going to return to normal until the foreclosure inventory is cleared and values stop falling.

-Starts/permits releases: Commerce Dept | NAHB
-Table and chart below. Click images for more.

CPI: Consumer Inflation (December 2011)
-CPI, Month/Month unchanged from previous month
-CPI, Year/Year change +3.0%
-CPI core (less food & energy) Month/Month change, +0.1%. Previous +0.2%. Consensus +0.1%.
-CPI core (less food & energy) Year/Year change, +2.2%
-Consumer inflation is flat, and not a threat near-term

Philadelphia Fed Manufacturing (January 2012)
-Index of manufacturing activity in Philly region rose to 7.3 for January
-Region is: Eastern Pennsylvania, Southern New Jersey, Deleware
-This is down from a from a revised 6.8 in December (was 10.3)
-Zero is the dividing line between expansion and contraction
-Fourth straight monthly gain even with revision down for December
-Full report

by Dick Lepre & Julian Hebron

-Up 24,000 from previous week’s revised 375,000 (was 381k)

-4-week moving average was 381,750, up 7,750

-Initial claims now at highest level since end of November on a seasonally adjusted basis, but still under 400k, a key threshold.

-There were a lot of post-Christmas layoffs presumably from employers such as UPS but this data is seasonally adjusted.

-The Bespoke chart below shows claims on a non-seasonally adjusted basis, and they report that “Even after this week’s reportedly big jump, for the first week of January (red dots), initial claims have not been this low since January 2008.”

-The reality is that the jobs market is still weak despite a decent run for claims before this week.

Retail Sales (December 2011)
-Retail Sales, Month/Month 0.1%

-Retail Sales less autos, Month/Month -0.2%

-Less Autos & Gas, Month/Month 0.0%

-Retail sales were up 7.7% in 2011 vs. 2010

-Full report from Commerce Dept.

Business Inventories (November 2011)
-Inventories, Month/Month +0.3%.
-This is more or less in line with consumer demand.

Outlook
This new year is starting poorly. Recent fundamentals are pointing to reduced GDP growth. We have not yet recovered from the mortgage mess induced recession and now the EU is about to start a lengthy period of recession or flat growth. Japan is going nowhere and China will lower GDP growth. Our national fiscal policy is unsustainable. What we have is a formula for lengthy, worldwide recession.

If this is in fact the outcome, the upside is sustained low rates for consumers who qualify for credit.

by Dick Lepre & Julian Hebron

The main market moving event of the week is tomorrow’s BLS jobs report. More below.

ADP Jobs Report
-ADP private Jobs for December +325,000

-Well above consensus (178,000) and previous (204,000)

-While ADP and BLS sometimes seem loosely correlated this is an indication and tomorrow’s BLS non-farm jobs will be strong

Challenger Job-Cut Report
-Announced Layoffs for December 41,875

-Previous was 42,474

-Except for a spike in September this number has been rather flat for about two years.

Initial Jobless Claims
-372,000 for week ended December 31

-Down 15,000 from previous week’s revised 387,000 (was 381k)

-4-week moving average was 373,250, down 3,250

-Weekly resumes down trend after rising week of 12/24 (the only rise in last 5 weeks)

-Below 400k signals improving jobs picture

-Average claims since 2000 are 390k, so 1-week and 4-week numbers are better than long-term trend.

The jobs market is a more complex thing than simple totals reveal. From month-to-month most people have the same job they had the month before but some workers die, some retire, some get laid off and some get rehired. In addition the market ideally should absorb young people who are seeking to enter the jobs market.

If people defer retirement because they do not have enough savings then total jobs may be higher than otherwise and while that is good because they are still earning and spending, this could be contributing to fewer people at the other end of the age spectrum getting hired. That $7 trillion in lost value in household wealth which yesterday’s Federal Reserve report mentioned may have shifted the demographics of the jobs market.

ISM Non-manufacturing Sector
-This is a survey index of services sectors

-Index value for December was 52.6. Previous was 52.0. Consensus was 53.4.

-50 is dividing line between expansion and contraction

-This shows modest growth.

-Up 15,000 from previous week’s revised 366,000 (was 364k)

-4-week moving average was 375,000, down 5,750

-Weekly up but 4-week average still trending down

-Below 400k signals improving jobs picture

-Average claims since 2000 are 390k, so even with the weekly rise last week, the 1-week and 4-week numbers are still better than long-term trend. But how this decrease in jobless claims translates into jobs remains to be seen. There is imperfect correlation between jobless claims and jobs. If the 4-week average is 375,000, then 1,500,000 people lost jobs in the last 4 weeks. But this number doesn’t capture newly hired people so it’s difficult to draw conclusions on this dataset alone. Markets won’t make any meaningful trading moves until the December jobs report is released next Friday, January 6. Consensus estimates call for 150,000 non-farm jobs created.

Pending Home Sales (November 2011)
-Pending Home Sales Index was 100.1 (full report-with methodology at bottom)

-7.3% higher than October, highest in 19 months

-5.9% higher than November 2010

-April 2010 was last time index was higher (111.5) as buyers rushed in to get tax credit

-For existing single family homes entered into sales contracts expected to close in 60 days

-This is a good number but: 33% of realtors report cancelled deals on existing home sales

-Also this data comes from NAR which just said it had been publishing incorrect home sales data for the past 5 years, so let’s let this play out a few months.

Chicago PMI
The Business Barometer Index for the Chicago region was 62.5 for December. Any value above 50 indicates expansion. Keep in mind that this is the wholesale side. If the consumer does not increase purchasing then the wholesale index will diminish.

Bloomberg Consumer Comfort Index (week ended 12/25)
This is a survey index of consumer attitudes. The level fell from -45.0 to -47.5. This says more about consumer psyche than economics. For example, in this survey the consumer stated that he intended to buy less, his personal finances were worse, but that current state of the economy was better. Go figure.

by Dick Lepre & Julian Hebron

BEA’s final GPD for 3Q2011 is now 1.8%. It started at 2.5% and was first revised to 2.0%. This “final” GDP will continue to be revised for years to come making one wonder WTF?

Some of the source of these revisions are understandable because investments, exports and imports only have two months’ data when the first release is issued necessitating guessing at the last month of the quarter.

Rick Davis of Consumer Metrics Institute has written extensively about this making the case that some of what BEA does lacks transparency because they use deflators (adjustments for inflation) which are out of line with CPI and PPI and for which BEA offers not explanation as to their primitive data or methods.

Initial Jobless Claims
-364,000 for week ended December 17
-Down 4,000 from previous week’s revised 368,000 (was 366k)
-4-week moving average was 380,250, down 8,000
-Below 400k signals improving jobs picture
-Average jobless claims since 2000 is 390k, so 1-week and 4-week numbers are less. Great trend.
-Continuing Claims for the week ended 12/10 were 3,546,000, the lowest level since GDP started back up.

Consumer Sentiment
Consumer Sentiment for December is 69.9 up from 64.1 in November. This is not hard data but a survey intended to measure predisposition to spend.

Leading Economic Indicators
LEI for November was +0.5%. Previous was +0.9%.

This is a rehash of 10 other bits of data. It is very much influenced by monetary policy (rates and money supply.) It is intended to forecast GDP growth 3-6 months in the future.

FHFA Home Price Index
Index level for October was -0.2% month/month and -2.8% year/year. Consensus for October was +0.3%. Home prices have not yet bottomed out. Add to that the admission yesterday by NAR that it had been overestimating Existing Home Sales for 5 years and one does not get imbued with confidence. This index isn’t the most credible barometer either because it only includes homes with Fannie/Freddie loans. Here’s the full report.

Corporate Profits
3Q2011 Corporate Profits were +6.2% year/year.

The Fannie Mae 3.5% coupon, a benchmark most lenders use to price 30yr consumer mortgage rates, is trading +/- 5 basis points today, hovering around the unchanged 102.44 level.

This despite another big decline in jobless claims and another improvement in manufacturing.

On the ‘risk’ side, stocks dropped three days up to today, and the S&P 500 is now up 6 points to a level of 1218.

A full summary of today’s better U.S. economic data is below. And the latest from Europe is IMF managing director Christine Lagarde explaining why Europe’s situation is dire indeed. Despite the modest stock gains, bonds are holding the line given non-U.S. risks.

For now, the good news is improving U.S. data (below) and low U.S. rates.

Initial Jobless Claims
-366,000 for week ended December 10
-Down 19,000 from previous week’s revised 385,000 (was 381k)
-4-week moving average 387,750, down 6,500
-Below 400k signals improving jobs picture
-Lowest level since May 2008
-The holidays can cloud jobs data but this is positive on the surface and trend may be emerging.
-More analysis & chart

Inflation: Producer Price Index
-PPI, Month/Month +0.3%
-PPI, Year/Year 5.7%
-PPI less food & energy, Month/Month +0.1%
-PPI less food & energy, Year/Year +2.9%
-Monthly and annual figures flat.
-No inflation threat for now. CPI tomorrow.

Empire State Manufacturing
-December business conditions index rose to 9.5
-Highest manufacturing activity level since May
-Was 0.61 in November, first positive since May, huge jump from October’s -8.48
-0 is dividing line between expansion and contraction
-Full report

Philly Fed Manufacturing
-December manufacturing activity index rose to 10.3
-Highest since April, third straight month of growth after 3mo of contraction
-Was 3.6 in October and 8.7 in September
-0 is dividing line between expansion and contraction
-Full report

RECAP DECEMBER 2-9 MARKET WEEK
Another Declining Home Price Report: CoreLogic’s October home price report showed that home prices were down 1.3% monthly and 3.9% annually. This follows Case Shiller’s September report the week before showing home prices were down 0.6% monthly and 3.6% annually. These reports don’t count all homes; here’s more on homes they count and the latest home price details.

Lowest Jobless Claims Since Feb: Claims for unemployment insurance were 381,000 for week ended December 3, down 23,000 from previous week. It was the lowest level since February and the second lowest since Lehman failed in September 2008. Also the 4-week moving average was 393,250. Below 400k signals improving job market. This Thursday’s report will be critical to see if the Thanksgiving break artificially slowed claims, or if a positive jobs trend is emerging.

Highest Consumer Sentiment In 6mo: The University of Michigan Consumer Sentiment Index was 67.7 for December, the highest in six months, indicating consumers may be in the mood to spend. The November reading was 64.1 and the strongest since June. This also has to develop into a consistent trend, but this number fluctuates with gas prices, political mood, etc. so it doesn’t really move markets. Actual spending data moves markets.

PREVIEW DECEMBER 12-16 MARKET WEEK
Next week’s economic calendar is quite busy. Below are highlights and rate impacts.

Last 2011 Fed Meeting: One thing driving rates lower in recent weeks is rumors the Fed may buy $545b of mortgage bonds (MBS) in a third round of QE to be announced 1Q2011. If Tuesday’s final Fed rate policy meeting of 2011 doesn’t confirm this QE3, the meeting won’t move markets because the Fed will hold to near-zero overnight rates and to their current policy of keeping rates down by reinvesting proceeds from existing MBS into new MBS.

Retail Sales Post Black Friday: Estimates call for retail sales to rise 0.6% to 0.8% in November. Sales rose 0.5% in October following a 1.1% rise in September. We could see this number beat since jobless claims and consumer sentiment have trended better (noted above), and because of early holiday shopping. If so, rates up.

Manufacturing Up Trend: November showed better data from two key U.S. manufacturing reports, both of which have 0 as dividing line between expansion/contraction. Empire State was +0.61 in November, the first positive since May and a huge jump from October’s -8.48. Philly Fed was +3.6 in October, the second month of growth (September was +8.7) following three months of contraction. December reports are Thursday for Empire and Friday for Philly. Estimates call for Empire to be 3.0 and Philly to be 4.0. If so, rates up.

Jobless Claims Trend: As noted in last week’s recap above, this Thursday is critical to see if an improving jobs outlook continues this week. Rates up if it does.

Inflation Flat Again?: November inflation for producers (PPI) and consumers (CPI) is due Thursday and Friday. October’s annual PPI was 5.9% total and 2.8% excluding food and energy. Annual CPI was 3.6% total and 2.1% excluding food and energy. All of these October annual figures were creeping up, but the October monthly figures were resoundingly flat, so rates held lows as bonds liked this news. If November monthlies inch up, rates will rise.

Biggest Stock IPO Since 2007: There are 12 IPOs this week including gaming site Zynga, making this the busiest IPO week since 2007. Traders will be looking to see if Zynga suffers same strong-start-then-retreat as LinkedIn, Pandora, and Groupon, but still, this kind of IPO activity could bode well for stock sentiment.

Europe: Last week, European Union leaders agreed to more centralized budget controls and the ability to hold nations more accountable for not balancing budgets (more from FT and WSJ). If it sounds thin, it may be, like many previous EU steps. But markets liked it to close the week.

Technical Trading Factors: Looking at stocks, the S&P 500 closed last week at at 1255, just below its 200-day moving average of 1263, a mark it rose above three trading days but couldn’t close above. Bulls could take charge if it closes above this level next week. There’s room to drop down to the 50-day moving average of 1220 if sentiment turned negative. As for mortgage bonds (MBS), rates rise when MBS sell, and rates haven’t risen for three weeks because the 3.5% Fannie Mae coupon—a key benchmark lenders use to price consumer rates—continue to be incredibly resilient at their 25 and 50 day moving averages even as stocks rally.

Bottom Line For Rates: Last week, I said rates could rise slightly unless EU leaders truly blow it. They didn’t blow it but a theme has emerged: stocks rally on the littlest EU optimism yet MBS hold the line, keeping rates low. This MBS technical strength could have to do with QE3 rumors because most other economic data points noted above are improving, which would normally cause MBS to sell and rates to rise above record lows. For this to happen, markets must see sustained improving U.S. economic data and a week where Europe isn’t front and center. That could be this week. But even if rates rise slightly, the long EU slog will still keep MBS a safe haven, so a mass selloff (aka rate spike) isn’t likely near term.

Consumer Credit
From late yesterday: Consumer Credit was +$7.6 billion. The largest component is non-revolving credit which, presumably, reflects strong auto sales.

Wholesale Trade
Inventories – Month/Month change +1.6 %. Previous was -0.1%. This gives some strength to 4thQGDP but if consumers do not buy these goods then 1Q2012 GDP will take a small hit.

The ongoing discussion about EU debt is part of the broader context of the world economy. The US is showing weak recovery from recession. Fiscal concerns will likely cause recession in many EU nations. In China growth is slowing and they have a looming currency and banking crisis.