THE BASIS POINT

U.S. ECONOMIC STATS: Recap Jan 23-27, Preview Jan 30-Feb 3

RECAP JANUARY 23-27 MARKET WEEK

Rates Drop on Fed Surprise: The first FOMC meeting of 2012 surprised markets by indicating the Fed would target overnight bank-to-bank Fed Funds Rate at 0 to .25% through late-2014. Before they were saying mid-2013. Rates dropped as mortgage bonds rallied on the news. The Fed also re-confirmed their Operation Twist strategy of shifting debt holdings from shorter into longer durations, and a ongoing reinvestment of proceeds from their existing mortgage bond holdings into new mortgage bonds, which helps keep mortgage rates low. Fed meeting summary.

Pending Home Sales Reverse Gains: The NAR’s December Pending Home Sales index was -3.5% to 96.6, a stark contrast from a 19-month high of +7.3% in November. This stat is new purchase contracts to buy existing homes that are expected to close in 60 days. Even with December decline, November-December numbers were best since March-April 2010. And December 2011 was +5.6% higher than December 2010. So this stat is trying to improve, but not helping is the fact that 33% of NAR realtors have reported cancelled deals on existing home sales October through December.

New Home Sales Questionable: December’s New Home Sales were 307,000 (seasonally adjusted, annualized), down 2.2% since November, and down 7.3% since December 2010. Average December sale price: $266,000. Estimated 302,000 new homes were sold in 2011, 6.2% below the 2010 figure of 323,000. New home sales are well below the 700k annualized needed for a healthy market. This long-term chart tells the story.

Home Prices Hanging On: The Federal Housing Finance Agency’s (FHFA) home price report was +1% for November but -1.8% since November 2010. FHFA’s report also said home prices are down 18.8% from their April 2007 peak. But this report isn’t as widely followed—nor does it impact rates—because it’s only for homes with Fannie/Freddie mortgages, so doesn’t include a broad enough sample as home price reports from Case Shiller and CoreLogic. The next Case Shiller report is Tuesday, and highlighted below.

GDP Not Looking Good: The first of three GDP readings for 4Q2011 was 2.8%, below estimates of 3%. But the trend for all of 2011 was that subsequent readings were cut. The third and final 3Q reading was 1.8% after being cut twice: second reading was 2%, first reading was 2.5%. Net result: 2011 GDP was just 1.7% vs. 2010 GDP of 3%. And it might go lower if 4Q is revised down.

Jobless Claims Still OK Despite Up Week: For the week ended January 21, claims for unemployment insurance rose 21k to 377k. Despite the rise, claims are still well below 400k, a threshold under which the job market is considered to be improving. The 4-week moving average is at 377,500, also below 400k. This is a good trend, but this report doesn’t count jobs added. We’ll get that data with Friday’s BLS report, previewed below. And also Jobless Claims are reported every Thursday.

PREVIEW JANUARY 30-FEBRUARY 3 MARKET WEEK

Next week’s economic calendar is busy. Plus it’s another big earnings week, and Greece’s debt deal will be top of mind for traders. Highlights below with rate impacts.

Flat Inflation Likely To Continue: December’s personal consumption expenditures index (PCE) is Monday. It’s the Fed’s preferred inflation measure. November’s annual figures were 2.5% total and 1.7% excluding food and energy. Same story with flat or declining monthly and annual PPI and CPI. December’s annual PPI was 4.8% total and 3.0% excluding food and energy. Annual CPI was 3.0% total and 2.2% excluding food and energy. No rate change on this PCE data, unless it’s an upside surprise, then rates up.

Home Prices Down Again?: November’s S&P Case Shiller home price report is Tuesday. Prices of existing single family homes across 20 major U.S. metro areas fell 1.2% in October and fell 3.4% since October 2010. It was second straight down month after a five-month ’20-City’ streak of modest rises. Still, dataset co-creator Robert Shiller said then: it’s a good time to buy a home, and last week did a detailed home price Q&A with Business Insider.

Manufacturing Growth Streak: January’s Institute for Supply Management (ISM) Manufacturing Index is Wednesday and estimates call for 55. December ISM was 53.9, up from 52.7 in November, with 50 as dividing line between between expansion and contraction. This was the 29th month of growth and a 6 month high. It’s slim growth, but a resilient streak. And of course consumers must still buy what’s being manufactured for this to translate into real economic growth. Rates even to up slightly.

ADP Jobs Report Expectations Vary: Payroll provider ADP’s January jobs report is Wednesday and expectations are broad from 175-250k. December’s ADP was a blowout: 325,000 private jobs created versus of 178,000 and November’s 204,000 figure. Still rates didn’t rise on this data last month. More in BLS jobs report preview below.

Rates May Hold Despite Better BLS Jobs Report: The Bureau of Labor Statistics January jobs report is Friday and expectations call for 170-225k nonfarm jobs created and unemployment unchanged at 8.5%. December’s BLS nonfarm jobs report showed 200k new non-farm jobs created vs. the 100k created in November, and unemployment dropped from 8.6% to 8.5%. Encouraging news since people need jobs to spend, but this chart shows just how much ground there is to regain from the recession depths. That link also explains that rates didn’t rise despite a second straight improving jobs report because Europe’s debt troubles loom larger for rate markets.

Greece Debt Deal Imminent, Unpredictable: Headlines and trading this week will focus on two main issues in Europe: (1) Greece’s months-long negotiations with private bond investors that involve exchanging outstanding bonds for new ones (with coupons as low as 3.6-3.75%) and taking 50-70% losses. If most private investors don’t agree, it could trigger credit default swaps, then banks come under pressure, then we’d have a European bank liquidity issue, which is really a global issue—U.S. rates would drop in this scenario. (2) Monday’s EU summit will focus on tighter fiscal union across the EU. But short-term, all sentiment hangs on the Greece deal. Volatility will reign, with most probable scenario being lower rates as investors focus on U.S. mortgage and Treasury bonds.

Earnings Highlights: Earnings season rolls on this week, including lots more that give us a feel for consumer strength: Philips Electronics, Gannett, Exxon Mobil, Honda, UPS, Pfizer, Amazon.com, Aflac, Oshkosh, Tyco, Aetna, Whirlpool, Tupperware, Qualcomm, Chipotle Mexican Grill, Las Vegas Sands, Allstate, AstraZeneca, Merck, Royal Dutch Shell Unilever, Sony, Kellogg, MasterCard, Allergan, Viacom, Cigna, Blackstone, CME Group, Pulte Group, Royal Caribbean, Clorox, Estee Lauder, Aon, Tyson Foods.

RATE & STOCK OUTLOOK

Don’t miss WeeklyBasis, short and sweet outlook on next week’s rate and stock markets. [COMING SHORTLY…]