Economic Reports Rundown 12-16-09

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The day's economic reports offered reason to rally. Housing Starts recovered; Consumer Prices quelled concerns about PPI; and import demand points to improving domestic demand for goods. The Dow, S&P 500 and Nasdaq are all higher at the hour of publishing, but buyer beware, as we have found reason to doubt in each one of these reports. We suggest you pay attention.

Economic Reports

Housing Starts Report

Housing Starts were reported this morning for the month of November. After dipping significantly in October to a revised annual pace of 527K, Starts recovered in November, reaching an annual pace of 574K. November's improvement met Bloomberg's consensus of economists' forecasts, which anticipated a rate of 575K. The pace still measured 12.4% below the same time a year ago, which was not a blockbuster period either.

Regionally speaking, most of the gain was driven by improvements in the Northeast and Southern US, where Starts improved 16.4% and 12.3%, respectively. Starts rose only 3.0% and 1.9% in the Midwest and Western US, respectively. Multi-family construction also played significant role in driving improvement, as Starts of construction of structures of five or more units increased 62.7% over October, while single family units improved just 2.1%.

We view this month's gains as suspect, since we have concern for the multi-family market generally. We speculate that overlap between commercial and multi-family development, as well as tighter financing, will limit the sustainability of improvement in multi-family projects. Real estate took a notable step backwards in October tied to the pending expiration of First-Time Homebuyer Tax Credit incentive. As discussed in this earlier tax credit article work, we would not look for immediate restoration of the single family segment post the renewal and expansion of the tax incentive.

Consumer Price Index (CPI)

The latest check on Consumer Prices came due this morning with November's Consumer Price Index (CPI) report release. Headline Consumer Prices increased a concerning 0.4% in November, but the result was in line with expectations, since energy prices were already widely noted higher. The Energy Index increased 4.1% during the month, driven largely by a 6.4% gain in gasoline, 9.0% gain in fuel oil and 6.3% rise in energy commodities. Energy price rise, namely in natural gas, also played great role in leading Headline CPI up 0.3% in October.

Core CPI, excluding food and energy prices, was relatively unchanged in November, against economists' expectations for a 0.1% increase. Prices had risen 0.2% in October, but November's prices were stabilized by decreases in lodging, especially that available away from home (hotels, motels). The indexes for rent and owners' equivalent rent both fell 0.1%, while lodging away from home fell 1.5%. On the increase, electricity prices rose 1.4%, while used cars and trucks cost 2.0% more on average.

On net, the CPI data helped to ease concerns tied to yesterday's 0.5% increase in Core Producer Prices, but we wonder just how long it will be until margin squeeze pushes consumer level prices up again and inflation roars.

Mortgage Activity Report

Mortgage activity was relatively unchanged in the week ended December 11. The Market Composite Index of mortgage activity volume showed a 0.3% increase. The Purchase Activity Index decreased 0.1%, while a slight rise in contracted 30-year fixed rate mortgages did not hamper a 0.9% rise in Refinance Activity. Contracted 30-year fixed rate mortgage rates gained to 4.92%, from 4.88%, while 15-year rates held steady at 4.33%.

Current Account Report

The US Department of Commerce reported on the Q3 Current Account at 8:30 this morning. The Current Account deficit expanded in the third quarter, to -$108 billion, from a revised -$98.0 billion in the second quarter. The deficit had narrowed in Q2 on weakened domestic demand, and so you might view the deficit expansion as a positive signal. However, while capital goods imports rose, much of the increase was due to greater petroleum and industrial supplies and materials imports. Those were greatly driven by increases in the prices of commodities due to dollar weakness. That's not indicative of demand improvement.

Crude Oil Inventory

The weekly Petroleum Status Report released this morning showed crude oil inventory decreased by 3.7 million barrels in the week ended December 11. Last week's report, covering the period ending on December 4, also showed crude oil inventory decreased by 3.8 million barrels.

In our "Week Ahead" copy, we said that as the wind chills, distillate fuels should see seasonal draw. Distillate fuel inventory decreased by 2.9 million barrels, comparing against the prior week increase of 1.6 million barrels. We correctly noted, "We would start looking for draws here in the weeks ahead."

Gasoline stocks increased by 0.9 million barrels, compared against a 2.2 million increase through the prior week. We are far from the summer driving season that leads draws in gasoline stores in the US.

Overseas News

The Czech Republic's central bank cut its key two-week repo rate by a quarter point to 1.0%. Sweden's Riksbank held its key rate steady at 0.25%. However, Norway's central bank surprised the currency market, after it raised its key rate a quarter point to 1.75%. This sparked a rally in the Norwegian krone. We expected all three to take a mild position, given nascent pressure on the euro and EU - related to the credit warnings issued to Greece and Spain. Norway looks to have acted in its own interests rather effectively here.

Corporate News Drivers

Wednesday's corporate earnings schedule includes reports from Hovnanian Enterprises (NYSE: HOV), Apogee Enterprises (Nasdaq: APOG), Joy Global (Nasdaq: JOYG), China Gas Holdings (OTC: CGHOF.PK), Crossroads (OTC: CRDS.PK), Aurubis (Frankfurt: NDA.F), Heiler Software AG (Frankfurt: HLR.F), Gifi Villeneuve (Euronext: IGF.PA), Manutan Int’l (Euronext: MAN.PA) and Zodiac Group (Euronext: ZC.PA).

FOMC Policy Statement Pending

The Federal Open Market Committee (FOMC) is slated to make its Policy Statement at 2:15 PM ET. Economists agree the US Federal Reserve committee will keep rates steady at 0.0% - 0.25%, and so all eyes will focus on the wording of the Fed's Policy Statement. Chairman Bernanke has not been in hiding, and so we do not expect a much-varied outlook nor plan from the Fed group this week. Still, traders tend to seek out reason to move in the short-term, and so their interpretation will matter more than the news itself – for today at least.


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