Economic Watchdog, Dec 24
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December 24, 2008
Despite shortened trading session, economic news has been a focus Wednesday. Stock and bond markets will close at 1:00 ET today, which means low volumes. Nonetheless, those traders that are working today have gotten several economic reports to digest. Reports on mortgage applications, durable goods orders, personal incomes and spending and crude inventory levels all were released this morning.
On Tuesday, data on new and existing home sales continued to show declines. There are very few signs that lower mortgage rates and Fed intervention has put a bottom under the housing sector. However, lower rates did push mortgage applications higher for the week ending Dec. 19. The MBA mortgage purchase index rose 11 percent led by a 60 percent jump in the refi index. For the week, the 30-year mortgage rate dropped 14 basis points to an average of 5.04 percent. Nonetheless, the housing sector continues to be a huge concern with inventory levels high and house prices following.
Another major concern is the large amount of jobs that have been lost. Jobless claims for the week ending Dec. 20 rose sharply, up by 30,000 to a total of 586,000. This was well above forecasts for a reading of 552,000 and the prior week’s figure of 556,000. The four-week moving average sits at 558,000, its highest reading since 1982. This has put forecasts for unemployment at high levels, possible surpassing the 10.8 percent unemployment rate hit during the recession of 1982. In November, the unemployment rate came in at 6.7 percent.
During the holiday season, consumer spending gets a lot of attention, especially when it occurs during a recession. In November, the Bureau of Economic Analysis reports that consumer spending fell 0.6 percent, roughly in line with expectations. However, personal income fell 0.2 percent when a flat reading was expected. Consumer spending has now fallen for five straight months, but the declines have been mainly due to falling gasoline prices. In fact, real spending, which is adjusted for inflation, rose 0.6 percent. This is the first gain in real spending since May. Nonetheless, with job losses piling up while housing prices decline, consumer spending looks destined to weaken further.
The core personal consumption expenditure price index was flat in November. The core PCE is a measure of inflation that is a favorite of the Fed. Of course, a sharp decline in oil prices has been the main reason for falling prices, with the headline PCE down 1.1 percent. Year on year, the core PCE is up 1.9 percent, which puts the index below the Fed comfort level. It’s hard to believe that less than a year ago the talk among traders and economists was fighting inflation with oil prices hitting record highs.
Speaking of energy prices, crude continues its decline, down about $1.50 a barrel Wednesday to a price near $37.50. Crude inventory levels for the week fell by 3.1 million barrels when an increase of 1.5 million barrels was expected. A 3.3 million barrel gain in gasoline reserves has kept crude prices lower. OPEC is trying to cut production to put a floor under the commodity, but falling demand is more than offsetting the cartel’s attempts.
Durable goods orders in November fell 1.0 percent, which was much better than the 3.0 percent decline expected and well off October’s decline of 8.4 percent. Excluding the transportation sector, new orders actually rose 1.2 percent. In the past year, new orders for durable goods show a decline of 13.2 percent, 6-tenths worse than October’s figure. This report continues to point to contraction in the manufacturing sector in the fourth quarter of 2008 through at least the first quarter 2009.
Jody Osborne
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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