Vital Signs: Betting on Lower Rates

On tap: February new home sales, durable goods, and personal income figures, and March consumer sentiment readings

The financial markets are betting a softer economy, led by housing, will push the Federal Reserve to cut interest rates back to 4.75% (from 5.25%) by the end of the year. Yet, even though the central bank acknowledged weaker conditions, its Mar. 21 monetary policy meeting press release stated "the predominant policy concern remains the risk that inflation will fail to moderate as expected." So are investors overestimating the potential impact from housing, or will the Fed have to make a sudden shift in its stance and cut interest rates?

From the Fed's perspective, personal income, consumer spending, and inflation aren't giving much ground. Economists expect the February personal income and outlays report to show more of the same: decent growth in income and spending. On the final page of the report, take a look at the personal consumption expenditures price index. This is the preferred inflation measure of the Fed. It showed a yearly growth rate of 2.7% in January, and 2.3% when food and energy were excluded. Both remain above the Fed's 1% to 2% comfort level. And even though the March consumer confidence figures are expected to wilt a little, those results haven't correlated well with spending of late.

Meanwhile, investors are focusing on weak results such as those in manufacturing. The February rebound in factory output provided a glimmer of hope, but that will be put to the test with the February durable goods reports. A rebound is anticipated after a dreadful January report. The key is whether businesses remain cautious. If they are, it will show up in the orders data for capital goods minus aircraft and defense equipment.

More directly, the busy spring buying season will play a big role in what happens to interest rates. According to economists, new home sales in February probably improved a little from January despite the inclement weather. If the seasonally adjusted data continue to show solid demand, then the drag from housing should steadily dissipate and the perceived need for interest rate cuts could disappear as well. If not, investors' bets could soon pay off.

Here's the weekly economic calendar, from Action Economics.

Economic Reports
Report Date Time For Median Estimate Last Period
New Home Sales (million, annual rate) Monday, Mar. 26 10 a.m. February 1.00 0.94
Consumer Confidence Tuesday, Mar. 27 10 a.m. March 108.5 112.5
Durable Goods Orders Wednesday, Mar. 28 8:30 a.m. February 3.0% -8.7%
Gross Domestic Product (final) Thursday, Mar. 29 8:30 a.m. Q4 2.2% 2.2%
Personal Income Friday, Mar. 30 8:30 a.m. February 0.3% 1.0%
Personal Consumption Expenditures Friday, Mar. 30 8:30 a.m. February 0.4% 0.5%
Chicago PMI Friday, Mar. 30 10 a.m. March 48.5 47.9
Construction Spending Friday, Mar. 30 8:30 a.m. February -0.5% -0.8%
University of Michigan Consumer Sentiment Index (final) Friday, Mar. 30 10 a.m. March 88.7 88.8

NEW RESIDENTIAL SALES - Monday, Mar. 26, 10 a.m. EDT

New single-family homes sales probably remained soft in February. The January level of sales dropped to an annual rate of 937,000, from 1.12 million in December. The latest drop was likely related to the swing in weather from mild temperatures in December to more seasonal conditions in January. More cold, wintry weather could weigh on February results, although February housing starts did rebound some and the February housing market index from the National Association of Home Builders showed improvements in present sales and buyer traffic.

The slide in January left the months supply of homes for sale to hit 6.8 months, from 5.7 months in December. The total number of homes available for sale inched down to 536,000, from 537,000 in the prior month, and 542,000 in November.


Tuesday, Mar. 27, 5 a.m. EDT - Federal Reserve Bank of Cleveland President Sandra Pianalto speaks about the internationalization of national currencies at the European Banking & Financial Forum held by the Czech National Bank in Prague.

ICSC-UBS STORE SALES - Tuesday, Mar. 27, 7:45 a.m. EDT

This weekly tracking of retail sales, compiled by the International Council of Shopping Centers and UBS bank, will update buying activity for the week ended Mar. 24. Sales grew by 0.4% last week, after growing 0.7% in the week ended Mar. 10. The increase from a year ago improved to 2.7% for the week ended Mar. 17, from 2.1% in the prior period.

JOHNSON REDBOOK INDEX - Tuesday, Mar. 27, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the third fiscal week of March, ended Mar. 24. Through the first two fiscal weeks ended Mar. 17, sales were up 0.5% compared to the same period in February. For the complete month of February sales were off 1.1% from January.

CONSUMER CONFIDENCE INDEX - Tuesday, Mar. 27, 10 a.m. EDT

The Conference Board's March monthly index of consumer confidence is expected to move lower. The February index climbed to 112.5, from 110.2 in January and 110 in December. The February headline reading was driven by an improvement in consumers' view of current conditions. The present situation index rose to 139- the highest reading since August of 2001- from 133.9 in January.

Respondents believed business conditions were better in February. At the same time, fewer believed that jobs were both hard to get and plentiful, reflecting a more neutral view of the labor market. The survey also showed that consumers feel less optimistic about their income prospects. Fewer see income gains in the coming six months, while slightly more consumers expect incomes to fall.

RICHMOND FED SURVEY - Tuesday, Mar. 27, 10 a.m. EDT

The Richmond Federal Reserve Bank releases its March regional survey of business conditions. The composite reading edged up to -10 in February, from -11 in January. A negative result means factory output across the area is declining. The shipments index showed that demand is softening some more, with a reading of -15, from -13 in January. The new orders series was at -4, up from -12 the month before. The weaker activity hit the employment index, which tumbled to -13, from a reading of -5 in each of the prior two months.

Looking ahead to the next six months respondents lost some of the optimism they had in January. The shipments reading fell back to 30, from 45 in January. The new orders, unfilled orders, and capital spending readings also softened in February.

MORTGAGE APPLICATIONS - Wednesday, Mar. 28, 7 a.m. EDT

The Mortgage Bankers Association issues its weekly mortgage application volume data for home buying and refinancing activity during the week ending Mar. 23. For the week ended Mar. 16, both the purchase and refi indexes eased some more. The purchase index was 410.6, from 414.3 in the week ended Mar. 9. The refi index slipped to 2208.6, from 2312.2 in the prior week.

The four-week moving average for the purchase index rose to 407.9, from 400.6 in the prior week. The four-week average for the refi index grew to 2174.6, from 2102.8. The average 30-year fixed-rate mortgage crept back up to 6.06% from 6.03% in the week ended Mar. 9.

DURABLE GOODS ORDERS - Wednesday, Mar. 28, 8:30 a.m. EDT

New orders for durable goods probably rebounded in February, after a dismal showing at the start of the year. New orders in January plunged 8.7%. A 60.2% drop in civilian aircraft orders accounted for a large portion of the monthly decline but the several areas outside of aircraft were lower as well. Construction machinery fell 40.6%, motor vehicle and parts orders slipped 6.7%, and computer and electronic products were down 9.5%.

A pickup in February factory output and a rebound in the new orders index in the Institute for Supply Management's national factory activity report bode well for February durable goods orders.

Within the February figures look at the capital goods orders minus defense equipment and civilian aircraft. This statistic gives a truer picture of business investment. There have been signs that companies are reining in capital expenditures.


Thursday, Mar. 29, 8:30 a.m. EDT - Federal Reserve Bank of Richmond President Jeffrey Lacker gives the opening remarks at the Federal Reserve's Community Affairs Research Conference in Washington, D.C.

12 p.m. EDT - Federal Reserve Bank of Minneapolis President Gary Stern delivers a luncheon address at the University of Dayton's seventh annual Redefining Investment Strategy Education forum in Dayton, Ohio.

12:30 p.m. EDT - Bank of Canada Governor David Dodge to address the Americas Society and Council of the Americas in New York City.

8 p.m. EDT - Federal Reserve Bank of Richmond President Jeffrey Lacker discusses inflation and unemployment at the 34th Annual Meeting of the Virginia Association of Economists in Richmond, Va.

JOBLESS CLAIMS - Thursday, Mar. 29, 8:30 a.m. EDT

Jobless claims for the week ended Mar. 17 fell to 316,000. In the prior week, claims fell to an upwardly revised 320,000, from an originally reported 318,000. The four-week moving average fell to 326,000, from 329,750 in the week ended Mar. 10. Continuing jobless claims for the week ended Mar. 10 edged down to 2.5 million, from 2.57 million in the week ended Mar. 3.

GROSS DOMESTIC PRODUCT - Thursday, Mar. 29, 8:30 a.m. EDT

The final report isn't expected to show much change to fourth quarter figures. After the initial data showed the economy grew at an annualized pace of 3.5%, revised figures released in February showed a markedly softer growth rate of 2.2%. Inventory growth slowed more than the government had expected, business investment was revised down, and the growth in personal consumption was also trimmed a little.

HELP-WANTED INDEX - Thursday, Mar. 29, 10 a.m. EDT

The Conference Board issues its index of help-wanted ads, based on ads gathered from major newspapers across the nation. The January index gave back some of the December gains, falling to 32, from 34. The January level a year ago was 38. Along with a lower index result, the percentage of markets with a rising want-ad volume plunged to 39%, from 80% in December and 41% in November.

Due to the strong level in December, help-wanted ads still managed to grow during the three-month period through January in eight of the nine U.S. regions.

The Conference Board's tracking of online job ads already showed a better result for February, although the index is not seasonally adjusted. Total monthly online job ads jumped by 682,400 in February. That resulted in 2.5 advertised vacancies for every 100 persons in the labor force, up from 2.1 in January.


Friday, Mar. 30, 8:30 a.m. EDT - Federal Reserve Bank of Philadelphia President Charles Plosser makes the opening remarks at a community affairs research conference in Washington, D.C.

12 p.m. EDT - Federal Reserve Board Chairman Ben Bernanke speaks at a community affairs meeting in Washington. D.C.


Personal income probably improved a bit more in February. Overall income growth was 1% in January, after a 0.5% rise in December. The recent strength in personal income has been centered in wage and salary gains. The rise of wages and salaries was 1.2% in January. Compared to the same period a year ago, January personal income was up 5.3%, while wages and salaries were 5% higher. The solid income gains are helping to sustain consumer spending in the face of a housing recession.

Consumer spending probably kept growing at a solid pace, after registering a 0.5% gain in January, and a 0.7% jump in December. Risks to February consumption include the rebound in gasoline prices and inclement weather. On a yearly basis, December spending was up 5.5%, from 5.9% in December.

The personal consumption expenditures (PCE) price index ticked up 0.2% in January, after a 0.3% increase in December. Another increase in energy prices will help push the headline reading higher in February. The slower pace of price gains in January left the yearly inflation rate at 2%, from 2.3% in December. Less food and energy, monthly prices were up by 0.3% in January, after 0.1% gains in the prior two months. The yearly pace of core inflation was 2.3%, from 2.2% in December.

The core PCE price index is the preferred inflation gauge of the Federal Reserve and the central bank's comfort level for this price index is 1% to 2%.

CONSTRUCTION SPENDING - Friday, Mar. 30, 10 a.m. EDT

Construction outlays probably held steady in February. Spending dropped 0.8% in January as private residential construction continued to collapse. Residential construction outlays fell 1.8% in January, after a 1% drop in December. The change from a year ago for private residential construction is 13%. The change in overall construction spending is off just 1.2% from a year ago.

Growth in non-residential construction continues to do a good job of offsetting the housing recession. Non-residential outlays were unchanged in January, after rising 2.3% in December, and are up 14.7% from a year ago. Government construction spending has also held up well, up 0.6% in January and 12% from a year ago.


The Chicago-area purchasing managers' March index of industrial activity probably improved a little. The index started the year inauspiciously, easing to 47.9% in February, from 48.8% in January, and 51.6% in December. The January result was the first under 50% since the spring of 2003. A reading below 50% indicates activity is contracting within the region.

The production index cooled off a little to 51.2% in February, from 53.2% in January, but remained above the recent trough of 49.7% in December. The new orders reading was a little better in February, but at 48.7% it still implies an overall easing in orders. One of the few bright spots in the February report was the employment index, which rebounded to 50.6%, from 42.8% in January.

CONSUMER SENTIMENT INDEX - Friday, Mar. 30, 10 a.m. EDT

The University of Michigan and Reuters will report the final reading of consumer sentiment for February. The index probably held fairly steady, after slipping to 88.8 in the initial March reading, from 91.3 in February, and 96.9 in January.

Consumers in March turned less positive about their current financial position, with the index falling to 103.6, from a final February level of 106.7. The economic outlook for the coming year was also less upbeat. Some of the latest slide in results is tied to losses in the more volatile equity markets. The University of Michigan/Reuters survey places more emphasis on financial market conditions. The Conference Board survey stresses labor market conditions.


Saturday, Mar. 31 - U.S. President George W. Bush meets with Brazil President Luiz Inacio "Lula" da Silva to discuss economic issues and alternative energy at Camp David, Maryland.

Earnings Calendar
Day Companies
Monday Dollar General, Tiffany & Co.
Tuesday Lennar, McCormick & Company
Wednesday Paychex
Thursday Family Dollar, Solectron
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