Fed Chair Janet Yellen will face her first test in her semi-annual monetary policy testimony in front of Congress this week. Ms. Yellen will be in front of the House Financial Services Committee on Tuesday and the Senate Banking Committee on Thursday. Ms. Yellen will be grilled a bit by those critical of the Fed’s actions to see what her take is on tapering QE3 and overall accommodative monetary policy.
The trading week begins with Stock prices modestly lower, while Bond prices are pushing higher. The week features just a few economic reports on Weekly Initial Jobless Claims, Retail Sales and Consumer Sentiment. Stocks have been under pressure in 2014 due to weaker than expected economic data, profit taking by investors, and the Fed easing back on its massive stimulus program, which is geared towards promoting both job and economic growth.
Fast food giant McDonald’s reported today that sales in January fell by 3.3% in the U.S., while total global sales were up 1.2%. The company cited bad weather last month for the decline in domestic sales. McDonald’s has been promoting its Dollar Menu, but has been also fending off competition by Wendy’s and Burger King.
The Labor Department reported this morning that employers added just 113,000 jobs in January, which was below the 175,000 expected, but up from the paltry 75,000 created in December. A freeze in hiring in the health care sector is one of the factors to the lower numbers. The Unemployment Rate fell to 6.6%, the lowest level since October 2008, but that can be due in part to people falling out of the work force than finding jobs.
Filling up at the pumps will begin to be more expensive as spring nears due to more drivers being on the road along with refineries shutting down for winter maintenance, which reduces supplies. The national average price for a regular gallon of gasoline is at $3.26. For 2014, AAA predicts that the nationwide average price will peak between $3.55 and $3.75 per gallon with the average price around $3.49.
The Census Bureau reports that the share of Americans who own their own homes was 65.2% in the fourth quarter of 2013, down from 65.4% in the previous quarter. Higher borrowing costs coupled with tight credit were the two factors behind the decline. The rate peaked at 69.2% in June of 2004.
Home prices continued to rise in the period from December 2012 to December 2013, but at a lesser pace than previous year-over-year readings. CoreLogic reported today that home prices, including distressed sales, rose by 11% in the period mentioned, but that is down from the 11.8% gain seen from November 2012 to November 2013. In addition, prices declined month-to-month by 0.1% from November to December.
Richmond Virginia Fed President Jeffrey Lacker reported today that U.S. growth could be muted in 2014, but the Federal Reserve will continue to taper its massive stimulus program, dubbed Quantitative Easing III. Mr.Lacker cited declining spending by both consumers and businesses. The Fed official went on to say he feels the growth will be closer to 2% in 2014, about the same rate that the country has seen since the end of the Great Recession.
Stock prices are rebounding today after yesterday’s steep plunge, which was touched off by a weaker than expected reading from a national manufacturing report, the ISM Index. The S&P 500 had recently lost nearly 6% from its record closing highs hit in late December and mid-January. The declines have come from profit taking, Fed tapering, a slowdown in China and on the notion that a small correction was due after the record levels recently hit.
The top spot at the Federal Reserve Bank of the U.S. switches to former Vice Chair Janet Yellen from outgoing Chief Ben Bernanke today. Ms. Yellen is the first woman to be the Chairperson in its 100-year history and will guide the nation through the post recession era of the U.S. economy.
In economic news, the January ISM Manufacturing Index was released this morning and came in lower that expectations at 51.3 versus the 56.0 expected to the slowest pace in 10-months. Within the report it showed that the new orders component fell 13.2 points to 51.2, also the lowest since May. The hiring gauge fell by 3.5 points to 52.3. The decline was due in part to unusually poor weather in January.
The big economic report due for release this week is the January Jobs report, which consists of Non-farm Payrolls and the Unemployment Rate. Payrolls are expected to rise by 175,000, after the weak reading in December of only 74,000 jobs created. The Unemployment Rate is expected is expected to drop to 6.5% from 6.7%. The report will be released Friday at 8:30am ET.
Consumers opened their wallets in December and spent on holiday shopping across the nation. Personal Spending rose by 0.4% last month, above the 0.2% expected. However, Personal Incomes were unchanged and below the 0.2% expected. Digging into the report it revealed that consumer inflation pressures were almost non-existent.
Manufacturing activity in the Chicago region declined in January from December. The Chicago PMI fell to 59.6 from 60.8 and was the lowest reading since November. Within the report it showed that the employment component fell, while the prices paid number rose. In addition, Consumer Sentiment fell to 81.2 in late January and down from the 82.5 registered in December.
Today marks the last day in office for Federal Reserve Chairman Ben Bernanke as Janet Yellen takes over the reigns as Fed Chief on Monday. Mr. Bernanke steered the US financial system through one of its worst periods in history after the financial and housing markets blew up in 2008. Ms. Yellen becomes the first woman to head the central bank in its 100-year history.
The National Association of Realtors (NAR) reported today that Existing Home Sales in December rose by 1% to an annual rate of 4.87 million units. That was slightly below the expectation of 4.90 million. In 2013, there were 5.09 million sales, up 9.1% from 2012. Within the report it revealed that the median existing home price was $198,000, up 9.9% from 2012. Inventories fell to a 4.6 month supply from 5.1 months in November.
Over in the jobs market, the Labor Department reported today that Americans filing for first time unemployment insurance rose by 1,000 in the latest week to 326,000, which was near the 327,000 expected. Taking out the weak December jobs report, which was attributed to a cold wave, the sector has been improving. But unseasonably cold weather has continued in January and the job numbers can be influenced when this month’s figures are released on February 7.
Fast food giant McDonald’s reported slightly better than expected earnings per share in its quarterly report. The company reported that it earned $1.40 billion in the fourth quarter on revenues of $7.09 billion. Global sales declined by 9.1%, while U.S. sales dropped 1.4%.
The Mortgage Bankers Association reported this morning that its Market Composite Index, a measure of total loan application volume, rose by 4.7% in the latest week as home loan rates fell to lows not seen since November. The refinance index increased by 10%, but the purchase index declined by 4%.
In corporate earning, revenues at Coach were weaker than expected, IBM’s revenue declined while Texas Instruments forecasted weaker than expected net income. In addition, United Technologies beat earnings expectations while revenues fell. There have been 61 companies in the S&P 500 that have reported with 56% topping estimates.
The first Federal Open Market Committee meeting of 2014 will take place next week with the closely watched monetary policy statement being released at 2:00pm ET. The investing public will be looking for any additional news on the Fed’s massive stimulus program, dubbed QE III or Quantitative Easing III. The Fed revealed last May they it may begin to taper its purchases of Treasury and Mortgage Backed Securities, which sent home loan rates for a 30-year fixed from the mid 3% level to the current level of 4.5%. The Fed did begin to taper its purchases from a total of $85 billion per month to the current pace of $75 billion.
Pending home sales improved further in December, marking the fifth gain in the past six months, according to the National Association of Realtors®
The Pending Home Sales Index,* a forward-looking indicator, increased 2.0 percent to 93.7 based on contracts signed in December from a downwardly revised 91.9 in November. The index is 4.2 percent below the 97.8 mark in December 2009. The data reflects contracts and not closings, which normally occur with a lag time of one or two months.
Lawrence Yun, NAR chief economist, credits good affordability conditions and economic improvement. “Modest gains in the labor market and the improving economy are creating a more favorable backdrop for buyers, allowing them to take advantage of excellent housing affordability conditions. Mortgage rates should rise only modestly in the months ahead, so we’ll continue to see a favorable environment for buyers with good credit,” he said.
“In the past two years, home buyers have been very successful, with super-low loan default rates, partly because of stable home prices during that time. That trend is likely to continue in 2011 as long as there is sufficient demand to absorb inventory,” Yun said. “The latest pending sales gain suggests activity is very close to a sustainable, healthy volume of a mid-5 million total annual home sales. However, sales above 6 million, as occurred during the bubble years, is highly unlikely this year.”
The PHSI in the Northeast increased 1.8 percent to 73.9 in December but is 5.3 percent below December 2009. In the Midwest the index rose 8.0 percent in December to 84.6 but is 5.1 percent below a year ago. Pending home sales in the South jumped 11.5 percent to an index of 101.9 and are 1.7 percent above December 2009. In the West the index fell 13.2 percent to 105.8 and is 10.7 percent below a year ago.