October 2009 - Fed and Economy Watch

The first monthly look at consumer sentiment for October wasn’t pretty. The University of Michigan survey said sentiment fell 4.1 points to 69.4, erasing more than half of September’s 7.8 point leap. Analysts were looking for continued strength as the equity market as climbed to annual highs in the first two weeks of the month. Jobless claims have also moderated in five of the past six weeks to nine-month lows, and home prices have been rising modestly. Even so, indexes for six-month expectations and current conditions each fell.

The Treasury said foreign intake of long-term US financial assets expanded in August, but compared to pre-crisis levels analysts said purchases were tepid. Net foreign purchases of long-term securities were in line with forecasts at $28.6 billion in August, compared with $15.3 billion in the prior month. “This is all fine and good, but the fact remains that foreign appetite for U.S. securities is much less than it was pre-crunch,” said TD strategist Eric Lascelles, who noted the monthly average in 2007 was $64 billion. “This presents clear risks for USD and Treasury yields,” he added.

Markets were given a kick of optimism this morning as another downward surprise was seen in the weekly jobless claims report. Initial claims fell to 514,000 in the week ending Oct. 10, the lowest figure in nine months. The prior week’s 520k figure was revised up to 524k. Claims have fallen in five of the past six weeks, leading the 4-week average down to 531,500, which is also the lowest since early January.

Total retail sales declined by 1.5 percent in September, less than the 2.1 percent drop economists had forecast. Excluding auto sales, which experienced their largest monthly fall since August 2005, retail sales were 0.5% higher in September, better than forecasts for a 0.2 percent increase.

Businesses cut back on inventories for a record 12th consecutive month in August. The 1.3% reduction follows a 1.4% drop in July, and together they pushed the annual drop to 14.7%. The drop was worse than Wall Street forecasts of a 1% cut, but the other half of the report was more positive as sales jumped for the fifth straight month. The 1.0% gain is the biggest gain since June 2008, and it follows an upwardly revised but still modest 0.1% gain in July. Since August 2008, sales are down 17.7%. Equity markets fell in minutes following the report but quickly recovered. Interpreting the report can be tricky as the decline itself hurts Q3 GDP, but the more businesses slash inventories the more rapidly they will have to restock once they are confident of an economic rebound. The inventories to sales ratio was 1.20, compared with the August 2008 ratio was 1.16.

The Institute for Supply Management said its non-manufacturing index rose to 50.9 last month, marking the first sign of growth in a year and the highest level since May 2008. A score above 50 indicates overall growth; analysts had only forecast a 48.8 score after the 48.4 level is August.

Total construction spending jumped in August but any optimism from the fresh data was offset by downward revisions to the prior month. The construction sector improved by 0.8% in August, in contrast to expectations that it would fall 0.1%. But spending in July fell by a whopping 1.1% in the new estimates, compared to the original projection of -0.2%. What’s really going on in the market can’t be seen in the headline alone. The main trend is that residential housing is heading upwards, including a 4.7% gain in August. But non-residential and government construction on weighing heavily on the index. Non-residential activity slipped 0.1% in August, while and public spending fell 1.1%.

Personal income was given a slight and unexpected boost in August, while consumption broadly advanced and inflation remained benign, a new report said Thursday. Income levels went up 0.2% in August, doubling the consensus forecast, while the prior month’s level was given a bump in revisions too. However, compared to last year income is still down 2.6%. The same report also showed consumption climbing. That was expected due to the widely reported success of the cash-for-clunkers program, but the data reveals that spending on autos didn’t drown out all other spending.