Volatility in the stock market left equities in a state of pessimism last week. The S&P 500 lost 4.02% in the five trading sessions, including a 2.81% loss on Friday, and the Dow tumbled 2.6% on the week to 9,713, pushing the 10k mark well out of distance.
The catalyst for Friday’s sell-off was speculation that CIT group, the commercial firm founded in 1908, would be forced to file for bankruptcy over the weekend. Those fears became a reality on Sunday as the company, with $64.9 billion in listed assets, became the fourth largest bankruptcy in US history.
“On Sunday, CIT entered what it called a different kind of bankruptcy, one that will let it reemerge from court protection by the end of the year under the ownership of its creditors, who widely supported the reorganization plan,” the New York Times reports. “Even so, the bankruptcy filing means taxpayers will lose the $2.3 billion investment they made in CIT as part of the government’s sweeping financial rescue last fall, marking the first such loss of the bailout program.”
This week the schedule is frothed to the brim with data. Monday opens with a key look at the manufacturing sector and two reports on the housing market. Later in the week focus will shift to the labor market, and the Federal Reserve will also hold a two-day meeting to discuss the future of monetary policy.
Key Events This Week:
10:00 ― The ISM manufacturing index is expected to see its third straight month of growth, thanks to broad economic stabilization at home and abroad. Aside from the headline, which is expected to inch to 53.0 from September’s 52.6 score, focus will be on the new orders and employment components. The former predicts future growth and the latter remains a laggard in the economy.
“Given increases in most regional manufacturing indices and the pick-up in durable goods orders, the ISM is expected to rise in October, coming in at a level consistent with economic growth for the sixth month in a row,” said forecasters at BBVA. “As a result, we can infer that economic expansion will continue into 4Q08 and, furthermore, that industrial production will increase as well.”
10:00 ― Construction Spending jumped 0.8% in August but the Street isn’t expecting a repeat in September. Private residential spending remains healthy but vacancies continue to pull down the nonresidential front. That puts focus on the details of the report rather than simply than headline, which is set to fall 0.2%.
“Single-family housing will post another strong increase, but this will be offset by declines in multi-family and nonresidential construction,” said analysts as IHS Global Insight. “The outlook for the single-family market is looking up, but that for multi-family homes and nonresidential construction is grim.”
10:00 ― The Pending Home Sales Index rose 6.4% in August to its highest level in more than two years. In the last 12 months signed contracts advanced by 12.4%. The September report is likely to hold sales steady as the tax incentive for first-time homeowners is set to expire on Nov. 30 (Congress is working to extend the incentive, and last week House Majority leader Harry Reid expressed confidence that they would.)
“The trend has been strongly upwards in recent months, but the drop in new home sales in September suggests downside risks,” said Ian Shepherdson at HFE. “The alternative story is that pending sales have been rising strongly in part because homebuyers generally ― not just first-time homebuyers ― see better value in existing homes.
10:30 ― Daniel Tarullo, a governor at the Federal Reserve, participates in a panel at an event sponsored by the University of Maryland in Washington. The topic is executive compensation.
- Treasury Auction:
- 1:00 ― 3-Month Bills
- 1:00 ― 6-Month Bills
10:00 ― The Factory Orders report should advance by 0.8% in September. The durable goods report already posted a 1.0% advance, but the performance from non-durable goods was probably less impressive.
“Factory orders likely rose by 1.0% m-o-m in September following a 0.8% decline in August,” said analysts from Nomura Global Economics. “The report will contain data on inventories of non-durable goods and possibly revisions to capital goods shipments and could thus imply revisions to Q3 GDP growth.”
- Treasury Auction:
- 1:00 ― 4-Week Bills
8:15 ― The ADP Private Employment is expected to show further moderation in the the pace of lay-offs for October. Analysts looks for the report to show a loss of 220,000 jobs in the month, a worse reading than expectations for Friday’s official numbers which should include gains from the public sector. Watch for predictions to change if the ADP report throws a curveball in either direction.
10:00 ― Economists are expecting the ISM non-manufacturing index to continue growing in September. Forecasts are largely based on last month’s new orders component, which jumped 4 points to 54.2. Compared to its cousin index from Monday this report isn’t so closely watched, but analysts do pay attention to the labor component to track nonfarm payrolls.
Economists from Nomura believe the index will see its best reading since August 2008: “The recent gains in this indicator came from improvements in firms' general sentiment about business activity and new orders. The employment component of the report remains below 50. For October, we expect that the index moved more convincingly above the 50 breakeven point, to 52.0.”
2:15 ― The FOMC Meeting Announcement will get attention insofar as the Fed gives new information about the direction of monetary policy. Yet chairman Ben Bernanke has made it clear that an expansionary policy with historic low rates will remain in place well into 2010. So, despite the media speculation for this report the results will probably be insignificant.
“While the exit strategy is anticipated to be a primary discussion topic, the committee is not expected to make any changes to the current policy until it is clear that the recovery is sustainable,” said economists at BBVA.
Added analysts from Deutsche Bank: “The Fed does not want to begin its exit strategy from a super-accommodative position until there is more confidence the labor market is stabilizing, and we are just not there yet.”
8:30 ― The Productivity & Costs report is hard to interpret. In the second quarter productivity climbed 6.6% while unit labor costs were trimmed by 5.9%. For Q3 production should gain another 6.4% while labor costs are cut 4.0%. This is great news for earnings but it’s hard to be enthusiastic about production jumping to new highs while lay-offs continue as a rapid pace.
Analysts from Nomura said the four-quarter change in unit labor costs will be the lowest since 1950: “Solid GDP growth but falling hours worked suggest productivity likely increased again in Q3. We look for a gain of 4.8% q-o-q following a 6.6% increase in Q2. Unit labor costs likely fell by 4.5% q-o-q or 3.4% y-o-y.”
8:30 ― Initial Jobless Claims have averaged 526k so far in October. Forecasters believe more of the same should be expected for the week ending Oct. 31, with the Street’s forecast at 530k. That’s far from indicating any stabilization in the labor market, but overall job losses continue to moderate.
8:30 ― The week’s most important indicator, the Employment Situation report, is expected to see the unemployment rate tick up one-tenth to 9.9%. Monthly lay-offs are expected to be 175k, which is still awful, but economists will point out that the trend is in the right direction and that things were much worse in the first quarter.
“Since the start of recession, the labor market has lost more than 7 million jobs and we believe that figure may rise as high as 8 million by the end of the labor market cycle,” said Ellen Zentner, macroeconomist at BTMU, said. “The pace of job loss is slowing, but losses will continue through the first quarter of next year.” She looks for 185k losses in the month.
3:00 ― The once-ignored Consumer Credit report has been getting lots of attention during the recession as analysts look to the data to track trends in consumer spending. Ahead of the holiday season the trends aren’t looking good: Credit fell $19 billion in July and $12 billion on August, and for September the Fed report is expected to show further subtraction in the realm of $10 billion.
“Consumers, plagued by ongoing weakness in the labor market, are still in the process of reducing their debt and credit markets remain tight, limiting access for those who seek it,” said economists at BBVA. “The ongoing reduction in credit outstanding is one of the factors that lead us to believe that consumer spending will remain subdued throughout the recovery process.”
3:00 ― Elizabeth Duke, a governor at the Fed, delivers keynote address to the Chicago Fed's 5th annual Community Bankers Symposium.