Economic Watchdog, Nov. 21

Economic data was on the heavy side Wednesday, but results mostly supported the bears. Traders got data on consumer sentiment and leading indicators, along with weekly data on petroleum inventory levels, mortgage applications and jobless claims. Economists are keeping an eye on economic data to see how it will impact the FOMC decision to cut rates December 11.

Consumer sentiment is an important aspect of the economy, as it has a direct impact on consumer spending. For the month of November, the University of Michigan reported that its sentiment index came in at 76.1. Though above the mid-month reading of 75.0, November’s result is still well below October’s reading of 80.9. Inflation expectations rose 3-tents compared with October to 3.4 percent, mostly a result of record high energy prices. The concern is that weak sentiment could lead to disappointing holiday shopping results.

The Conference Board released its leading indicators report this morning for the month of October. The index fell 0.5 percent when a decline of 0.3 percent was expected. The biggest draws came from building permits, jobless claims and consumer expectations. Strength was found in gains in the stock market and new orders for manufacturers. The Conference Board also noted that the economy is likely to slow further after the holidays.

The holiday shopping season will be interesting giving the record high in energy prices and falling home values. Both of these take way the amount available to spend on other goods and services. Oil prices hit another record high intraday Wednesday with the January contract reaching a high of $99.29. However, the commodity is down in midday action by about a dollar to $97 a barrel. Ironically, the weekly crude inventory report showed a 1.1 million barrel decline when a moderate gain was expected.

Jobless claims are getting attention today, mainly due to the fact this week’s data coincides with the Bureau of Labor Statistics [BLS] survey. Jobless claims fell by 11,000 this past week to a level of 330,000, in line with expectations. Though consistent with a tight labor market, concerns about wage push inflation have taken a back seat with concerns about energy and economic growth the major focus.

On Tuesday, the Housing Starts report showed a surprise gain in October. However, building permits, a forecaster of future starts, continued to decline. On Wednesday, the weekly mortgage applications data showed a two percent decline to a level of 424.1. Low mortgage rates are keeping refinancing high with the 30-year fixed mortgage rate at 6.18 percent.

Despite comments from the Fed on Tuesday that monetary policy seems to be appropriate, Fed fund futures are still pricing in another rate cut at the Dec. 11 meeting. The odds are showing about a 70 percent chance of at least a 25-basis point cut. A lot could happen between now and the FOMC meeting, but I would be surprised to see the Fed cut again unless economic data shows deterioration in the near term.

The rest of the week will be quiet for economic data with the stock market closed Thursday for the Thanksgiving holiday with Friday an abbreviated session. Next week will also be on the light side when it comes to key economic data, but be assured traders will be taking a very close look at how strong the holiday shopping season starts.

Jody Osborne
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site