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Challenges Remain Despite Easing Economic Strains

Although the Greek saga continued to create volatility in the markets last week, the economic recovery at least domestically does not appear bleak. After recovering in fits and starts, there appears to be an across the board, modest and continuing improvement in economic conditions. The job market is a case in point. The weekly jobless claims have remained well below the 400,000 level for weeks now.

Despite liquidity injections by central banks world over, inflation has not raised its ugly head and remains under control. Even in the debt-ravaged Europe, the improvement is there to see. Some of the peripheral nations, which are facing liquidity strains, are being brought under the scanner and efforts are on to help them alleviate the fiscal woes they are facing. So, is there a light at the end of the tunnel? Only time will tell.

Last week, the Federal Reserve's consumer credit report showed that outstanding consumer credit rose at a healthy pace for a second straight month. Consumer credit rose by $19.3 billion or at a seasonally adjusted annual rate of 9.3 percent, with non-revolving credit rising by 11.8 percent compared to a more modest 4.1 percent increase in revolving credit.

Meanwhile, the U.S. trade deficit widened to $48.8 billion in December, the biggest gap since June. Imports rose 1.3 percent month-over-month compared to a muted 0.7 percent increase in exports.

Main Street will be once again be buzzing with activity in the unfolding week after the relative calm of the previous week. The Commerce Department's retail sales report for January, the results of the February manufacturing surveys of the New York Federal Reserve and the Philadelphia Federal Reserve, the Federal Reserve's industrial production report for January, the National Association of Homebuilders housing market index for February, the Commerce Department's housing starts report and the weekly jobless claims report are among the closely watched reports of the week.

Traders may also focus on the minutes of the January FOMC meeting, some Fed speeches, announcements concerning Treasury auctions of 2-year, 5-year and 7-year notes and the Labor Department's consumer and producer price inflation reports for December. The business inventories report for December and the Conference Board's leading economic indicators index round up the major economic events of the week.

Retail sales may have perked up in January, given the improvement we have been seeing in the labor and housing markets. Solid January auto sales are expected to have boosted the headline number, while higher gasoline sales may also have lent support.

Higher auto sales also point towards healthy industrial production growth for January. Additionally, firmer metal prices could have lifted mining production, while utility output is expected to have been constrained by unusually warm winter weather.

However, the weather may have benefited housing starts, which could have rebounded in January from the previous month's 4 percent drop. According to BMO Capital Markets, going forward, residential construction will support rather than restrain recovery, as demand stabilizes and homebuilders start replenishing lean inventories.


There are no economic reports due to be released on Monday.


Retail sales of food and retail companies with one or more establishments that sell merchandise and associated services to final consumers are slated to be released at 8:30 am ET. For January, economists estimate a 0.7 percent increase in retail sales and a 0.6 percent increase in retail sales that exclude autos.

U.S. retail sales rose 0.1 percent month-over-month in December. Meanwhile, the previous month's growth was upwardly revised to 0.4 percent from the initially estimated 0.2 percent increase. Sales, excluding autos, fell 0.2 percent, the first drop since May 2010. Auto sales climbed 1.5 percent, while electronics/appliances store sales fell 3.9 percent and gas station sales slipped 1.6 percent. Retail sales, excluding autos, gasoline and building materials, edged down 0.2 percent.

The export & import price indexes for January, which gives the changes in the prices of non-military goods and services traded between the U.S. and the rest of the world, are due out at 8:30 am ET. The consensus estimates call for a 0.3 percent month-over-month increase in import prices and a steeper 0.1 percent increase in export prices.

In December, imports prices edged down by 0.1 percent after rising by an upwardly revised 0.8 percent in November. The drop was largely due to a 0.5 percent decrease in prices for fuel imports. Additionally, the report showed that export prices fell by 0.5 percent in December following a 0.1 percent increase in November.

Philadelphia Federal Reserve Bank President Charles Plosser is due to speak to the University of Delaware Center for Economic Education and Entrepreneuship on the economic outlook, in Newark, Delaware at 8:45 am ET.

The Commerce Department is scheduled to release its business inventories report for December at 10 am ET. The report summarizes the results from the monthly retail trade, wholesale trade and factory goods orders surveys. The report is expected to show a 0.5 percent increase in business inventories for the month.

In November, business sales rose 0.3 percent month-over-month and were 9.6 higher than in the year-ago period. Business inventories at the end of November were also up 0.3 percent and increased 8.5 percent from the year-ago period. The total business inventories to sales ratio was at 1.27 compared to 1.28 in November 2010.


The results of the New York Federal Reserve's empire state manufacturing survey, which elicits response from 200 manufacturing executives in New York state, is slated to be released at 8:30 am ET. The headline general business conditions index for February is expected to come in at 14.75.

Conditions among manufacturers in the region continued to improve in January. The headline business conditions index rose to 13.5 in January from a revised reading of 8.2 for December, reaching the highest level since April 2011. The new orders index rose to 13.7 from 6, while the order backlogs index improved to -5.5 from -15.1.

The Treasury Department is due to release a report on the flows of financial instruments into and out of the U.S. for December at 9 am ET.

The Federal Reserve's industrial production report is due out at 9:15 am ET. Economists estimate 0.7 percent growth in industrial production for January

U.S. industrial output rose at a slightly slower than expected pace of 0.4 percent month-over-month in December, with manufacturing output advancing by a solid 0.9 percent. The previous two months' readings were downwardly revised. Mining output was up 0.3 percent, while utilities output fell 2.7 percent. Capacity utilization rose 0.3 points to 78.1 percent. Business equipment production climbed 0.7 percent and production of industrial equipment was up 1.5 percent.

Dallas Federal Reserve Bank President Richard Fisher is scheduled to speak to the Texas Manufacturers Summit 2012 and then to the media at 9:15 am ET.

The National Association of Homebuilders is scheduled to release the results of its February survey on homebuilders' confidence at 10 am ET. The consensus estimates call for the index to increase to 26.

In January, the homebuilder sentiment index rose to 25 from 21. The headline index is now at its highest level since June 2007. The present conditions index rose 3 points to 25 and the sales expectations index also increased by a similar magnitude to 29, while the index measuring prospective buyer traffic was up 3 points to 21.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended February 10th at 10:30 am ET.

Crude oil stockpiles edged up by 0.3 million barrels to 339.2 million barrels in the week ended February 3rd, with inventories remaining in the upper limit of the average range.

Gasoline inventories rose by 1.6 million barrels and remained in the upper limit of the average range. Distillate inventories also climbed, rising by 1.2 million barrels, and were in the middle of the average range. Refinery capacity utilization averaged 82.6 percent over the four-weeks ended February 3rd compared to 83.3 percent over the previous four weeks.

The Federal Reserve is due to release the minutes of its January 24th-25th meeting at 2 pm ET.

Following the conclusion of the 2-day monetary policy meeting, the Federal Reserve said it expects economic conditions over the medium term to warrant exceptionally low levels for the federal funds rate at least through late 2014 compared to its earlier view of keeping interest rates unchanged till the middle of 2013.

Much of the remainder of the statement was maintained unchanged, while the central bank reiterated its commitment towards implementing its already announced bond buying program.

Updating its economic forecast, the Fed lowered the central tendency of its 2012 GDP forecast to 2.2-2.7 percent from 2.5-2.9 percent. The 2013 forecast was also lowered to 2.8-3.2 percent, but the 2014 forecast was upwardly revised to 3.3-4 percent from 3-3.9 percent.

The unemployment rate projections were lowered for all three years, while for core PCE inflation, the Fed upwardly revised the high end of its 2012 forecast and also nudged up its forecast for 2013.

In a landmark event, the central bank also unveiled the interest rate forecast of the FOMC members, with most members expecting normalization to begin by the end of 2014. They also see the possibility of QE3 later in 2012.


A report on housing starts, which refer to the number of privately-owned new homes on which construction has been started over some period, and building permits, which are the number of permits issued for new housing units each month, is slated to be released at 8:30 am ET. Economists estimate housing starts of 675,000 for January, while building permits are also expected at 684,000.

Housing starts fell by 4.1 percent month-over-month to a seasonally adjusted annual rate of 657,000 units in December following a 9.1 percent surge in the previous month. Multi-family starts slumped 20.4 percent and were primarily responsible for the drop, while single-family starts rose 4.4 percent. Building permits, an indicator of future housing activity, fell merely 0.1 percent to 679,000 units.

The Labor Department is due to release its customary jobless claims report for the week ended February 11th at 8:30 am ET. Economists expect claims to edge up to 365,000 in the recent reporting week.

Initial jobless claims fell to 358,000 in the week ended February 4th from the previous week's revised figure of 373,000. Economists had been expecting jobless claims to edge up to 370,000 from the 367,000 originally reported for the previous week. The Labor Department also said that the less volatile four-week moving average fell to 366,250 from the previous week's revised average of 377,250.

The U.S. Labor Department is scheduled to release its report on the producer price index for January at 8:30 am ET. The index measures the average change over time in the prices received by domestic producers of goods and services. Economists expect the headline index for January to have risen by 0.4 percent and the core producer price index may have increased by 0.2 percent.

The producer price index fell by 0.1 percent in December. The year-over-year rate of producer price inflation slowed to 4.8 percent, the smallest increase in about a year. However, excluding food and energy, core producer prices rose 0.3 percent, the biggest increase in 5 months. The annual rate of core producer price inflation rose to 3.1 percent. Pipeline inflationary pressure is easing, with core intermediate prices falling by 0.5 percent.

The results of the Philadelphia Federal Reserve's manufacturing survey are due out at 10 am ET. Economists expect the diffusion index of current activity to show a reading of 9.5 for February.

The Philadelphia Federal Reserve's manufacturing survey for January showed that manufacturing conditions expanded at a faster rate in the month. The business conditions index based on the survey rose to 7.3 in January from a revised reading of 6.8 in December. The new orders index fell 3.8 points to 6.9 and the shipments index was down 3.4 points to 5.7, while the unfilled orders index suggested a contraction with a reading of -4.1 compared to December's 5.1.

Inventories saw some improvement but remained weak. Both the employment indexes improved from the month-ago levels. Meanwhile, the 6-month outlook index improved to 49 from December's 40.

Federal Reserve Chairman Ben Bernanke speaks to the FDIC's "Future of Community Banking Conference" along with Acting FDIC Director Martin Gruenberg, in Arlington, Virginia at 9 am ET.


The consumer price index for January is scheduled to be released at 8:30 am ET. The index is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Economists expect the headline index to have increased 0.3 percent compared to a 0.2 percent increase in core inflation.

Consumer price index was unchanged in December compared to expectations for a 0.1 percent increase. Excluding food and energy prices, consumer prices edged up by 0.1 percent in December, matching economist estimates.

The Conference Board is scheduled to release a report on the U.S. leading index for January at 10 am ET. The consensus estimate calls for a 0.5 percent increase in the leading indicators index for the month.

The leading indicators index rose 0.4 percent month-over-month in December. The lagging and coincident indicator indexes rose 0.3 percent each. The Treasury yield curve, initial jobless claims and average workweek made positive contributions to the leading indicators index, while consumer expectations served as a drag.

by RTT Staff Writer