Forex Profits Master: US: Industrial Production declined 0.1% despite the surge in utilities

Highlights

Although depressed by the expiration of the payroll tax cut, retail sales rose 0.1%

? Coming out of a strong holiday-related spending surge in November and December, retail sales managed to grow a modest 0.1% in January although at a depressed rate due to the expiring payroll tax cut that took effect at the beginning of the year. However, on par with consensus figures, retail sales came out ahead but not necessarily due to stronger economic conditions emboldening consumer demand. Higher equity levels, rising home prices and continued improvement in the labor market invoked a little more optimism that translated somewhat into consumer demand for goods despite the hit to disposable

? Excluding autos, retail sales rose 0.2% which means auto sales were less prolific than the past few reports, declining 0.1% after two months of strong growth. In terms of movers, computer parts and software saw a significant drop in sales, down 1.7% in January while miscellaneous store retailers fell 2.6% on weak office sales. The drivers for the month were general merchandise and jewelry stores which rose 1.1% and 5%, respectively, while a majority of the other retail components shifted less than a percent on a more muted basis. Gasoline sales also rose 0.25% after two consecutive months of deep decline, mostly reflecting January’s rise in oil prices. Overall, this month’s figure suggests the consumer was less affected by the payroll tax increase than expected although it did mute some components of the sector.

Industrial Production declined 0.1% despite the surge in utilities

? After two months of moderately strong growth, industrial production fell by 0.1% in January as manufacturing eased on a broad basis. Although the decline was led by an unwelcome decline in the production of vehicles, the general decline in production is less worrying than it seems. The past two months of stronger growth coupled with the general upward trend in the index since the fall of 2012 was interrupted by the political and financial struggles that continue to haunt businesses and consumers. Consumer goods production declined by 0.2% on weaker demand for durable goods, assumedly due to the expiring payroll tax cut that prompted larger purchases before the tax took effect on January 1st. Automotive production took a sharper dip, almost 4.0%, after growing at an accelerating pace throughout the fourth quarter as demand grew for competitive domestic options over imports.

? However, on the non-durable side, utilities grew at a markedly strong pace on increasing energy production in the form of electricity and natural gas, up 3.5% after a strong decline in the month before. The capacity utilization figure, revised up for December, raised the bar for January’s figure, coming in at 79.1% compared to December’s revised 79.3%. While the decline was minimal and with headwinds still visible, we still expect February to show some better figures as regional reports such as the Empire State Manufacturing survey rose at an extraordinary rate, hinting at stronger production growth.

Week Ahead

Housing Starts & Building Permits (January, Wednesday 8:30 ET)

Forecast: 930K, 900K Consensus: 922K, 920K Previous: 954K, 903K

Housing starts are expected to decline slightly from December but remain overall robust in YoY terms. Demand for new homes fell in December, evidenced by the drop in those sold, with supply still tight. The main crux might have been the consumer side, and the payroll tax cut expiring in January could have an impact on plans for home buying in the coming months. Prices are still rising and the inventory remains low which sets up construction companies for sustained growth throughout the resuscitation of the U.S. economy. The coming months are showing signs of improvement as the equity markets continue to grow and employment opportunities are becoming more frequent, giving the consumer some much needed confidence which in turn results in a higher demand for homes.

Consumer Price Index, Ex Food & Energy (January, Thursday 8:30 ET)

Forecast: 0.2%, 0.2% Consensus: 0.1%, 0.2% Previous: 0.0%, 0.1%

Headline inflation for January is expected to increase at a moderate pace as agricultural and energy prices tick upward after a relatively quiet end of the year figure. Consumer prices were subdued throughout the past few months, declining 0.3% in November and holding unchanged in December. For January, we expect that energy prices will be a main driver, showing some upward pressure during the month as crude prices rose considerably according to the WTI and Brent figures. Agricultural prices have also increased: crops showed the larger increase in prices over livestock, mostly due to harvest and some lingering drought effects. Additionally, housing prices and rising rents will continue to push shelter prices higher while medical and transportation services are unlikely to put as much pressure as the aforementioned factors. Overall, we expect a stronger headline figure for January due to rising energy prices while the core figure should accelerate only slightly from the end of 2012.

Existing Home Sales (January, Thursday 10:00 ET)

Forecast: 4.96M, 0.0% Consensus: 4.90M, -0.8% Previous: 4.94M, -1.0%

Existing home sales are expected to remain mostly unchanged in January to continue the slow-moving trend we have seen in recent months. Even as more homes come onto the market and the uncertainty that plagued the December decline has mostly dissipated, consumers have not been as aggressive about home buying plans. Inventory remains low and the shadow inventory of homes is still being dumped, albeit at a slow rate, into the market, limiting opportunities for potential homebuyers of existing properties. With home prices on the rise, we can expect home buyers to continue to demand the more affordable existing homes at an accelerated pace given the seemingly sustainable market recovery. However, given that incomes have fallen due to the expiration of the payroll tax cut, the headwind from a decline in perceived wealth might deter some from purchasing a home to start off 2013. Therefore, we expect that existing home sales will be mostly flat in January as headwinds in the form of declining incomes have the chance to put downward pressure on sales along with the lacking inventory to support high demand.

Philadelphia Fed Survey (February, Thursday 10:00 ET)

Forecast: 2.0 Consensus: 1.0 Previous: -5.8

Continuing the bounce between positive and negative territory, we expect the Philadelphia area to resurge again into positive figures as evidence suggests manufacturing is on the mend for February. Industrial production for January showed some slight weakness, but the broad-based decline points to a general weakness rather than any specific ailments within the sector, suggesting a hint of growth for February. Also fueling confidence is the Empire State Manufacturing Survey which shot up an incredible 17.8 points since January, its largest increase since December 2010. Overall, it seems there is a pervasive surge of production and manufacturing set for February as demand from abroad rises. Therefore, we expect the Philadelphia Fed index to rise as new orders in February push it back into positive territory

Market Impact:

With Monday off for Presidents’ Day, next week seems a little less full than the last two. However, some key indicators will help shed light on the housing market recovery coupled with inflationary pressures that the Fed continues to keep a watchful eye on. Indicators like housing starts and existing home sales will help round out January data and pinpoint where some of the weakness lay in the months skimpy sales. Consumer and producer inflationary figures will also show whether policy action need be taken to curtail a rise in prices. Barring any political releases as the sequester nears, only 2 weeks away, we expect next week to be unruffling for the markets and allow investors to absorb corporate earnings and the M&A activity.

Quote of the Week

Federal reserve Board Vice Chair Janet L. Yellen
AFL-CIO
February 11, 2013

“I see the evidence as consistent with the view that the increase in unemployment since the onset of the Great Recession has been largely cyclical and not structural.”