Market Week Ahead: U.S. consumer prices increased by 0.1% in November

U.S. consumer prices increased by 0.1% in November
On Wednesday, the Bureau of Labor Statistics announced that both headline and core
consumer price index increased by 0.1% in November on a seasonally adjusted basis.
Headline consumer prices rose 1.1% in the last 12 months (a decline from 1.2%). In the last
6 months, the 12 month inflation was 1.1% on average. The report revealed that the food and
energy indices also increased by 0.2% in November. The 12-month increase in the energy
index is 3.92%. The gasoline index hiked 7.3%, while the household energy index dropped
0.2% in the same period. The index for housing increased by 0.03% in November. Shelter
prices rose 0.11%, which is the second highest increase in the last 19 months. The shelter
index rose 0.2% in the last 12 months. The rent index and the index for owners' equivalent
rent also rose 0.2% and 0.1% in November, respectively. The medical care index jumped
3.2% while the index for used cars and trucks hiked 6.0% in the last 12 month. On the other
hand, the indexes for household furnishings and operations, new vehicles, apparel, and
recreation have fallen 2.5%, 0.4%, 0.8% and 0.9% over the last 12 months, respectively.

Although the headline inflation in November is slightly lower than expectations, the inflation
report is consistent with our baseline scenario of low but positive inflation in 2010 and 2011.

Federal Reserve purchased $21.4bn of Treasuries since Dec 13th
The Fed purchased $106.3bn of Treasuries in the first month of QE2, slightly above the
stated aim of $105bn per month. As a result, so far this month the Fed’s purchases have
tended slightly towards the lower end of the purchase schedule. In the week ending Dec
15th, the maturity distribution of the Fed’s holdings of Treasury securities strongly favored 5
to 10 year treasuries, with a decline in the 1 to 5 year treasuries. The Fed increased $17.1bn
and reduced $1.3bn, respectively. It could be the case that the Fed focused more closely on
longer-maturity treasuries given recent robust movements in the long end of the yield curve,
which the Fed believes is a key metric in fostering long-term investment. The maturity
distribution table for 1 to 5 years has not been negative since Oct 6.

Week Ahead
Initial Jobless Claims (Dec-18, Thursday 08:30 ET)

Forecast: 420K Consensus: 420K Previous: 420K

The labor market seems to be improving as suggested by recent trends in unemployment insurance claims. In fact, claims’ 4-week moving average has declined continuously since the end of October, standing at 422.8K, the lowest level since August 2008. Although this is a positive sign, initial claims are still above pre-recession levels. Consistent with our expectation of a slow economic recovery, we expect initial claims to experience small changes in the following weeks, standing at 420K for the week ending December 18th.

Personal Income and Spending (November, Thursday 08:30 ET)

Forecast: 0.3%, 0.4% Consensus: 0.2%, 0.5% Previous: 0.5%, 0.4%

U.S. retail sales in November increased by 0.8% and reached a level of 7.7% above its November 2009 level. Total sales in the last three months jumped 7.8% from the same period a year ago. Retail sales excluding autos also increased by 1.2%, above expectations of a 0.6% increase. Furthermore, the ICSC/UBS Retail Chain Store Sales Index rose 1.1% in November following a three consecutive month fall. Therefore, we expect personal income and spending to continue increasing in November.

Durable Goods Orders (November, Thursday 08:30 ET)

Forecast: -0.3% Consensus: -0.7% Previous: -3.3%

Durable goods orders and new orders excluding transportation declined 3.3% and 2.7% in October, respectively and disappointed the market. Excluding defense, new orders were 2.1% lower than the previous month. Transportation equipment also dropped in two of the last three months. It decreased by 5.2% ($2.9bn) due to a sharp 25% decline in defense aircraft and parts. Nondefense aircraft and parts (demand for commercial aircrafts) dropped 4.4% following a 112.6% increase in the previous month. This component has increased by 74% in the last 12 months. The current indicators point to a continuing contraction in the new orders for durable goods but at a slower pace.

New Home Sales (November, Thursday 10:00 ET)

Forecast: 305K Consensus: 300K Previous: 283K

New home sales are expected to increase in November from its record-low levels. Although we expect a 7.8% jump in new home sales in November, it will still remain at a very low level compared to its historical average of 697K. Considering current inventories in the housing markets, we expect new home sales remain weak even in 2011.

Market Impact

While existing and new home sales are crucial to understanding the trends in the real estate industry, personal income and spending will help us forecast the contribution of consumption to the economic recovery in 4Q10. If the real PCE continues to increase at the same pace as in the last three months, it would imply a very strong PCE contribution to economic growth in 4Q10. Moreover, better-than-expected new orders might indicate better-than-expected economic activity in the coming months and would be welcome by the markets.
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