Vital Signs: Inflation and Housing Take Center Stage.

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Author: Mehring, James

THE WEEK AHEAD

Consumer and producer prices, as well as housing starts, will be watched closely. Also on tap: industrial production, May regional manufacturing activity reports, and more

The latest batch of inflation and housing data take on added importance in light of the latest Federal Reserve monetary policy meeting. The Fed raised interest rates by a quarter-point, to 5%, but investors were keen to find hints about future policy in the post-meeting press release. Judging by the bond market's initial reaction, the statement was more hawkish than anticipated. Still, it did nothing to settle the debate over whether the Fed would pause in June.

According to Chairman Ben Bernanke and company, more rate hikes may still be needed to keep lid on inflation, but it stressed "the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information." The statement suggests the Fed's next step rests almost completely with how data between now and the next meeting in late June conforms to the central bank's expectations.

The upcoming week brings the next batch of inflation data. Higher gasoline and oil prices are expected to have boosted headline figures for the April consumer and producer price indexes. The average price of gasoline in the U.S. zoomed up to $2.92 per gallon, from $2.50 in April. The more important measure will be changes in ex-food and energy prices. The March core consumer price index surprised analysts with a 0.3% rise. Another such pop in the index would certainly alter market perceptions on inflation and Fed policy.

The April industrial production report will also garner a lot of attention. The manufacturing sector is now running full tilt with a diminishing level of spare capacity to meet extra demand. What's more, moves to add capacity have been slow in coming and are running far behind the gains in output. That means utilization rates will keep increasing with output gains, which could lead to price increases driven by capacity constraints.

The Fed statement also explicitly mentioned the housing market as a factor that could cool down the economy. The April figures on housing starts come out and economists see a small increase from March. Starts have remained quite strong despite a clear shift in sentiment among home builders surveyed by the National Association of Home Builders. With mortgage rates on the rise and home inventories climbing, it would seem some kind of adjustment in starts is imminent.

Here's the weekly economic calendar.

Economic Releases

Report

Date

Time

For

Median Estimate

Last Period

Empire State Index

Monday, May 15

8:30 a.m.

May

• 16.8
• 15.8

Producer Price Index

Tuesday, May 16

8:30 a.m.

April

• 0.6%
• 0.5%

PPI [ex-food & energy]

Tuesday, May 16

8:30 a.m.

April

• 0.2%
• 0.1%

Housing Starts [Million]

Tuesday, May 16

8:30 a.m.

April

1. 970
2. 960

Industrial Production

Tuesday, May 16

9:15 a.m.

April

• 0.4%
• 0.6%

Capacity Utilization Rate

Tuesday, May 16

9:15 a.m.

April

• 81.5%
• 81.3%

Consumer Price Index

Wednesday, May 17

8:30 a.m.

April

• 0.5%
• 0.4%

CPI [ex-food & energy]

Wednesday, May 17

8:30 a.m.

April

• 0.2%
• 0.3%

Leading Economic Indicators Index

Thursday, May 18

10:00 a.m.

April

0.1%

-0.1%

Philadelphia Fed Index

Thursday, May 18

12:00 p.m.

May

• 13.3
• 13.2

EMPIRE STATE MANUFACTURING SURVEY

Monday, May 15, 8:30 a.m. EDT

The New York Federal Reserve Bank releases its May survey of business conditions for manufacturers in the New York Fed district and the consensus view is for just a small improvement. The tone of the April index was more subdued, with the general activity index falling to 15.8, from 29 in March. The April result still implies that conditions are improving in the district but just not as robustly. The fall in the general business conditions index was accompanied by similar declines in the new orders and shipments indexes. More respondents reported a fall in order backlogs than those who indicated an increase, leaving that index at -2.9. At the same time, the region's manufacturers were feeling a little better about the next six months. The general conditions index improved to 42.7, from 38.1 in March. The new orders, shipments, and unfilled orders indexes also showed improvement. Expectations of strong demand had manufacturers expecting to hire more workers and increasing their outlays for capital equipment. HOME BUILDERS SURVEY

Monday, May 15, 1 p.m. EDT

The National Association of Home Builders and Wells Fargo bank issue the May survey results. The release updates housing market conditions by measuring builders' assessments of current sales, buyer traffic through model homes, and expected demand. The April report showed a further decline in homebuilder sentiment with a headline index reading of just 50, from 54 in March. The latest reading was the lowest since November of 2001. A reading of 50 indicates that surveyed builders are basically split down the middle between those who view conditions as good and those who see conditions as poor.

All three components in April also fell to their lowest levels since late 2001. The index tracking single-family home sales dipped to 54 in April, from 59 in March. Expectations among builders for sales in the coming six months fell to 58, from 62. The latest reading for prospective buyer traffic was 39, off a point from the reading of 40 posted in both February and March. The steady slide of the index is being pinned on the exodus of investors and speculators. Higher mortgage rates are contributing to this trend as well as making homes less affordable for other types of potential buyers.

MEETINGS OF NOTE

Tuesday, May 9

U.S. President George W. Bush hosts Australia's Prime Minister John Howard at the White House in Washington, D.C.

8:45 a.m. EDT

Federal Reserve Bank of New York President Timothy Geithner speaks about credit derivatives and economy at the Credit Risk Conference at New York University in New York City.

7:45 a.m. EDT

Federal Reserve Board Governor Randall Kroszner chairs a panel discussion entitled "A Portrait of Hedge Fund Investors: Flow, Performance and Smart Money," as part of the Federal Reserve Bank of Atlanta's conference on hedge funds in Sea Island, Ga.

6:30 p.m. EDT

Federal Reserve Board Chairman Ben S. Bernanke gives the keynote speech at the Federal Reserve Bank of Atlanta's conference on hedge funds in Sea Island.

ICSC-UBS STORE SALES

Tuesday, May 9, 7:45 a.m. EDT

This weekly tracking of retail sales, compiled by the International Council of Shopping Centers and UBS bank, will update buying activity for the period ending May 13. Sales eased in the first week of May by 0.4%, after closing out a strong April with a 0.7% gain. Compared to a year ago, sales cooled down to a 3.2% rise, from 4.3% in the previous week. The May figures will provide a truer picture of consumer spending and confidence for the second quarter.

NEW RESIDENTIAL CONSTRUCTION

Tuesday, May 16, 8:30 a.m. EDT

Housing starts are expected to edge up to a pace of 1.97 million in April. In March, housing starts fell to a pace of 1.96 million, from 2.13 million in February. Other housing related data has been a little mixed. New and existing home sales were up in March, but inventory levels continue to creep higher. The starts figures could show whether another increase in new home inventories is likely in April.

The rate of new home completions reached its fastest pace since mid-1973, hitting an annual rate of 2.22 million in March. There has been a jump in new home completions and homes under construction during the first quarter of 2006 due in part to the record warm January. The glut of new homes coming onto the market has the potential to pull down home prices in some areas of the country.

PRODUCER PRICE INDEX

Tuesday, May 16, 8:30 a.m. EDT

Soaring oil prices are expected to have played a big role in pushing up the April producer price index for finished goods. The median forecast is for a 0.6% rise in April.

In March, wholesale prices grew 0.5% as energy prices climbed 1.8%. However, energy prices rose by 3% in March of 2005, which is why the yearly rise moderated. The index was up 3.5% from a year ago in March, from a pace of 3.7% in February and 5.7% in January. Excluding food and energy costs, the rise in wholesale prices should remain tame in April. Core producer prices inched up 0.1% in March but held at an yearly pace of 1.7%.

On a quarterly basis, prices of finished, intermediate and crude energy goods all fell in the first quarter vs. the fourth quarter. Meanwhile, price gains for finished goods outside of food and energy accelerated in the first quarter.

INSTINET REDBOOK RESEARCH STORE SALES

Tuesday, May 9, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the second fiscal week of May, ended May 13. Over the first fiscal week ended May 6, sales were off 2.9% from the same period in April. For the entire month of April store sales grew by 4.9%.

INDUSTRIAL PRODUCTION

Tuesday, May 16, 9:15 a.m. EDT

U.S. industrial production is expected to have kept chugging along in April. In March, output grew by 0.6%, on top of a 0.5% gain in February. The composition of growth in March and February were very different. Colder temperatures in February led to an 8% surge in utility output while factory production fell 0.1%. In March, factories bounced back with a 0.5% gain and mining output grew 0.9%. The latest batch of orders data and the Institute for Supply Management's manufacturing activity index point to continued strength in manufacturing. Capital spending is particularly robust, with output of business equipment rising 0.8% in March, and 10.9% from a year ago. The average operating rate for all industries probably rose as well in April. The utilization rate grew to 81.3% in March, the highest level since September of 2000. The utilization rate in manufacturing was 80.4% in March. Factory output has continued to outpace capacity growth, which means an increase in the utilization rate. The decline of spare production capacity is an important trend for the Federal Reserve in making monetary policy decisions.

MEETING OF NOTE

Wednesday, May 10, 9:15 a.m. EDT

Federal Reserve Bank of Boston President Cathy Minehan moderates a policy session entitled, "Hedge Funds: An Industry in Its Adolescence" as part of the Federal Reserve Bank of Atlanta's conference on hedge funds in Sea Island.

MORTGAGE APPLICATIONS

Wednesday, May 10, 7 a.m. EDT

The Mortgage Bankers Association releases its numbers on mortgage application volume for both home buying and refinancing for the week ending May 12. The rebound over the last week of April quickly disappeared. Both the purchase and refinancing indexes fell. The purchase index came in at 416.5 for the latest period, from 433.3 for the week ended Apr. 28. The refi index plunged to 1427.4 over the week ended May 5, from 1565.6. The latest result for the refi index was the lowest of the year.

The latest results pulled the four-week moving averages lower. The four-week average for the purchase index fell to 411.7, from 412 for the final week of April. The refi index moving average dropped to 1502.1 for the week of May 5, from 1528.4 in the prior period.

CONSUMER PRICE INDEX

Wednesday, May 17, 8:30 a.m. EDT

Consumer prices for all goods and services probably accelerated as gasoline prices continued to soar. The March index grew 0.4% as gasoline prices shot up 3.6%. Compared to a year ago, however, the CPI was up 3.4%, compared to the yearly pace of 3.6% in February, and 4% in January.

The rise in consumer prices excluding food and energy is expected to be more subdued. In March, the core index grew a larger-than expected 0.3%, but the yearly pace stayed at 2.1% for a third straight month. There was an unexpected jump in apparel prices of 1%, but economists don't foresee similar gains. Another area were prices crept higher was in the cost of shelter. The March measure of owners' equivalent rent increased 0.4% from February and 2.7% from a year ago. It could keep climbing as home prices plateau and rents rise. This trend is due to the process the Labor Dept. uses for tracking how the market price of occupying a home changes. The index accounts for over 23% of the total CPI index. If the owners' equivalent rent index does increase at a faster pace, it would put some upward pressure on the core price index.

REAL EARNINGS

Wednesday, May 17, 8:30 a.m. EDT

Inflation-adjusted weekly earnings of production workers probably edged up 0.2% over April. The Labor Dept.'s employment report showed a 0.8% bounce in average weekly earnings, while economists expect a 0.6% rise in the April consumer price index. Compared to the same period a year ago, inflation-adjusted earnings was up 0.1% for March, after a 0.1% rise in February. MEETINGS OF NOTE

Wednesday, May 18, 8:30 a.m. EDT

Federal Reserve Board Governor Kevin Warsh moderates a policy session entitled "Systemic Risk and Hedge Funds" as part of the Federal Reserve Bank of Atlanta's conference on hedge funds in Sea Island.

9:15 a.m. EDT

Federal Reserve Bank of Chicago President Michael Moskow gives the opening remarks at the Chicago Fed's annual banking conference on banking entitled this year "Innovations in Real Estate Markets: Risks, Rewards, and the Role of Regulation." 9:30 p.m. EDT

Federal Reserve Board Chairman Ben S. Bernanke gives the keynote speech at the Federal Chicago Fed's annual banking conference on banking in Chicago.

9:30 p.m. EDT

U.S. Treasury Secretary John Snow testifies about the semi-annual foreign exchange report before the Senate Banking Committee in Washington, D.C.

9:30 p.m. EDT

Federal Reserve Bank of Richmond President Jeffrey Lacker gives a speech on consumer finance at the Conference of State Bank Supervisors' 105th Annual Meeting & Conference in Norfolk, Va.

11:45 a.m. EDT

Federal Reserve Bank of Atlanta President Jack Guynn gives the concluding remarks at the Federal Reserve Bank of Atlanta's conference on hedge funds in Sea Island.

11:45 a.m. EDT

Federal Reserve Bank of St. Louis President William Poole speaks about yield-curve inversion at a Philadelphia Federal Reserve Bank event in Philadelphia.

5:30 p.m. EDT

Former Federal Reserve Board Chairman Alan Greenspan is the guest speaker at the Bond Market Association's 30th anniversary dinner in New York City.

JOBLESS CLAIMS

Thursday, May 11, 8:30 a.m. EDT

Jobless claims stood at 324,000 in the week ended May 5, pumped up by layoffs resulting from a partial government shutdown in Puerto Rico. During the week of Apr. 29, claims stood at an upwardly revised level of 325,000. The latest result pulled up the four-week moving average to 317,250, from 314,750 for the week ended Apr. 29. Continuing jobless claims for the week ended Apr. 29 fell to 2.39 million, from 2.44 million in the prior week.

LEADING INDICATORS

Thursday, May 18, 10 a.m. EDT

The Conference Board's composite index of leading economic indicators probably didn't move much in April. The consensus view of 0.1% rise, would offset the March slip of 0.1%. In March, the index stood 2.7% above its year ago level, the best pace since February of 2005.

Already for April, the average level of initial claims was up slightly and the index of consumer expectations from the University of Michigan was a little lower as well. Those should limit the gain in the index. There was no change in average weekly hours in manufacturing. The Institute for Supply Management's manufacturing index of supplier delivery times grew in April, which should have a positive impact. A further rise in stock prices during April and a widening between the Federal Reserve's funds rate and the U.S. Treasury's 10-year note will also prove to be positive influences on the index.

PHILADELPHIA FED SURVEY

Thursday, May 18, 12 p.m. EDT

The Philadelphia Federal Reserve Bank's May factory activity index for the mid-Atlantic region is not expected to change much. The headline index mounted a small rebound in April, back to 13.2, from 12.3 in March. However, the new orders and shipments indexes retreated in April, after rising in March. Despite the apparent deceleration in growth across the region, more respondents reported that they hired workers and bumped up hours worked.

The employment moves may be linked to the improved outlook for the coming six months. The headline index climbed to 28.2, from 14.6 in March, but was still a little short of the levels posted in the three months prior to March. The region's manufacturers were more upbeat about order levels over the summer but also expected to get squeezed by higher costs of inputs.

MEETINGS OF NOTE

Friday, May 19, 9:45 a.m. EDT

U.S. Treasury undersecretary for domestic finance speaks at the Bond Market Association's annual meeting in New York City.

12:20 p.m. EDT

U.S. Treasury Secretary John Snow delivers a luncheon speech at the Bond Market Association's annual meeting in New York City.

1:30 p.m. EDT

Federal Reserve Bank of New York President Timothy Geithner gives a keynote speech at the Bond Market Association's annual meeting in New York City.

Earnings Calendar

Day

Companies

Monday

Agilent Technologies, Target, and more.

Tuesday

Applied Materials, Compuware, Deere & Company, Hewlett-Packard, Home Depot, Staples, TJX Companies, Wal-Mart Stores, and more.

Wednesday

Intuit, and more.

Thursday

Autodesk, Dell, Gap, Limited Brands, Nordstrom, and more

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By James Mehring