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[Jody Osborne]

ECONOMIC WATCHDOG, March 7


The economy continues to be a major topic for traders, especially with the employment report on tap this Friday. Tuesday’s data included the final revision to fourth-quarter productivity and costs, as well as weekly data on same-store sales. Oil prices continued to move lower Tuesday on expectations that OPEC will keep production quotas where they are. Bond prices are also a concern for equity traders, with the yield curve inverted and the 10-year note at a 20-month high.

Oil prices fell 83-cents Tuesday, closing the session at $61.58. OPEC is set to meet Wednesday and history has shown that the March meeting is one where production quotas are cut. However, this year several OPEC leaders have hinted that production will not change this year with crude prices already at elevated levels. Oil prices are also down on hopes that an agreement between Iran and the International Atomic Energy Agency dealing with the country’s nuclear program. Of course, there remain concerns about terrorist attacks on oil facilities in the Middle East and Nigeria and this is helping to keep oil prices elevated.

Bond prices rose slightly on the session, but a majority of Monday’s declines remained. The yield curve remains inverted with the 2-year note showing a higher yield at 4.758 percent compared with the 10-year note at 4.739 percent and the 30-year at 4.722 percent. One worry for the stock market is that capital will start to move to the bond market and away from equities as yields rise.

Same-store sales rose 0.2 percent for the week ending March 4 as measured by the ICSC-UBS store sales report. The report stated that warm weather helped boost sales during the week, pushing the year on year rate up to 4.3 percent from 3.6 percent in the prior week. Interestingly, the Redbook report wasn’t as positive, showing a decline to 2.4 percent year on year growth from 3.0 percent in the prior week. Overall, the S&P Retail Index ($RLX) fell slightly on the session.

Productivity came in at a decline of 0.5 percent in the fourth-quarter, which was only a tenth of a point better than the initial reading. This was disappointing, as expectations were for the revision to show just a 0.1 percent decline. This is the first drop in productivity since the first quarter of 2001. Strong productivity has been able to keep inflation down even with energy prices elevated.

Besides weaker-than-expected productivity growth, labor unit costs rose 3.3 percent. This was slightly below the initial reading of 3.5 percent, but was above expectations for a reading near 3.0 percent. Though this could raise concerns about inflation pressures, the past year has shown productivity growth of 2.5 percent with unit labor costs up just 1.3 percent.

Comments from St. Louis Fed President William Poole that the Fed might need to push harder on the breaks created some concerns about interest rates. However, Mr. Poole is known for his hawkish view of rates. Nonetheless, there actually is a small chance that the FOMC might raise rates by 50-basis points at its next meeting as measured by Fed fund futures.

Wednesday’s economic calendar is light with only the crude inventory report and mortgage applications data on tap. However, Fed Chairman Ben Bernanke is scheduled to speak to bankers in Las Vegas. William Poole is also set to speak at a breakfast meeting in St. Louis. Traders will be dissecting the comments made by these leaders to see what the Fed has in store for interest rates.