Week ahead in US financial markets
By Joseph Brusuelas
Federal Reserve Board chairman Ben Bernanke will headline a major week of Fed
talk when he speaks at conference on inflation on Monday evening. The market
will be closely observing his keynote address to see if the Fed chair follows
up on his recent remarks to support the value of the dollar. Monday also sees a
mid-day speech by NY Fed president Timothy F Geithner on the economic outlook,
while Boston Fed chief executive Eric S Rosengren on Tuesday evening will
provide the opening remarks before a research conference on inflation, where
Bernanke will give the keynote address. The very hawkish Dallas Fed president
Richard Fisher will speak on globalization and monetary policy on Wednesday
morning, and the same day Fed governor Stanley
Mishkin will moderate a panel on inflation that same day in Boston.
Monday 10am (all times eastern daylight)
Pending home sales (April)
Consensus 0.00%, Merk -1.30%, Prior -1.00%
Pending homes sales for April will likely provide another, in a long line of
indicators, that the housing crunch is far from over. The 11 months of
inventory of existing homes and the very difficult future faced by the building
community are but a few of the major economic issues that will be with us long
after financial markets begin functioning normally. Potential purchasers of
homes are correct to remain quite wary of entering into agreements to purchase
given the necessary decline in the price of homes to clear the large quantity
of inventory on the books. The whisper campaign underway by the development
community that some micro-areas of the real estate market have turned the
corner should be taken with more than a bit of skepticism. We expect that
pending sales will fall -1.3% for the month.
A weak dollar should continue to buttress a sagging economy that without the
robust demand from the external sector would have contracted through the first
three months of the year. Our forecast implies that the nominal deficit should
see improvement for the month of April arriving at -$57.1 billion versus the
-$58.2 billion previously. We expect that foreign demand for in the goods
sector, specifically for semiconductors, electronics and telecommunications
equipment should be quite brisk for the month. The benefits of a flexible and
open economy should be on display during a month when we expect to see
continued improvement in the trade deficit between the US and the Pacific Rim
countries which at this point should begin to trickle into the debate over free
trade underway in the US election
The general slowdown in the economy should generate an outsized decline in tax
receipts for the May reporting period when we expect to see a -$174.1 billion
operating deficit. Moreover, with government spending activity on the upswing
in an attempt to offset the housing induced case of the blues that currently
afflict consumers, we do think that the risk for the series is to the upside.
With the economy moving sideways and showing no signs of recovery, but not in a
condition resembling collapse, the market will be looking to the beige book for
hints on regional conditions regarding the state of personal consumption, the
housing sector and the pricing environment. We anticipate that the beige book
will indicate that the housing sector continues to act as a deadweight and
consumption ex-gasoline is sluggish at best. Outside of the external sector,
the economy saw negative growth through the first three months of the year and
the primary question outstanding going forward is whether the rebate checks
will offset the sharp rise in the cost of gasoline and food over. In our
estimation, the rise in gasoline prices has reduced the power of the rebates
and we expect to see growth in Q2 arrive at 1.7, down from our provisional
estimate of 2.1%.
The weak dollar and the surge in demand for commodities and energy has been the
primary catalyst behind the rise in the cost of imported goods. Given the most
recent increase in the aforementioned categories we expect that the
month-over-month reading to advance 2.7% and the annual basis to increase 15.1%
for the May sampling period. It is our estimation that import prices, as a
factor in inflation, are being underestimated at this point. We believe that
the recent rebound in the value of the dollar will prove transitory, and
long-term structural adjustment downward in the value of the greenback will act
as a catalyst for inflation beyond what is currently priced in by the market.
The first real test of the efficacy of the fiscal stimulus out of Washington
will be on display when we see the advance retail sales report for the month of
May. Through the end of the sampling period, the US Treasury sent out $45.46
billion in rebate checks, which should provide a net boost to overall sales.
With auto sales inching up for the month, after a dismal April, we expect that
the stimulus should provide enough of an offset to the rising cost of gas and
food to generate a 0.6% increase in headline sales and a 0.8% rise in the core
rate. However, we do think that the risk is to the downside. The Spending Pulse
report of a -6.0% decline in demand for retail gasoline could weigh quite
heavily on the overall report.
We expect that initial claims will tend back towards the top of its range to
365,000 for the week ending June 7. The labor market, much like the economy is
moving sideways at the moment, with no decisive catalyst provide a breakout in
either direction over the horizon. Our year-end estimate of 5.5% in the rate of
unemployment still stands and the recent 3.093 million posting in the
continuing claims data supports that forecast. Also reporting Thursday:
Business inventories (April).
After a very modest increase in both headline and core inflation in April, the
market will be focused on any possible revisions to data after seasonally
adjusted inspired -2.0% decline in the cost of gasoline. Our skepticism
regarding the current state of the data is a matter of record and we will not
delve on it further here. Over the next few months the data will begin to
capture the increase in the core costs that most individuals have begun to
observe and are behind our assessment that inflation will continue to rise
throughout the remainder of 2008. For us, just as important is the relative
increase in the cost of food that hit a record 5.1% in April and is poised to
continue to increase at near record levels in May. Food represents 13.8% of the
cost of living for the median consumer and the combination of the sharp
increase in the cost of food and energy has begun to change the consumptive
behavior of the individual. Our forecast implies that headline CPI will advance
0.5% month on month and 3.9% year on year. The core will increase 0.2% month on
month and 2.3% year on year for May with the risk for the trading day to the
upside.
Friday 10:00
University of Michigan Consumer Sentiment (June Preliminary)
Consensus 59.4%, Merk 56.1%, Prior 59.8%
We do not expect any improvement in the very bearish condition of consumer
sentiment anytime soon. For sometime we have made the case that consumer
sentiment has become quite sensitive to changes in the cost of gasoline. At
this point, the cost of petroleum has increased so sharply, it is stimulating a
further change in behavior. According to the US Department of Transportation
miles driven has fallen 4.3%. The Department of Transportation reports that
demand for petroleum is down 3.9% and the Spending Pulse report on credit card
spending stated that demand for retail gasoline dropped 6.0%. It is little
wonder that the estimates of consumer sentiment across the board are touching
decade-long lows. We expect the headline to fall to 56.1 for the preliminary
June estimate.
Joseph Brusuelas is chief economist at Merk Investments.
www.merkfund.com
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