We anticipate that the general business conditions headline inside the New York
Fed manufacturing index will see the fourth negative reading over the past five
months. The combination of the continuing surge in oil and commodity prices
should provide the impetus for the dour outlook inside the domestic
manufacturing sector. In addition, we expect that the lack of demand for new
orders could weigh heavily on purchasing managers' sentiment and is the source
of our expectation that the risk for the month is to the downside. Our forecast
implies that the headline should
The TICS flows for April should reflect the general view of the market that the
economy did not fall into a free fall following a very difficult month of
March. Although, the economy through the first month of Q2 08 did not
illustrate any significant growth, the fact that it did not collapse shaped
market sentiment during the period. We expect that the purchase of net long
term securities will fall to $61.5ln and the monthly net TIC flows will
increase to $35 billion versus the -$48.2 billion recorded previously, with the
risk for both to the upside. The net short sale of securities in April was a
reflection of the market disturbance surrounding the collapse of Bear Stearns
in March. The April data should reflect the modest recovery from the unease
that prevailed during the previous month.
Tuesday 8:30am
US current account balance (Q1)
Consensus -$173.5b, Merk --, prior -$172.9b
The trend in the improvement in the current account should
continue through mid-year and then flatten out on the back of the lagged impact
of the modest improvement in the dollar and its impact on net exports. Based on
Q4 '07 data, the US still must import $1.9 billion a day to finance the gap in
the current account.
The producer price index should reflect the strong move in input prices that
have been observed over the past few months. Outside of the apparel and auto
sector, prices have begun moving in a direction indicating inflation. The cost
of residential gas increased 4.9% year on year and gasoline climbed 9.2% over
that same time frame. Of more than passing interest to the market will be any
revision in the gasoline component that the Labor Department had falling -4.6%
for April. Total intermediates continue to demonstrate pressure in the pipeline
and were up 10.5% overall and the core ex food and energy are up 5.8% over that
same time frame. We expect that headline producer prices will increase 1.10%
month on month and 6.70% year on year and the core should climb 0.2% month on
month and 3.0% year on year over that same period.
After a surprise increase in starts, which were inspired by a transitory surge
in the building of multi-family dwellings, we have no doubt that the usual
suspects will be calling for a turnaround in the market. We disagree. The
absolute level of supply on the market and the expectation of the 2.0
million-plus wave of foreclosures that will hit the market over the next two
years should reassert their influence over the market and move to suppress the
speculative appetite of the building community. Our forecast indicates that
starts should fall to 970,000 and permits should decline to 945,000 for the
month.
We
expect industrial production to continue to fall
flat in May when our forecast implies no change in
manufacturing activity and capacity utilization to
remain unchanged at 79.7%. The malaise in the auto
sector and relatively restrained domestic demand
for consumer goods should continue to offset the
still strong demand from the external sector for
industrial materials. The swing sector, as it
always is with the change of seasons, will be
demand for utilities. However, the early arrival
of summer heat will not provide a net impact on
total production until the June sampling period,
and we think that the risk is to the downside for
the month of May.
The claims data reasserted its upward march for the week ending June 7 and we
expect that the data should see a modest correction to 380,000. The week ending
June 14 is the final sampling period for the June payrolls period and the
market will be closely observing the evolution of the continuing claims series.
We expect another increase in the series and expect a move above 3.15 million
for the week.
We expect the seventh consecutive reading indicating contraction in the
manufacturing sector inside the Philadelphia Fed survey of manufacturing
activity for the month of June. Our forecast implies that the headline will
arrive at -13.64 for the month. We do urge our clients to recall that due to
the unique composition of the Philadelphia Fed's survey, its headline general
business activity question is not linked to the underlying components. Thus, we
do expect that the increase in the prices paid component and a sixth straight
negative reading in the new orders component may not be reflected in the June
headline. That will have to wait until the July survey, when we expect another
strong downside move in the headline.
Joseph Brusuelas is chief economist at Merk Investments.
www.merkfund.com
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