The week ahead in US financial markets
By Joseph Brusuelas
The week will be dominated by the publication of the Federal Open Market
Committee monetary statement on Wednesday. Later that night Fed vice chairman
Donald Kohn will be addressing a European Central Bank (ECB)monetary
conference, which will be closely watched by markets on both sides of the
Atlantic to ascertain if the growing rift between the Fed and ECB is becoming
wider. The release of consumer confidence estimates for June by the Conference
Board (Tuesday) and the University of Michigan (Friday) will frame the week.
Wednesday will see the release of the durable goods and new homes sales reports
for May.
The primary narrative in what is becoming a record dive in
consumer confidence is clearly the rising cost of gasoline, the fall in home
prices and the non-trivial impact that it has made on consumer sentiment and
spending. Adding to the steady downbeat trend in the data has no doubt been the
five consecutive months of declines in the labor sector and the very difficult
environment for consumers, who even with their one-time rebates in hand, look
to at best tread water in light of rising inflation. We expect that the
headline consumer confidence for the month of May will decline to 56.6.
The 67 orders for aircraft at Boeing and another month of modest orders from
the defense department should be the only net positives in the durable goods
orders series for the month of May. Given the continuing weakness in the auto
sector, our bearish forecast of a -0.5% for the headline and -1.9% in the core
ex-transportation may be a bit on the optimistic side.
Wednesday 10am
New home sales (May)
Consensus 510, Merk 495, prior 526K
The inventory levels in the new home series, which stand at 10.6 months, is
still far too high to stimulate risk taking among consumers. We use the term
"risk taking" with specificity because, given the sheer volume of stock in the
series, a move towards purchasing a new home does entail the risk that over the
first year or two of ownership the overall value of the home could fall. This
is not lost among consumers, who have vigorously moved to the sidelines. While
we acknowledge that the combination of modest rates and accommodative sellers
in the building community could provide a transitory increase in the headline,
we think that we are still some months away from the housing sector
stabilizing. We anticipate that demand for new homes will fall to 495,000 for
the month of May.
We expect the Federal Open Market Committee to hold rates steady when the
latest policy communique is released. Our assessment of the upcoming monetary
statement is that the Fed will take a hawkish turn but will not provide an
explicit indication of a rate hike at the August meeting. We anticipate that
the committee will use the pricing paragraph to reinforce their recent tough
rhetoric on inflation to shape a change in the balance of risks. While the
statement may shade that balance towards inflation, as we think it should, the
committee will largely remain in a data dependant position for some time.
GDP Q1' final estimate
Consensus 1.0%, Merk 1.0%, prior 0.9%
The final estimate of GDP for the first quarter of 2008 should arrive at a 1.0%
rate of growth on the back of a 1.0% rate of personal expenditures. The primary
catalyst for growth during the first three months of the year was the solid
gain in net exports, without which, the economy would have contracted for the
quarter.
The claims series has made a steady upward march in to the 350,000 territory,
where it has stayed for the past two weeks. We expect it to modestly decline
back towards its four-week moving average of 375,000 for the week ending June
22. At this point firms have been careful not to reduce their workforce after
closely managing them during the economic expansion. However, with firms now
having to grapple with a sharp escalation in the cost of inputs and basic
operation, they may be tempted to being to furlough more workers than initially
planned to protect profit margins and limit the pass through of costs
downstream to consumers.
In contrast with the continued downward spiral in the new home series, we do
see the possibility of a one-month increase in the headline for existing homes.
Our provisional forecast of an increase to 5.04 million is predicated on the
-8.0% year-on-year decline in the median price of a home combined with what was
a still quite accommodative rate of interest. However, we are not calling a
bottom to the market. We do think that the possible increase in demand will be
a one-time phenomena because in June potential buyers will have observed a
steady increase in 30-year mortgage rates that will move to curtail any
potential breakout for the existing home series. It is still our assessment
that the market will not observe stabilization in demand for new homes until
spring 2009.
The weak labor market and rising costs are working in tandem to curb an overall
appetite for new spending. The one major catalyst for any potential move to the
upside will be the rebate checks, which stimulated a 1.0% rise in advance
retail sales for the month. In our assessment, much of that action was located
at discount chains and gasoline stations, and we expect the real,
inflation-adjusted increase in spending to arrive flat for the month.
Friday 8:30am
Personal consumption expenditure deflator, month on month/year on year
Consensus 0.20%/2.10%, Merk 0.20%/2.20%, prior 0.10%/2.10%
The Fed's preferred indicator of inflation should see a modest increase in core
rates that should compliment another increase in the headline. Our forecast is
predicated on what we expect to be a slow and steady bleed through of headline
prices into the core rate. Much has been made in recent weeks about the lack of
observable impact on core pricing. It is our assessment that rates of headline
and core pricing will continue to increase and our one-year ahead core forecast
implies a strong move to 2.6% with risk to the upside. The recent breakout in
hawkish rhetoric from Federal Reserve members is a direct attempt to manage
inflation expectations in advance of what the Fed surely expects will be a
general increase in core prices on the back of the staggering increase in
headline costs that have been observed over the past number of months.
Friday 10am
University of Michigan (June-final)
Consensus 56.7, Merk 56, prior 56.7
We expect that the general downward trend in consumer sentiment will continue
when we forecast the headline for the final June estimate to decline to 56.0.
The record decline in consumer confidence has been increasingly driven by the
sharp escalation in the cost of gasoline. Even the one-time stimulus of the
rebate checks, which acted as a catalyst for an increase in nominal sales in
May, did not provide any marginal support to consumer confidence. With more
pain at the pump on the way throughout the remainder of the summer, risk will
be to the downside in just about all consumer sentiment surveys for the
foreseeable future.
Joseph Brusuelas is chief economist at Merk Investments.
www.merkfund.com
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
