The week ahead in US financial markets
By Joseph Brusuelas
The markets will see a week of very important data and an address on the
financial crises and the US economy from the Federal Reserve and US Treasury.
The major events will be the publication of the June non-farm payrolls report
on Thursday. Wednesday will see an address on the economy by US Treasury
Secretary Henry Paulson and a talk on the current global financial disruption
by Federal Open Markets Committee governor Frederic Mishkin.
Monday 9:45am (all times eastern daylight)
Chicago PMI (June)
Consensus 48.5, Merk 47, Prior 49.1
The general headline business barometer should see a decline to
47.0 for the month of June on the back of a weak month of new orders and a
sharp rise in the cost of production. We have for some time thought that the
manufacturing industry would experience a very rough month of June. Our
below-market forecast is specifically predicated on the weak response in motor
vehicle assemblies post settlement of the American Axel strike. Given the very
real problems in the auto industry we think that the published production
schedules out of Detroit will prove to have been overoptimistic in retrospect
and provide a continuing deadweight on economic activity in the upper Midwest
for some time to come.
When one takes a look at the carnage in the auto industry due to the steep
climb in the price of gasoline the idea that the rebate checks afforded
consumers by the Federal government will provide a net boost to domestic auto
sales looks quite suspect. Year to date, the sale of light duty truck and SUVs,
which have been the bread and butter of Detroit for the past decade, are down
15.7% and 25.3% respectively. Total sales for cars are flat year over year and
we do not see any material improvement for the month. Our forecast implies
domestic sales will fall to 10.4 million units and the total vehicle sales to
14.1 million for the month of June.
Tuesday 10am
ISM Manufacturing Index (June)
Consensus 49, Merk 48, Prior 49.6
The sharp increase in the cost of production should take a healthy bite out of
industrial activity in June. Our forecast implies a decline in the headline
manufacturing index to 48.0 for the month, which would be the fifth consecutive
reading indicating contraction in the industrial sector. The primary culprit
for the decline, in addition to the aforementioned rise in prices paid, should
be the seventh consecutive reading indicating contraction in the new orders
component, with a healthy risk to the downside emanating from the continued
retrenchment in the domestic auto industry. The combined impact of rising costs
and diminished demand from domestic sources should be expected to push the
production component back into terrain indicating contraction and provide the
foundation for a very pessimistic report to end the second quarter of 2008.
We expect that the ADP forecast will catch up with the reality of continuing
retrenchment in the labor sector and report a net subtraction of -20k in
payrolls for the month of June. After a few months of overshooting the mark,
the gents at Macroeconomic Advisers who provide the estimate should make the
adjustments in the model necessary to account for the modest amount of
bloodletting that continues to define an economy basically moving sideways.
Another flat month of orders for durables signals that factor orders should see
an equally dreary outcome. Although, the shipments category can be expected to
advance slightly, other than a decent month of orders for civilian aircraft and
a pickup in activity at the Department of Defense, there is little to write
home about in the manufacturing sector.
Jobless claims have advanced quietly to 384,000 and we expect to see a slight
retrenchment to 380,000 in the series. More important has been the upward
movement in the continuing-claims series that feeds into the estimate of
unemployment within the non-farm payroll series. Standing at 3.139 million,
this does support our longer-term call of the rate of unemployment to move to
6.0% in early 2009.
The employment situation in June should provide a fairly representative picture
of the US economy - flat with a risk to the downside. We anticipate that
payrolls will decline -37,000 for the month on the back of continued
retrenchment in total private employment with goods production and the
construction industry providing fuel for further downside movement. One factor
minimizing the damage for the month inside the labor sector, should be the
return to the payrolls of workers in the auto industry after the settlement of
the American Axel strike. This should keep losses in the manufacturing sector
down to around -30,000, which would be around -15,000 less than was the trend
before the strike. If one adds that gain to the -37,000 that we expect, the
headline number would arrive at -52,000, which is just below the three-month
average of -55,000 for non-farm payrolls.
Just as important, will be the look at the rate of unemployment for the month.
We expect that the Bureau of Labor Statistics will make the necessary seasonal
adjustments to reflect the early entry on the job market of 16- to 24-year-olds
in May that was the primary catalyst for the strong move to 5.5% in May. Based
on this we anticipate that the unemployment rate will fall back to 5.4%. This
seasonal inspired change does not impact our bearish outlook for the rate of
unemployment to move to 5.5% in the short term and to 6.0% in early 2009.
The early arrival of the rebate checks and a healthy amount of pent up demand
for discretionary consumption provided the fuel for one of the few decent US
macro reports in May. We expect that the composite index should remain in
terrain indicting modest growth with the headline falling to 51.4. The primary
risk to our forecast will be the rise in prices in June, which surely weighed
heavy on consumers attempting to estimate just how much further the cost of
energy and gasoline will continue to rise.
Joseph Brusuelas is chief economist at Merk Investments.
www.merkfund.com
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