Week ahead in the US financial markets
By Joseph Brusuelas
The July 7-11 period, a light week for data, will feature a speech by US
Federal Reserve chairman Ben Bernanke on Tuesday, who will give the keynote
address at a Federal Deposit Insurance Corporation forum on mortgage lending to
low- and moderate-income households. Earnings announcements that may move
markets will be the releases at Pepsi on Monday, Chase and Chevron on Wednesday
and perhaps the major event of the week, General Electric earnings on Friday.
Tuesday 10am (all times eastern daylight)
Pending home sales (May)
Consensus -3.0%, Merk -1.5%, Prior 6.30%
The month of May saw mixed results in the housing sector, with
purchasing activity advancing in the existing home series, but falling back in
the new homes series. The combination of falling prices and historically
reasonable 30-year mortgage rates provided enough of a catalyst to obtain
barely passable sales figures in what should be the primary month in the summer
buying season. Yet, we do not expect that to continue in June. Because lending
is still very tight and consumers wary of buying property we expect that
downward trend in pending sales will reassert itself in June. Our forecast for
the month of May suggests that pending sales should fall by -1.5%
Over the past few weeks inside the initial jobless claims series, the market
has observed the four-week moving average continue to climb towards 380,000. We
think that the continued shedding of jobs and what looks to be another painful
bout of culling in the auto industry does not portend a turnaround in the labor
sector any time soon.
The sharp increase in the cost of oil should send the nominal trade deficit up
to -$61.5 billion for May. However, ex-petroleum and the trade balance adjusted
for inflation should continue to see improvement. On an annualized basis, the
ex-petroleum trade component has observed a 30% improvement and the real
adjusted goods balances have seen a 17% increase in purchases from abroad. This
has been driven by the fall in the dollar and the fairly robust growth in the
emerging world. Sectors that have profited from this improvement have been
exports of telecom equipment, civilian aircraft and computer accessories. We
expect this to continue in May.
The painful increase in the cost of oil and commodities observed by the market
in June should be on display. Our forecast implies a month- on-month increase
of 1.8% and a year-on-year advance in the cost of imported goods of 19.5%. Many
of the major trading partners of the US still peg their currencies to the
dollar and are quite hesitant to either de-link from the dollar or curb
domestic demand to facilitate a soft landing for the US. Thus, global inflation
has reached critical levels and the Federal Reserve is not well-positioned at
this time to do much about it. There is little left to say.
Friday 10 am
University of Michigan (July Preliminary)
Consensus ---, Merk 55.3, Prior 56.4
How low can consumer confidence go? A dive towards 50 is not out of the
question, but not quite yet. We think that consumer confidence will fall to
55.3 in the July preliminary estimate. When it comes to consumer sentiment the
song remains the same. Falling home prices, sharp increase in gas prices, tight
money and declining prospects in the labor market are all combining to depress
consumer sentiment. Until two or more of the aforementioned factors obtain some
relief, consumer confidence will continue to bounce along multi-year lows.
Second-quarter tax payments typically provide a surge in receipts that send the
monthly budget modestly into the black. We anticipate that this will be the
case in June when the monthly deficit will swing back into the black to the
tune of $17.2 billion. This does not signal that the slowdown in the economy is
over. Rather, our assessment is that the increase in receipts will be well
below the current market consensus and that the major budget problem faced by
the Washington will only grow worse.
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