Week ahead in the US financial markets
By Joseph Brusuelas
The Federal Open Market Committee meeting on Wednesday and the personal
income/spending report on Monday will shape the upcoming week in US financial
markets. Of the large number of firms reporting the releases by AMBAC, MBIA,
Freddie Mac and Proctor and Gamble all retain the capacity to move the markets.
Monday 8:30am (all times eastern daylight)
Personal income and spending (June)
Consensus -0.20%/0.50%, Merk -0.2%/0.4%, Prior 1.90%/0.80%
We expect to see the impact of the fiscal stimulus begin to ease
in June. Our forecast implies that personal spending will advance 0.4% vs the
0.8% posted in May and personal income should decline 0.2%. More importantly,
given the extraordinary run in the cost of oil and gasoline through the month
of June, we do expect that real spending should fall back to 0.2% with risk to
the downside for the month. Pre the fiscal rebate, real spending was anemic.
The core PCE (personal consumption expenditures) deflator should see another
0.3% month-on-month increase with the year-on-year advancing 2.3%. The
weighting inside the PCE deflator does not give as heavy a weight to shelter as
the consumer price index, thus the recent rise in the cost of services may
provide upward pressure on the overall price environment in the Fed's preferred
measure of inflation. Thus we see the risk to core pricing as being to the
upside.
A strong month of defense orders should provide the foundation for a solid
factory orders report for June. The combined impact of external demand and
government spending are the primary factors behind our expectation that factory
orders should advance 0.6 for the second consecutive month.
Tuesday 10am
ISM Non-Manufacturing
Consensus 48, Merk 48, Prior 48.2
Service sector activity looks to have moderated in June and our forecast backs
up that conjecture. We expect the headline in the ISM estimate of
non-manufacturing activity to have eased to 48.0 vs the 48.2 posted previously
and modestly below the six-month average of 49.2. The combined impact of rising
prices and sagging new orders should be the primary catalysts for another weak
report.
The recent testimony by Federal Reserve chairman Ben Bernanke signaled that the
Fed is still primarily concerned with the fragility of the banking system.
Thus, it is quite clear that the Fed is not going to be raising rates any time
soon. Mr Bernanke carefully begin to shape this and future statements by using
language that will soften the blow of changing inflation expectations and the
not-so-subtle move back towards concerns over growth. Gone are statements
making claims of expectations remaining "firmly anchored" with the Fed chair
moving to the phrase "reasonably well anchored". We expect the statement to
reflect the already telegraphed change in the bias in the statement back
towards a balance of risks between growth and inflation. The committee will be
sure to note the mid-year increase in consumer spending and the recent
correction in the cost of imported oil.
The claims data through most of July was influenced by seasonal anomalies not
fully captured by the seasonal adjustment to account for temporary plant
closures in the manufacturing sector. Thus, the reading over the past two weeks
has trended towards the upper end of its recent range and we expect that data
to arrive at 400,000. The recent upward trend in the data does not augur well
for the August non-farm payroll report.
The sharp decline in the housing sector has modestly eased and purchasing
activity during the month did appear to have firmed somewhat. In some areas of
the country such as the West, where prices have fallen 17.0% year over year,
some buyers have taken this as a cure to wade back into the housing market.
However, tight lending standards and climbing interest rates make any rebound
in the sector difficult at best. Thus, we expect that pending sales will
decline 1.3%.
The one real positive factor in the overall economy over what has been a very
difficult year for the US economy has been the relatively solid pace of
productivity. The trend in productivity has permitted profits at non-financial
corporations to see modest gains, held down wages and in all probability
limited the pass-through of advancing energy and commodity costs to consumers.
What may be of more interest to the market will be the estimate of unit labor
costs. The recent beige book provided the first tangible sign of workers
requesting wage increases due to advancing inflation. While, we do not expect
to see that in the Q3 data, going forward that will be something to observe
should inflation not fall back in 2009 per the Fed forecast. We expect to see
non-farm productivity increase 2.6% and unit labor costs to increase 2.0% for
the second quarter of the year.
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