Week ahead in the US financial markets
By Joseph Brusuelas
The publication of the advance retail sales report for July on Wednesday and
the July consumer price index the following day should be the primary market
moving macro-events this week.
Corporate earnings reports on Thursday for Wal-Mart, Nordstrom's and
Berkshire-Hathaway will be closely observed. Federal Reserve Board Minneapolis
president Gary Stern will speak on "Repercussions from the Financial Shock" on
Wednesday at 2:30pm EDT and Chicago Fed president Charles L Evans will
speak on the US economic outlook the following day at 12:30pm EDT.
The trade balance should see a bit of deterioration in June due to the run-up
in oil prices during the sampling period. The price of West Texas Intermediate
moved from US$128.00 per barrel to a high of $140.58 to close the month. This
should partially offset the continued strong demand for US goods and services
on the back of a diminished US dollar and relatively strong external demand. We
expect that the deficit will increase to $61.5 billion for the month.
We expect that going forward that the US budget deficit will grow materially
worse. Our forecast of a $83.7 billion deficit is a sign of things to come. Our
expectation of a growing problem in the deficit is a function of increased
outlays and shortfalls in tax receipts. Revenues from individual taxes paid
have begun to deteriorate along with corporate tax payments. Overall total
receipts are down 6% year on year. We expect that the 2008 deficit will arrive
in line with administration forecasts, but the fiscal year 2009 could approach
a deficit of $600 billion should Congress attempt to pass a second stimulus
package and take other measures to shore up the finances at the Federal Deposit
Insurance Corporation.
Import prices in July should advance 1.8% month on month and 21.1% on an annual
basis. However, the fall in the cost of imported petroleum should provide a bit
of drag on the overall increase in the cost of imports, which is the first
positive news that market has observed in some time. Ex-petroleum costs for
industrial supplies, foods and beverages and consumer goods will all continue
to see solid increases. While the easing of the cost of imported oil will
provide some measure of relief to the market in coming months, the inflation
imported via the trade channel from China will remain on ongoing concern going
forward as the focus inside the Middle Kingdom shifts from combating inflation
to supporting growth.
The month of July should capture the final surge in spending related to the
well-timed stimulus package. The data based on the Redbook weekly and chain
store sales both support this assessment and looked to receive further support
due to back to school sales activity. While outstanding problems in demand for
autos continues to weigh heavily on the headline figure, ex-autos sales are
holding up relatively well. The outstanding question hovering over the retail
sales picture going forward is how will consumers respond to the modest relief
seen at the pump during the sampling period. We think that the cost of gasoline
will have to move back towards $3.50 per gallon in the short term and below
$3.00 per gallon later this year for the retail sales environment to see a
solid response by the consumer. We expect that the headline will see a 0.20%
increase month on month and a 0.6% advance ex-autos.
The move in the headline figure to 5.0% in June provided a material measure of
discomfort to the market. The publication of the July CPI should facilitate a
sense of deja-vu if our forecasts of a 5.2% year-on-year increase and 0.5%
month-on-month gain arrive on target. While some will dismiss the headline and
focus on the core, we do not take much comfort in our expectation of a 0.2%
month-on-month and 2.4% year-on-year increase in core inflation. Our
one-year-ahead forecasts suggest further deterioration in the core. While the
market of late has taken solace in the Fed forecast that inflation should
moderate in the coming months, we are careful to note that they have been
making this claim since August 2006. Moreover, it is our assertion that, once
the liquidity that the Fed has pumped into the system over the past year begins
to provide support to the economy, firms that have seen their profit margins
shrink will look to regain more than a share of pricing power. Should this
occur, core pricing will continue to bedevil a Fed that is counting on headline
pressures easing somewhat over the next several months.
Initial claims over the past two weeks has surged well above the critical
threshold of 400,000 and the less volatile four-week moving average has
increased to 419,000. The strong move to the upside may partially be a function
of legislative changes that have enabled continuing files to be identified and
initial filers. This implies that the market should see the headline moderate
over the coming weeks towards the four-week moving average. Thus we expect a
442,000 print for the upcoming week.
The modest decline in pricing pressures should provide a measure of relief to
purchasing managers in August. We expect that with production picking back up
in the manufacturing sector and new orders moving back into positive territory
the contraction in the manufacturing sector should ease somewhat in August.
Moreover, the midyear inventory correction, as illustrated by the -14.74
reading in the July inventory component inside the release, should have run its
course and provide a bit of positive support for the month. We anticipate that
the general business conditions headline will arrive at -1.0 for the month,
with a risk to the upside.
Industrial production should continue to limp along on the back of demand for
utilities. Our forecast of a 0.1% increase for the month is a function of the
traditional summer increase in demand for energy than a solid and sustainable
increase in the overall manufacturing sector. We remain quite bearish on the
manufacturing sector outside of demand from the external sector and with the
dollar firming, over the coming months that support should begin to weaken
somewhat.
Friday 10am
University of Michigan Consumer Sentiment (August - preliminary)
Consensus 62.3, Merk 62, Prior 61.2
After a long period of steady increases in the cost of gasoline, consumers have
begun to see the most modest amount of relief at the pump. Over the past four
weeks the cost of gasoline fell by 23 cents to $3.88 per gallon nationally.
While not enough to provide support for an observable increase in personal
consumption, it should be sufficient to drive overall consumer sentiment upward
to 62 during the preliminary estimate of consumer confidence. While this is a
positive development, consumer sentiment still remains at decade-long lows and
for lack of a better term still stinks.
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
