Week ahead in US financial markets
By Joseph Brusuelas
The holiday-shortened four-day trading week will be light on data, most notably
featuring Friday's publication of the August non-farm payrolls report. US
Federal Reserve speakers include Dallas Fed president Richard Fisher on
Thursday, discussing the US economy, and San Francisco Fed president Janet
Yellen on Thursday and Friday, on both occasions to address the topic of the US
economic outlook.
The Institute for Supply Management's estimate of activity in the industrial
sector for August should see a slight decline on the
back of modest economic activity at home and abroad. Purchasing managers should
see a glimmer of hope on the back of what we think will be a very sharp decline
in the prices-paid component, the shoddy state of new orders and a second
straight decline in new export orders should feature what will be a fall back
to 49.3 in the headline for the month.
The ongoing adjustment in domestic motor vehicle industry should continue in
August when we expect that domestic vehicle sales will arrive at 9.4 million
and total vehicle sales will come in at 13.0 million. The combination of lack
of demand for the fuel-inefficient vehicles still on the market and the
substitution of private transportation for mass transport in large metropolitan
areas is subtly reshaping the domestic auto market. Within the context of tight
credit, a weak labor market and falling home prices, the auto industry is
poised for further problems throughout the remainder of 2008.
The solid environment for external demand should underlie a mild factory orders
report for July. We anticipate that factor orders will increase 1.0% for the
month. The second straight above expectations print in durable goods orders for
July and the fifth straight above market expectations posting does give some
hope that the spillover of financial stress into the real economy will be
limited. The market will focus beyond the headline on shipments of non-defense
capital good ex-aircraft that is a forward-looking indicator of growth. We
expect to observe a solid 0.6% advance in that category.
The market will be focused on the condition of the consumer and the lingering
deadweight that is the housing sector on economic activity midyear. The beige
book should report modest economic activity with demand still seeing some of
the impact from the fiscal stimulus package that arrived in the second quarter
of 2008. What might prove more interesting will be the pricing situation during
the report. The previous beige book imparted that there were anecdotal reports
of demands for wage increases linked to surging headline prices. Should that
gain steam, the markets current rosy outlook on future inflation may be
slightly altered.
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 442,000. 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. Thus we expect a 435,000 print for the upcoming week.
Thursday 8:30am
ISM non-manufacturing
Consensus 49, Merk 49, Prior 49.5
The service sector reflects the stress of higher headline costs and mixed
prospects in the labor market that have defined the condition of the consumer
over the past several months. We expect that the headline for the ISM
non-manufacturing activity estimate will modestly ease to 49.3.
Amid a very difficult economic environment over the past year, productivity
continues to hold up quite well. Firms that did not over-indulge themselves
during the expansion have maintained worker output per hour though 2007-08.
During energy shocks, one would normally expect to productivity to weaken, but
the lagged impact of past investment in technology appears to have provided a
cushion for firms to weather the storm. We expect productivity in the second
quarter to increase 3.0%, primarily on the back of firms reducing payrolls to
hedge against further economic downturns ahead.
The rise in initial jobless claims throughout the sampling period may be a bit
ripe due to a policy change in how first-time claimants are accounted for.
However, the smoothed four-week moving average has moved above the 400,000
level. The carnage in the goods producing sector, construction and
manufacturing will continue. In July, other than the healthcare, education and
hospitality sectors, major categories of private sector hiring went negative or
were flat for the month. We expect the headline to see a net subtraction of
-75,000 for August and the unemployment rate to rise to 5.7% for the month.
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