Week ahead in US financial markets
By Joseph Brusuelas
Inflation will be at the forefront of a heavy week of US macro data, with
import prices and producer prices released on Thursday, which will feature most
other market-moving figures, and Friday, and the advance retail sales estimate
for August closing out the week. The only Federal Reserve speaker scheduled for
the week is Fed Dallas president Richard W Fisher, who is due to speak in
Austin, Texas, today. The remainder of the week falls under the traditional
blackout period on Fed talk ahead of the September 16 open markets committee
meeting.
Tuesday 10am (all times eastern daylight)
Pending home sales (July)
Consensus -1.00%, Merk -1.30%, Prior 5.30%
Pending home sales for July should fall 1.3% after a strong 5.3% uptick in
June. The modest increase in sales activity during the
summer months of 2008 has been fueled by purchases of foreclosed homes in the
existing stock of houses. According to the National Realtors Association, up to
40% of all homes purchased in the existing home sales report fall under that
category. This number will probably have to increase given the quantity of
Alt-A and prime borrowers that are expected to see their homes enter into
foreclosure over the coming months. Some cash buyers and other well-positioned
consumers may find good opportunities to re-enter the housing sector over the
next several months, but we do not think in the short-term that this will be
sufficient to clear the outsized level of inventories currently on the market.
The price of West Texas intermediate crude oil hit its recent peak on July 14
at US$146.13 per barrel. This should provide a bit of a drag on the recent
improvement in the trade deficit. We expect that deficit should increase
modestly to -$58.5 billion for the month. However, the real dollar goods
balance should continue to see modest declines and the external sector should
continue to provide support for overall economic activity during the third
quarter of 2008.
US inflation indicators should see their first sign of relief reflecting the
decline in headline costs. We expect that import prices will fall -0.7% in the
month versus the previous 1.7% increase in July. On an annual basis, import
prices should show a 19.8% increase. The primary catalyst behind the August
headline decline should be the fall in petroleum costs.
Initial claims should fall back slightly to 440,000 during the upcoming week.
Over the next several weeks look for the weekly claims series to be quite
volatile on the back of dislocation in the labor sector due to the series of
hurricanes that look to hit the southeast portion of the United States.
The US budget statement should continue to spill red ink again in August, when
our forecast suggests that the deficit should grow to $107.1 billion for the
month. The combination of increased outlays, falling tax revenues that final
rebate checks being cashed should push the deficit higher for the second
straight month.
The market will focus on what we expect to be a decline of -0.4% month on month
in headline costs for producers. This improvement, which should be driven by
the fall in oil costs, has been widely priced in to expectations. However, we
note that core prices can be expected to rise 0.3% month on month and 3.8% year
on year in addition to the 10.2% annual increase in headline prices. For the
past several months we have pointed out the risk due to rising total
intermediate costs, which are up 16.6% annually on a headline basis and 10.2%
in the core. Fueling this rise has been the 23.9% increase in the cost of
material for non-durable manufacturing, 36.4% cost of processed fuels and
lubricants and 12.5% advance in the cost of materials for durable
manufacturing. We do not think that these costs will be receding anytime soon
and the risk of inflation into the core will continue for some time even as
headline costs continue to abate. Most importantly, this is what led the Kansas
City, Chicago and Dallas Fed regional banks to ask for a 25 basis point hike in
the discount rate to 2.5%. According to the three Fed regional banks, "higher
input costs were being passed through to product prices and that inflation
expectations had risen and judged that the upside risks to inflation were of
greater concern than the downside risks to growth."
The retail sales environment during the month of August should reflect the
increasing strains that have become quite visible on the consumer. With the
impact of the stimulus fading and a lackluster late summer sales season in the
auto and back to school sales, we think that overall sales should see a tepid
increase of 0.1% in the headline and a 0.2% decrease in the core, with risk to
the downside in both. Anecdotal reports from retailers do not bode well for the
series and the typical later-summer surge associated with the fall school
season looks to have failed to materialize. Should the redbook and retail chain
reports come in below our modest expectations, we will revise down our forecast
accordingly.
Friday 8:30am
University of Michigan Consumer Confidence (September)
Consensus 63.5, Merk 63.9, Prior 63
The recent decline in the price of gasoline should continue to provide support
to consumer confidence, which seems to have reached cyclical lows during June.
The preliminary September estimate of consumer sentiment should rise to 63.9 as
the recent fall in headline prices is passed through to consumers in the guise
of cheaper prices for energy. We think that the modest outbreak in optimism is
likely to be transitory once consumers, especially those in the Northeast and
upper Midwest, turn their attention to the cost of heating oil and electricity
costs during the upcoming winter months ahead.
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