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The Financial Week Ahead in US

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Week Ahead in U.S. Financial Markets (October 6 − October 10 2008)

Fri, Oct 3 2008, 15:16 GMT
by Joseph Brusuelas

Merk Hard Currency Fund

Financial Markets Summary For The Week of October 06 - October 10

The week of October 6-10 will see a light week of economic data that will be dominated by the Tuesday FOMC minutes from the September 16 meeting and Fed Chair Ben Bernanke speech that same day. Other data to be released during the week will be the Wednesday pending home sales report for August and the weekly initial claims data on Thursday. The week will close with the publication of the August trade balance and the September import price estimate. Depending on events over the weekend out of the US Congress and perhaps the Fed, the market conditions may see a bit of volatility during the early part of next week over economic concerns and redemptions in the hedge fund community.

Fed Talk

After another earth shaking week in the global markets, market participants will be observing comments from a variety of current and former members of the Federal Reserve System that will be speaking during the upcoming week. The major event looks to be the 7 October speech by Fed Chair Bernanke, topic TBA at 12:30 EDT. Monday will see former US Fed Chair Paul Volker and former Fed Vice-Chair Roger Ferguson address the topic of global financial supervision in the global marketplace. Chicago FRB President Evans will address productivity trends in the manufacturing industry, also on Monday. Minneapolis FRB President Stern will speak on the "Repercussions from the Financial Shock" on Tuesday.

FOMC Minutes Tuesday 2:15 PM

The volume and magnitude of the steps taken by the Fed in the run-up to the most recent FOMC meeting and those taken in its aftermath are arguably the most important taken in the long history of the institution. The primary focus of the minutes will be the discussion organized around the Fed decision of September 14 to accept a wider range of collateral under both the term securities lending facility and the primary dealer credit facility programs. The secondary focus of the market will be to assess the probability of either an intermeeting rate cut or a reduction in the federal funds rate when the FOMC meets on October 29 based on the economic assessment of the condition of the consumer, the labor market and business investment. To a certain extent, Mr. Bernanke has already made the case that the downside risk for the consumer, jobs and corporate investment may warrant a rate cut, but a fragile market will be looking for signs of imminent action by the Fed ahead of its next meeting.

Pending Home Sales (August) Wednesday 10:00 AM

Pending homes sales in August should see another month of declines when we anticipate that the headline will decline -2.3% vs. the -3.2% drop posted in July. The purchasing environment in August picked up slightly in the existing home sector mostly due to the availability of heavily discounted foreclosures that have hit the market. According to the National Association of Realtors between 35-40% of the sale of existing homes can be attributed to the purchase of distressed properties.

Initial Jobless Claims (Week ending October 4) Thursday 08:30 AM

The continuing claims series illustrates the growing weakness in the US labor sector. The number of individuals collecting benefits is the highest since September 2003. While, initial claims is higher than it otherwise would be due to the dislocation caused by the hurricanes to hit the Gulf Coast in September, the upward trend in the data is clear and we do expect to observe an increase in claims associated with the credit panic in the coming weeks.

Trade Balance (August) Friday 08:30 AM

The trade balance for August should see some improvement on the back of the decline in oil prices. Our forecast implies that the trade balance should improve to -$57.3bln vs. the -$62.98bln posted in July. Ex-petroleum the deficit stands at -$18.80bln and is a reflection of the relative weakness of the dollar and the extent to which the US relies on oil imported from abroad. The moderation in energy prices should facilitate a further narrowing of the trade deficit going forward, but the deceleration of the global economy should cause the increase to moderate in coming months.

Import Prices (September) Friday 08:30 AM

After posting the single largest decline in the cost of imported goods in nearly two decades, import prices for the month of September should fall -2.5% m/m primarily due to the correction in global energy markets during the sampling period. Demand for commodities and energy declined perceptibly during the period and the risk for the trading day is to the downside. Moreover, there are now signs that reduced demand in the US has spilled over to other industrialized nations where firms may feel pressed to reduce prices to control inventory levels and maintain market share abroad. For now the decline in import prices remains primarily an energy story. But, should the clogging up of credit markets continue, prices of imported goods across the broad spectrum of the economy could see further retrenchment.

Published on  Fri, Oct 3 2008, 15:16 GMT

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Week Ahead in U.S. Financial Markets (September 29 − October 3 2008)

Fri, Sep 26 2008, 14:03 GMT
by Joseph Brusuelas

Merk Hard Currency Fund

Financial Markets Summary For The Week of September 29 - October 03

The week of September 29-October 3 will see very important data that will provide information on the condition of the consumer and the labor sector. The major data risk for the week will occur with the Monday release of the August personal and income statement and the Friday publication of the September estimate of non-farm payrolls. We look for modest declines in real spending and a loss of -105K payrolls with the unemployment rate increasing to 6.2%. Tuesday will see the release of the September Chicago PMI, estimate of consumer confidence by the Conference Board and total vehicle sales. The Institute for Supply Management estimate of activity in the manufacturing sector will be published on Wednesday and their read of service sector activity will be released on Friday. Thursday will see the release of weekly claims and factory orders.

Fed Talk 

After a very eventful few weeks, the market will have an eye on Fed talk during the upcoming week. On Monday Kansas City Fed President Thomas Hoenig will speak on the economy and monetary policy. St. Louis Fed President Bullard will speak on Friday, time and topic TBA.

Personal Income/Spending (August) Monday 08:30 AM

Our forecast implies that on a nominal basis income and spending should see a modest 0.1 increase and no change respectively. However, on an inflation adjusted basis, we anticipate that spending should see the third straight negative posting and arrive down at -0.3% for the month. With personal disposable income looking to see a third straight month of contraction the condition of the consumer is looking more precarious. While consumer have observed some relief due to falling gasoline prices, it has not been sufficient to stimulate an increase in retail sales. Our forecast of personal consumption for Q3'08 stands at -1.0%.

PCE Deflator (August) Monday 08:30 AM

The Fed's preferred measure of inflation should see a modest increase in the core rate. Our forecast implies a month over month increase of 0.2% and the annualized rate should advance 2.5% for the month. With the near catastrophe in the financial system, the Fed will not be focused on price stability for the foreseeable future. Price stability in the near term is still a function of past monetary policy and the run up in headline costs. We expect to see core rates continue to build over the next few months. However, should aggregate demand contract or demand for commodities resume their recent downward trend, we could see headline and core inflation peak sometime later this year. Nevertheless, due to the increase in Federal spending on the back of the bailout of the U.S. financial system, we do believe that conditions are being put in place that will stimulate a long term move in inflation well above the current implied target range of the Fed.

Chicago PMI (September) Tuesday 09:45 AM

The estimate of manufacturing activity in the upper Midwest should see a second consecutive month of solid gains. Our forecast implies a reading of 54.0 on the back of another month of strong new orders and production to meet foreign demand. Yet, the 54.0 forecast does suggest slower growth than was seen in August and it is an open question whether purchasing managers sentiment can remain elevated under conditions of weakening consumption and the ongoing problems in the auto sector. Even amidst of falling input prices, we think that the severe disturbance in the domestic system of credit should weigh heavily on the minds of purchasing managers concerned over access to capital. Thus, the risk for the month is to the downside.

Consumer Confidence (September) Tuesday 10:00 AM

An interesting confluence of events should provide a test of the durable psyche of the consumer. Although, the cost of gasoline provided a brief source of support to consumer confidence, the recent near shutdown of the domestic system of credit and the proposed $700bln bailout by the U.S. Treasury should offset whatever positive change in consumer sentiment that had been building. We expect a modest decrease in sentiment to 55.0 for the month and major downside risk throughout the remainder of the year.

Domestic Vehicle Sales (September) Tuesday-Throughout The Day

The condition of the consumer and uncertainty over the economic outlook should continue to dampen enthusiasm for purchases of vehicles, whatever their national origin in September. The double barrel blast of a weakening labor sector and disturbance in the system of credit should again offset the aggressive discounting to clear inventories on the part of automakers. We expect the sale of domestic vehicles to fall to 10.1mln and total vehicle sales to decline to 13.3mln.

ISM National Manufacturing (September) Wednesday 10:00 AM

The ISM's estimate of national manufacturing conditions should see a sideways move in September with firms seeing a positive turn in the cost of commodities, but a modest decline in export orders and a very soft environment in domestic demand. Our forecast implies that both new orders and production activity should see downward movement and suggests that risk for the month is to the downside

Initial Jobless Claims (Week ending Sep 27) Thursday 08:30 AM

Jobless claims should see a slight moderation to 470K for the week ending September 27. The four-week moving average inside the initial claims series has continued to climb steadily over the past several weeks. We think that the headline should see a modest adjustment downward, but the overall trend in the series should continue to move upward. As conditions in Texas and Louisiana adjust, we do expect to see some moderation in the headline, but the continuing claims series will continue rise.

Factory Orders (August) Thursday 10:00 AM

After five straight months of gains in factory orders on the back of demand from the external sector and orders for civilian aircraft, we expect to see a decline in the headline of -4.1%. Orders at Boeing for the month remain weak and demand for durable goods should see a modest decline after two very strong postings.

Non-Farm Payrolls (September) Friday 08:30 AM

The labor sector should continue to see another month of declines. Our forecast implies that the establishment survey should see a decline of -105K and the household estimate should see an increase in the rate of unemployment to 6.2%. We expect to see an outsized decline of -50K in the manufacturing sector, along with continuing declines in the goods producing, construction and service sector. We expect that the positive contributions to the payroll situation of the healthcare and government sectors will be more than offset by the contraction in the aforementioned areas of the economy and the risk of further deterioration in both the headline and unemployment rate during the month should not be discounted.

ISM Non-Manufacturing (September) Friday 08:30 AM

Our forecast of service sector activity in September suggests that the headline should moderate to 50.0 on the back of a deteriorating labor sector and outlook among the consumer. Indicators of personal consumption in the non-manufacturing sector for the month all imply a further decrease in overall spending among consumers. With personal disposable income falling over the past two months consumers are not well positioned to increase discretionary spending on non-essential items.

Published on  Fri, Sep 26 2008, 14:03 GMT

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Fed Talk

Mon, Sep 15 2008, 08:40 GMT
by Joseph Brusuelas

Merk Hard Currency Fund

Financial Markets Summary For The Week of September 15-19

The week of September 15-19 will see a solid week of US macro data. The major market moving releases of the week will be the FOMC statement on Tuesday and the publication of the consumer price index on Wednesday. Other data for the week will feature estimates of manufacturing activity in September, with the Empire Manufacturing survey released on Monday and the Philadelphia Fed estimate published on Thursday. The August industrial production estimate will be released on Tuesday. The final data for the week will be released Thursday morning when the jobless claims for the week of September 13 are published and the leading economic indicators for September are released

Fed Talk

Due to the traditional blackout period on Fed talk ahead of the September 16 FOMC meeting, it will be a quiet week of Fed talk. The only Fed speaker scheduled is the Federal Reserve Bank of Chicago President Evans who will speak on the economic outlook at a Swiss National Bank conference. Time TBA.

Empire Manufacturing (September) Monday 08:30 AM

We expect the second consecutive increase in the New York Fed's estimate of manufacturing activity in the Northeast. Our forecast implies that the headline should increase 4.1 on the back another decline in the prices paid component and a slight rebound in the new orders category. The break in the upward trend in input costs has provided some relief for manufacturers and demand from abroad should add an element of demand contributing to the modest increase in the headline.

Industrial Production/Capacity Utilization (August) Tuesday 09:15 AM

External demand has been one of the few bright spots in the economy over the past several months. But, the cooling in demand for commodities in August, should act as the primary catalyst for the -0.2% decline implied by our forecast. Thus, capacity utilization should decline to 79.6 for the month. The risk to our forecast is that demand for utilities during the final month of summer could swing the headline back towards a positive reading. Overall industrial production remains weak and outside of external demand there is little to support any short-term recovery in the prospects for the manufacturing sector.

Consumer Price Index (August) Tuesday 08:30 AM

We expect that the headline inflation will hold steady at 5.6% on an annual basis and see no increase for the month of August. The core should see an increase of 0.2% m/m and move to 2.6% y/y, with risk to the upside on the monthly estimate. The CPI headline estimate has seen a 10.6% on a three month annualized basis while the core has increased 3.5%, the ex-food component 10.9% and the ex-energy estimate has advanced 4.2% over that same time frame.

The past three months has seen core prices in particular begin to advance. On a three month annualized basis the cost of services is up 6.2%, housing 6.5%, apparel 4.2%, education 5.5%, medical care 2.4% and tobacco 14.9%. The only significant category inside the CPI that has fallen is the cost of computers which has declined -15.7%. Perhaps, more interesting than the data itself, will be the market response to it. The market has discounted the rise in core prices that we expect to define the remainder of the year on the rosy assumption that headline costs will continue to decline allowing the Fed to ignore what we think will be continued pricing pressure in the core.

FOMC Meeting Tuesday 2:15 PM

The upcoming FOMC meeting should see the committee hold rates steady at 2.0%. We expect that the fragility in the financial sector should remain front and center among many concerns at the Fed. We expect language in the monetary statement to support the recent actions taken by the U.S. Treasury with explicit reference to the narrowing of spreads and decline in the 30 year fixed mortgage rate. The assessment of risks should remain balanced between growth and inflation. Although, the Taylor Rule implies that monetary policy remains accommodative by at least 150 basis points, the fragility of financial system dictates that rates remain on hold regardless of the upside risk to inflation.

US Current Account Balance (Q2-2008) Wednesday 08:30 AM

The US current account deficit should increase to -$179.7 billion on the back of decline in investment flows into the US and soaring oil and commodity prices throughout the sampling period. The decline of the dollar and robust external demand for domestically produced goods have partially offset the sharp increase in the cost of oil during the quarter, but we still anticipate that the current account will deteriorate for the second consecutive quarter. The US requires $1.9 billion dollars per day to bridge the gap between what it spends and what it saves. A healthy skepticism regarding the ability of the U.S. to sustain such a large deficit is at the heart of our long-term bearish outlook on the dollar.

Housing Starts/Building Permits (August) Wednesday 08:30 AM

We think that housing starts are at or near forming a bottom. The 965K that the market observed in July represent the weakest month in starts since the January of 1991. The environment for starts has not seen such sustained weakness since the twin recessions of the early 1980. Given the current level of household formation we do not think that starts will decline toward the mid 800K levels observed during the searing economic downturn observed in 1982. Permits should fall to 920K for the month.

Initial Jobless Claims (Week ending Sep 13) Thursday 08:30 AM

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 have and look to hit the Southeast portion of the United States. Thus, the headline data will see risk to the upside over the next few weeks followed by a correction. More importantly going forward will be the continuing claims series. The series has trended upward and now stands above 3.5mln. We expect that jobless claims will fall slightly to 440K and the continuing claims should rise to 3.65mln.

Philadelphia Fed (August) Thursday 10:00 AM

The industrial picture in the Mid-Atlantic region continues to see contraction. The six-month average inside the Philadelphia Fed's survey of manufacturing activity stands at -17.3, which is reflection of the slowdown among regional manufactures. We expect the September headline to see a bit of improvement to -11.49 mostly due to the easing of commodity and basic input prices. However, the data inside the survey continues to underperform with the new orders category remaining weak and the employment indicator seeing contraction for the past six months.

Published on  Mon, Sep 15 2008, 08:40 GMT

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A heavy week of US macro data

Mon, Sep 8 2008, 13:30 GMT
by Joseph Brusuelas

Merk Hard Currency Fund

Financial Markets Summary For The Week of September 8-12

The week of September 8-12 will see a heavy week of US macro data. Inflation will be at the forefront with import prices and producer prices released on Thursday and Friday, while the advance retail sales estimate for August to close out the week figures to be the primary market moving release of the week. The week will kick off with the Tuesday publication of the July pending home sales release. The majority of the data for the week will be published on Thursday, which will also see the release of the July trade balance, weekly jobless claims and US monthly budget statement. Friday will also see the publication of the University of Michigan's preliminary estimate of consumer sentiment for September.

Fed Talk

The only Fed speaker scheduled for the week is FRB Dallas President Fisher, who will speak in Austin, Texas, topic and time TBA on Monday, September 8. The remainder of the week falls under the traditional blackout period on Fed talk ahead of the September 16 FOMC meeting.

Pending Home Sales (July) Tuesday 10:00 AM

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.

Trade Balance (July) Thursday 08:30 AM

The price of West Texas intermediate crude oil hit its recent peak on July 14 at $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 -$58.5bln 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.

Import Prices (August) Thursday 08:30 AM

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% the month vs. 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 Jobless Claims (Week ending Sep 7) Thursday 08:30 AM

Initial claims should fall back slightly to 440K 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.

US Budget Statement (August) Thursday 2:00 PM

The US budget statement should continue to spill red ink again in August, when our forecast suggests that the deficit should grow to -$107.1bln 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.

Producer Price Index (August) Friday 08:30 AM

The market will focus on what we expect to be a decline of -0.4% m/m 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% m/m and 3.8% y/y in additional 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."

Advance Retail Sales (August) Friday 08:30 AM

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% 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.

University of Michigan Consumer Confidence (September) Friday 08:30 AM

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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Published on  Mon, Sep 8 2008, 13:30 GMT