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The Week Ahead

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Supported by tax rebates and lax monetary policy

Mon, Jul 14 2008, 09:32 GMT
by Marcial Nava, Alejandro Neut

BBVA Bancomer

Retail & Food Services Sales (June, Tuesday 8:30 ET)

F: 0.2, 0.7% C: 0.3, 0.8% P: 1.0, 1.2%

Supported by tax rebates and lax monetary policy, consumer spending, particularly on non-durable goods and services, proved resilient in the second quarter. On the contrary, spending on durable goods deteriorated significantly. For instance, auto sales –about a third of total consumers’ spending on durable goods- dropped 4.9% to 13.6 million of annualized units in June; this was the lowest level since August 1993. We look for a 0.2% increase in nominal retail and food services sales in June. However, excluding autos, sales probably rose 0.7%, boosted by sales at gas stations. Unfortunately, this boost is only nominal and related with higher gasoline prices. Moreover, when adjusted by our CPI inflation forecast, total sales probably declined 0.4%. In the next months, consumer spending will be hit by a weak labor market and a reduction in households’ net worth.

FOMC Minutes (June 25th Meeting, Wednesday 14:00 ET)

During its last meeting, the FOMC kept the Fed funds rate at 2% while releasing a hawkish statement, in which members acknowledged rising inflationary pressures, but remained cautious about the health of the real economy. As a result, minutes will probably reflect the Fed’s predominant view that inflationary pressures come from soaring commodity prices, but have not yet infected core inflation. In addition, minutes will probably stress the importance of inflation expectations in future monetary policy actions. We also expect the minutes to confirm the growing uncertainty within the Fed. Remember that last FOMC decision was not a unanimous vote. Instead, one of the ten members voted in favor of a rate hike, showing a glimpse of the heated debate that probably ensued. Finally, it is important to note that the expected emphasis on inflation is already discounted by market participants, and that troubles with Fannie Mae and Freddie Mac (and recent speeches aimed at calming the markets) will probably take the spotlight away from these minutes.

Industrial Production & Capacity Utilization (June, Wednesday 9:15 ET)

F: -0.3, 79.2% C: 0.0, 79.3% P: -0.2, 79.4%

Throughout this year, regional industrial and consumer surveys have been steadily worsening. Accordingly, manufacturers have been scaling back production in face of weaker demand. Even though GDP numbers have not been as bad as many analysts were expecting, we think that next week’s industrial production numbers will not yet signal any recovery. Neither should we expect any sign of recovery in the next few months. Leading indicators of manufacturing production (such as the Empire State Index) will probably show a continuation of the slowing economic trend.

Headline CPI & Core (June, Wednesday 8:30 ET)

F: 0.6, 0.2% C: 0.7, 0.2% P: 0.6, 0.2%

Headline CPI will show a stark increase, while core inflation will remain contained. Oil prices alone explain the divergence between these two price indices. Oil prices have broken the 140 dollars per barrel, and are rapidly approaching the 150 dollars mark. But inflationary pressures have a broader base than oil alone. The dollar has continued its depreciatory trend, with an effect still to be seen in core prices. However, the risks of a passthrough are contained by the weaker domestic demand associated to the current economic downturn.

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Published on  Mon, Jul 14 2008, 09:37 GMT