Previous Week

  • US: Fed conducted its first Term Deposit Auction
    The Federal Reserve carried out its first auction of 14-day term deposits for $1bn through its new Term Deposit Facility on June 14th. The rate was 0.27% and the bid to cover ratio was 6.14 times. Although the auction was relatively small, it represents an important step forward for the Fed in its ongoing exit strategy. Term deposits will be used like certificates of deposit. These funds will be removed from commercial banks’ reserves at the Fed so that banks will not be able to use them to provide loans. Excess bank reserves are now more than $1 trillion and represent 52% of the monetary base. Nonetheless, the Fed is not expected to drain excess reserves in large amounts in the next auctions. The first competitive sale was a successful test to understand whether the system would work properly in the future. The second auction will offer 28-day term deposits and will be conducted on June 28. The third auction will offer 84-day term deposits and will be conducted on July 12. The amounts offered are yet to be announced. The Fed may schedule up to two additional small-value TDF auctions later in the summer.

  • EU: Fiscal plans on the spot light
    Although the recent announcement by the German government of an €80bn package was introduced as an example of fiscal rectitude, markets did not find the austerity measures strong enough. The measures have no effect on the 2010 budget, while cuts will grow progressively from a relatively modest adjustment of €11bn in 2011 to €34bn in 2014. Cuts in welfare spending and the public wage bill are targeted for 2011. For later years the measures are less certain. The fiscal package does not involve harder adjustments than the ones outlined in the stability program approved in early 2010. Italy’s €24bn economic package provides unconvincing details since a large portion of the revenues are expected from combating tax evasion and local governments’ spending cuts. The French government also outlined its proposal of pension reform the day after it was criticized by the European Commission for being too optimistic on its growth projections and for not approving any austerity policies. The impact of the pension reform on the fiscal budget is expected to be small in the short-term (0.5% of GDP in 2013), but large in the long-term (1.9% of GDP by 2020). The plan raises the official retirement age to 62 from 60, eliminates exemptions to payroll taxes, introduces a new top income tax rate of 41% and raises contributions for public sector workers to align them with the private sector.


Existing Home Sales (May, Tuesday 10:00 ET)

Forecast: 6.12mn Consensus: 6.1mn Previous: 5.77mn

Commentary: In April, pending home sales, a leading indicator for existing home sales, increased 6% signaling a significant jump in existing home sales in May. Although the home buyers’ tax credit expired on April 31, 2010, we will continue to see its effects for a couple of months more and therefore we are expecting 6.12mn existing homes sold in May. Market Impact: Although increase in pending home sales strongly indicates a jump in existing home sales, any negative surprises would raise questions regarding the strength and sustainability of the housing market in a post home buyers’ tax credit period.


New Home Sales (May, Wednesday 10:00 ET)

Forecast: 0.49mn Consensus: 0.41mn Previous: 0.50mn

Commentary: New home sales are expected to decline after increasing two straight months. Although the new home sales are at very low levels compared to historical averages, 0.49mn new home sales indicate the second highest level in two years. Declines in building permits in the last two months and expiration of home buyers’ tax credit puts significant pressure on new home sales. Market Impact: Any significant negative surprises in new home sales would raise questions regarding the strength of construction industry and housing market and thus increase uncertainty over residential investment’s ability to support economic recovery and employment.


FOMC Meeting Announcement (Wednesday 14:15 ET)

Forecast: 0-0.25% Consensus: 0-0.25% Previous: 0-0.25%

Commentary: The FOMC is expected to hold the target interest rate at 0%-0.25% and maintain the “extended period of time” language. Recent Fed speeches have indicated that economic conditions are improving in line with Fed expectations, but growth will only be moderate and inflationary pressures will remain at bay. Market Impact: A surprise in the statement would be the removal of the “extended period of time” language, which would indicate that rates will rise sooner than expected.


Durable Goods Orders, excl. Transportation (May, Thursday 8:30 ET)

Forecast: -1.0%, 0.6% Consensus: -1.3%, 1.0% Previous: 2.8%, -1.1%

Commentary: The transportation component of durable goods orders is expected to pull down the overall figure due to a downward adjustment following April’s large order of non-defense aircraft and parts. Apart from this component, orders are expected to post a widespread increase, which would point to strengthening private demand. Market Impact: A negative surprise in this component would raise market concerns about the sustainability of private demand growth.


Gross Domestic Product (Final) (1Q10, Friday 8:30 ET)

Forecast: 3.0% Consensus: 3.0% Previous: 3.0%

Commentary: Gross Domestic Product (GDP) is not expected to be revised after its downward revision from 3.2% to 3.0% in May. We expect moderate recovery will continue in the second quarter and markets will be waiting for 2Q10 preliminary GDP estimates which will be released in July. Market Impact: Although it is not expected, significant downward revision to GDP would negatively affect the market’s mood and increase concerns over the sustainability of the recovery.