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FOMC Policy Announcement (June 25th)

Mon, Jun 23 2008, 13:20 GMT
by Marcial Nava, Alejandro Neut

BBVA Bancomer

Fed Funds Forecast: 2.0% C: 2.0% P: 2.0%

In its next meeting the FOMC will probably maintain rates at 2%. Uncertainty has intensified on both sides of the Fed’s equation. On the one hand, the economy still faces downside risks due to the fact that financial markets remain under considerable stress. On the other hand, inflationary pressures – coming mainly from large increases in oil and food prices- have intensified and headline inflation has accelerated both for PPI and CPI. Although core inflation has remained immune to these pressures, expectations have been showing an incipient reaction –and with isolated surveys showing a very significant rise, like the 5.5% inflation reached by Michigan 1-year Inflation Expectations. As a result, recent speeches by Board members have been hawkish in tone. But other than reemphasizing their commitment to combat inflation, we do not see them as signaling any change in policy in the near future.

Consumer Confidence Index (June, Tuesday 8.30 ET)

F: 56.0     C: 57.0     P: 57.2

We expect the Conference Board’s Index of Consumer Confidence to deteriorate in June, reflecting more pessimistic assessments on labor markets, increasing gasoline prices, and weaker financial markets. In May, private nonfarm payroll declined only by 49,000, but the unemployment rate reached a high 5.5%. Tax rebates may have helped the hardship faced by a large percentage of families but probably, they did little in terms of expectations. The Confidence Index stands at 57.2 points, the lowest reading since October 1992.

Existing & New Home Sales (May, Tuesday and Wednesday 10:00 ET)

F: 4.80, 550K C:     4.96M, 510K     P: 4.89M, 526K

Housing demand has not bottomed yet and homebuyers have adopted a waitand- see attitude toward home prices. Thus, we expect housing demand to weaken further as prices keep falling. In our view, the housing market will deteriorate –each time at a slower pace– throughout the rest of the year and will not start to recover until the beginning of 2009. We will hardly see an improvement in existing home sales, given a wave of foreclosures that make the housing inventory even higher. We expect new home sales to continue on a downward trend. Prices are likely to continue falling, particularly in markets with weaker economic fundamentals.

Durable Goods Orders (May, Wednesday 8:30ET)

F: 0.0%     C: 0.0%     P: -0.5%

May durable goods orders likely remained at April’s low levels, anticipating disappointing readings of industrial output in the coming months. Durable good orders have accumulated a 4.3% reduction so far this year. Nondefense capital goods orders excluding aircraft –a leading indicator of nonresidential investment– declined 1.6% y-o-y on average during 2007. This trend continues and is likely to be exacerbated by tighter credit standards and declining corporate profits. As a result, we expect non-residential investment to soften in 2008; although, it will remain growing above PCE. Sectors more closely linked to exports are likely to benefit the most.

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Published on  Mon, Jun 23 2008, 13:26 GMT