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Weekly Observatory

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August 4th, 2008

Tue, Aug 5 2008, 09:33 GMT
by Marcial Nava, Alejandro Neut

BBVA Bancomer

FOMC Monetary Policy Announcement (Tuesday 14:15 ET)

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

We expect the FOMC to maintain its current policy stance by keeping rates at 2% while committing to fight long term inflationary risks. We therefore expect the Board to announce no bias, with increasing inflationary and growth risks balancing each other. Some members have recently expressed their willingness to initiate a rate hike, even if only to signal their commitment to fight inflation. But the majority of the Board, including Bernanke, feels it is too soon to tighten. Most governors still see important cyclical recessionary risks for the second half of 2008. And given the current frailty of the financial system, they worry about the prospects of a deeperthan- average recession. With rising risks in both side of the Fed equation, we expect FOMC members to keep their current stance while on the alert to any of multiple threats.

Non-manufacturing ISM (July, Friday 8:30 ET)

F: 48.0     C: 48.7%     P: 48.2%

The latest BLS employment report showed a significant reduction in private services’ jobs -around 129,000 from January to July- most of them from temporary and help services. These suggest that services may no longer be able to absorb the ongoing losses in manufacturing and construction. Second-quarter GDP also revealed some moderation in services’ demand. Private spending on services increased 1.1% in 2Q08, the lowest rate since 1Q91. Therefore, we expect the non-manufacturing ISM index to remain below its 50 points threshold, pointing to a contraction in the services sector.

Initial Unemployment Insurance Claims (August 2nd, Thursday 8:30 ET)

F: 400K     C: 420K     P: 448K

Unemployment insurance claims have increased dramatically over the past three weeks, implying acceleration in the pace of job destruction. This was also evident from the fact that the unemployment rate reached 5.7% in July, the highest since March 2004. We expect initial claims to remain elevated at 400K in the week ending August 2nd, consistent with weaker labor market conditions.

Non-farm Business Productivity & ULC (2Q08, Friday 8:30 ET)

F: 1.2, 1.6%     C: 2.5, 1.4 %     P: 2.6, 2.2%

Higher-than-expected GDP figures and relatively mild job losses suggested that non-farm business productivity continued to expand in the second quarter. We look for a 1.2% increase from 2.5% in 1Q08. This is equivalent to a 2.9% change on a year-over-year basis, still above productivity’s longterm trend, estimated at 2-2.5%. We also expect unit labor costs to increase 1.6% in 2Q08 (from 2.2% in 4Q07), favored by relatively solid productivity gains and some moderation in the pace of compensations. Labor compensations have softened as implied by the Employment Cost Index, which grew 0.7% q-o-q in 2Q08, its lowest quarterly increase since September 2005. A slower pace of unit labor costs should help to contain inflationary pressures.

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Published on  Tue, Aug 5 2008, 09:42 GMT