The Day Ahead: Retail Sales, Jobless Claims, Inventories, Bond Auction

Optimism is in the air. While analysts debate whether the US economy is on the brink of recovery or whether the recession has already ended, real GDP reports from France and Germany, just released, report that both economies were expanding in the second quarter.

“This is further evidence that the worst for the global economy is behind us and sights are now set on recovery,” said Robert Kavcic from BMO Capital Markets. Each nation was expanding at just 0.3%, a minor increase that wasn’t enough to stop the Eurozone from contracting overall (-0.1%), but it’s the first piece of growth since Q1 2008.

After gaining about 1.30% yesterday, US stock markets look to open up another 1% this morning. And equities could move even higher an hour before the bell when the Retail Sales report is released, as analysts believe the July figures were boosted on account of the surge of new vehicle sales at the end of the month. At the same time we’ll see the latest data on Jobless Claims, which will be much talked about if first-time claimants fall below 550k.

Elsewhere in the finance world, oil prices have been on the rise ($71.60), while the US$ has continued to weaken as investors extract funds in the safe haven and back into risk.

Key Releases Today:

8:30 ― Media have been discussing the success of the “Cash for Clunkers” program ad nauseam recently, and to understand why just check out the Retail Sales report this morning. Economists expect the report to see a 0.8% boost in June after a 0.6% gain in May, largely on account of new vehicle sales.

“Unit sales of light vehicles surged from an annual rate of 9.7 million units in June to 11.2 million in July, reaching their highest level since last September,” note analysts from IHS Global Insight in a weekly note. 

“Even though the ‘cash-for-clunkers’ program didn’t officially kick off until the last weekend of July, the incentive was hugely popular, pushing auto sales up 16% in the month to 11.2 million units, annualized,” added Jennifer Lee from BMO. “And with Congress agreeing to extend the program’s life, we should see another hefty boost to auto sales in August.” 

With auto dealers excluded, the gain should be a modest 0.3%. Part of the softness is due to falling oil prices, which has surged in the prior month.

Looking into the longer term, BTMU’s Ellen Zentner said not to expect anything like a V-shaped recovery in the retail world. “Saving and paying down debt have become the new mantra for households and it will be reflected in their spending habits for years to come,” she said.

8:30 ― The Jobless Claims report was taken as great news last week as initial claims fell to 550k in the first week of August, even though continuing claims shot up by 69k in the week ending July 25. Together the figures indicate the job destruction is abating, but there’s still no optimism that businesses are hiring en masse. The downward trend for first-time claims is expected to continue this week with analysts expecting a 543k print in the week ending August 13.

Ian Shepherdson from HFE said the jobless claims number could tick up this week, but it’s pretty clear the trend is downwards. “If we’re right, and the average reading for the next couple of months is close to 550k or so, it would be reasonable to expect the rate of decline of payrolls to slow markedly, to perhaps just 150k per month,” he added.

10:00 ― One of the major items in the GDP report was that inventories had been slashed at a more rapid rate than earlier thought in the first half of the year. The slashing wreaked havoc on the GDP figures but looking ahead it means businesses will have to stock up once demand picks up. Unfortunately, that isn’t expected to take place just yet, as Business Inventories are set to fall 0.8% in June ― their 10th consecutive decline, following a 1.0% drop in May and a 1.3% fall in April.

1:00 ― The Treasury Department will complete the third leg of this quarter's $75 billion refunding process with a 30 year bond auction. $30 billion in long bonds will be offered. Upon completion the Treasury Department will have raised $14 billion in new cash this week.