The Week Ahead: Three More Housing Reports

The week is beginning on a global wave of optimism with equities across Asia climbing, partly in response to Friday’s US existing home sales report, which trounced expectations with a 7.2% gain in July.

Earlier today in Japan, the Nikkei 225 jumped 3.35% ― its biggest one-day gain since May 7 ― on optimism that the US would rebound. 

“The housing report confirmed the U.S. is clearly on a path to recovery,” said Yoshinori Nagano, senior strategist at Daiwa Asset Management, according to Bloomberg News. “The fundamentals of the global economy and corporate earnings are improving, supporting the resilience of the market.”

South Korea's Kospi also rose 1.6%, Taiwan shares moved up 2.7%, Hong Kong's Hang Seng was 1.9% higher, and New Zealand's NZX-50 was trading 1.0% higher. China’s Shanghai index, which shook global markets with its extreme volatility last week, closed with a 1.10% gain after rebounding from losses earlier in the day.

In weekend news, Jean-Claude Trichet, president of the European Central Bank, defended the “gradualist approach” of monetary policy at the Jackson Hole Symposium. His views were backed by Jurgen Stark, executive board member of the ECB, who said the central bank's credibility would be threatened if rates were allowed to dip below 2%. It’s worth noting that Ben Bernanke, before taking the helm at the Fed, argued against the gradualist approach in favor of a “bang-bang” or “cold-turkey” method.

Among other speakers were Vice Chairman Donald Kohn, who argued that the Fed’s loose monetary policy has helped to prevent deflation. Former Fed Governor Frederic Mishkin, a well-known inflationary hawk, surprised few when he said interest rates should be raised aggressively as the economy rebounds.

An editorial in today’s Wall Street Journal takes the opposite argument: “The Great Depression was W-shaped. The stock-market collapse led to a steep economic decline. But by 1933, the economy had rebounded. Then a series of monetary and fiscal blunders drove the country back into a deep recession at the end of 1937. For the administration, the answer is clear: Err on the side of continued expansionary policies.”

On to data: starting the week off is a slow Monday, with no economic indicators set to hit markets. Looking ahead to the rest of the week...

Key Releases This Week:

Tuesday:

9:00 ― More good news from the housing market is expected in the form of the S&P Case-Shiller Home Price Index, which should indicate that average price declines across 20 metropolitan areas were moderating as of June. Going forward, that will only be good news if potential homebuyers are still attracted to the market, as new and existing home sales have been driven by the allure of reduced prices.

In last month’s survey, home prices posted their first monthly gain (+0.5%) in almost three years, with annual declines at an average of -17%. “The change in momentum here is very significant,” commented Robert Shiller, co-creator of the index, at the time. Still, he expects prices to remain near current levels for the next five years.

“A flat month would pull the yearly rate of decline below -17% for the first time since the Lehman disaster, suggesting that house prices are at least groping for a bottom,” said analysts from BMO Capital Markets.

10:00 ― There doesn’t seem to be much room for Consumer Confidence to move this month. Continued gains in the stock market and a wildly successful Cash for Clunkers program could boost sentiment, but will that outweigh a 9.4% unemployment rate and rising jobless claims? Analysts think so, but the impact will be mild. The median forecast from economists looks for a 47.6 score this month ― a one-point improvement from July.

“Amid additional signs of stabilization in the economy and the better than expected non-farm payroll and unemployment results, consumer confidence is expected to rise in August after dropping in the two previous months,” said the forecasting team at BBVA. “Nevertheless, it will remain at a low level because consumers continue to suffer from a weak labor market and tight credit markets. As a result, consumption is expected to remain weak in the third quarter.”  

10:00 ― The FHFA House Price Index is unlikely to receive much attention as the more important S&P index is released just an hour before. But analysts will want to see if the two reports are consistent. 

Wednesday:

8:30 ― New orders for Durable Goods are expected to rise 3.0% in July after a 2.5% loss in June, partly on account of rising sentiment in various manufacturing indexes. Core orders are set to rise 0.8%, half the pace of the 1.6% gain in June.

“The transportation component may experience a boost from the Cash for Clunkers program as auto dealers need to replenish inventories,” note economists from BBVA. “Although orders are expected to remain weak, an increase in this component could signal that the decline in industrial production could ease in the third quarter.” 

Analysts at IHS Global Insight expect new orders to almost double the consensus forecast, based on a boost from non-defense capital equipment orders ― a bellwether indicator.

“Durable goods orders should climb a steep 5.6% in July,” they said in a weekly forecasting note. “Boeing took more orders than were cancelled, defense ordering should have rebounded after a June drubbing, and light vehicle producers were back at their desks taking orders after bankruptcy-related shutdowns in June.”

10:00 ― The housing market received a boost when New Home Sales posted an 11% advance in June (the fastest growth rate in 9 years), which put the annual pace of sales to 384,000, its highest rate this year. An additional 5% gain is expected for July, as buyers take advantage of heavily reduced prices and first-time home-buyers receive an $8,000 government tax credit. 

In Sunday’s New York Times, it was reported that some buyers have “even been able to pull off a ‘triple whammy’ — taking advantage of auction prices lowered to sell, plus the tax credit, plus the F.H.A.-approved smaller down payment.” (An F.H.A.-approved loan allows buyers to put down as little as 3.5% of the purchase price. See story here.) 

Looking forward, some analysts are concerned that the factors driving the recovery now will also hurt the potential for recovery later.

“Although levels remain extremely low compared to those of last year, the rate of decline is easing, which is an indication of stabilization in the market,” said economists at BBVA. “Nevertheless, the greatly discounted prices of existing homes could present a risk to the recovery of the new homes market because buyers are seeking the best deal.”

Similarly, Patrick Newport and Nigel Gault from IHS Global Insight said the government tax credit, which expires on November 30, appears to be having a significant impact, but it may just be shifting potential sales from the Fall into the Summer. “If this is the case, and if the credit is not extended, sales will take a hit after the credit expires.”

11:30 ― Dennis Lockhart, president of the Atlanta Fed, addresses the Chattanooga Area Chamber of Commerce in Chattanooga, Tennessee. 

Thursday:

8:30 ― The consensus from economists looks for second-quarter GDP to be revised lower in the preliminary estimates, as inventories appear to have been slashed at a quicker rate than originally thought. The -1.0% cutback in gross domestic product is now thought to be -1.6%. That may not be bad news, as forward-looking markets will be pleased that the worst is behind us, setting the economy up for a quicker rebound.

8:30 ― Jobless Claims have been a major disappointment lately. With markets optimistic on signs the economy is turning the corner, new claims for unemployment benefits have been a reminder of how troubling the economy remains. In the week ending August 15, 576,000 Americans filed for new claims, putting the total number of recipients at 6.241 million. Economists believe the weekly figure will be trimmed to 565k this week, but even if that’s the case it is little consolation, as any figure above 360k is consistent with payrolls cutbacks.

5:00 ― James Bullard, president of the St. Louis Fed, speaks to the University of Arkansas MBA program in Little Rock.

Friday:

8:30 ― Views are mixed on the Personal Income & Outlays report. Last month, incomes were slashed 1.3%, but having gained an equivalent amount the month before, the news wasn’t shocking. Analysts expect a 0.1% gain in income this month, but forecasts range from -0.1% to +0.4%.

“Due to rising joblessness and shrinking wages, personal income likely fell again in July, extending a downward trend outside of government support measures,” said Sal Guatieri from BMO Capital Markets.

Outlays ― spending, to the lay-folk ― are expected to rise for the third straight month, largely on account of the Cash for Clunkers program in the final week of the month. 

“Spending fell 1.2% in the second quarter, and although we expect it to rise 2.5% in the third, that is almost all due to Cash for Clunkers,” said economists at IHS Global Insight.

Forecasters look for a 0.3% monthly advance, building on a 0.4% gain in June.

10:00 ― As with Tuesday’s consumer confidence report, the Reuters/University of Michigan Consumer Sentiment report isn’t expected to show much movement in August. “The economy may be recovering but consumers aren’t rejoicing,” said Sal Guatieri from BMO. July’s score of 63.2 is expected to topped only by a score of 64.0 in August.