The Week Ahead: Turning Point for Markets?

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Markets slipped 1.8% last week but overall September saw shares rise 3.6%, indicating that investors do not believe the market has overheated despite the rapid gains made since March. 

After a packed schedule last week, the five days ahead look relatively light. Indeed, on Tuesday and Wednesday the focus will be on headlines from meeting held at the House Financial Services Committee. 

With markets continuing to digest the worse-than-expected employment data from Friday, some are saying this week could be a turning point for markets.

“The ballyhooed ‘V’-shaped economic recovery may conclude with a lower case ‘v’; in other words a strong, short snapback in economic growth from 2Q to 3Q,” said Brian Sozzi, research analyst for Wall Street Strategies. “Following 3Q, the probability for a further extension in the recovery ‘V’ is up in the air as global demand for durable goods, for example, remains sluggish. China alone cannot dig the rest of the world from below trend growth, and the market may now be reassessing the risk equation of equities.”

Highlights from the Weekend:

Treasury Secretary Tim Geithner said global financial conditions have “improved dramatically” but high unemployment would continue to hurt the world’s financial system. He told an audience in Turkey that it remains too early for nations to withdraw stimulative policies.

The IMF’s Dominique Strauss-Kahn said he wants the Fund to become a global central bank holding reserves of $10 trillion, which could be used for lending to developing nations. According to the Wall Street Journal, the IMS “is essentially being turned into the staff of the Group of 20.”

The Irish people overwhelmingly voted yes to ratify the EU’s Lisbon Treaty, which aims to enhance “the efficiency and democratic legitimacy of the Union and to [improve] the coherence of its action.”

Former Federal Reserve chairman Alan Greenspan said he is opposed to additional stimulus measures for the American economy. He told ABC’s “This Week with George Stephanopoulous he fears that as people remain unemployed, they may lose their skills and, which would be an “irretrievable loss” for the economy.

HSBC released a report entitled “The Tipping Point – The Rise of the East and Demise of the West.” In it, the Hong Kong bank said emerging nations in Asia will dominate the global economy, as low interest rates will create excess global liquidity to be poured into developing markets.

Key Releases This Week:

Monday:

10:00 ― Economists believe the services industry is lagging behind as the economy stabilizes, so the consensus is for no change to the ISM Non-Manufacturing Index. The survey of the financial, construction, and the services industry advanced 2 points in August to 48.4, indicating modest deterioration.

“Although the index has rebounded substantially since November 2008 ― when it reached a minimum of 37 ― its trend continues to show a weak environment,” said forecasters from BBVA. “Uncertainty in these sectors remains, as suggested by September’s employment report . . .  Employment losses were widespread, with the service sector accounting for almost half of them.”

Ian Shepherdson from High Frequency Economics also looks for no change from the prior month. “The August index overshot a bit relative to the sales numbers, so we look for no further gain in September,” he said. “Either way, we don’t think the survey has much to tell us about the future,” he added, calling the survey “little more than a lagging indicator” of retail sales.

  • Treasury Auctions:
  • 11:30 ― 3-Month Bills
  • 11:30 ― 6-Month Bills
  • 1:00 ― 10-Year TIPS ($7 billion) 

Tuesday:

Tuesday is relatively light on data. Weekly retail reports from the International Council of Shopping Centers and the Johnson Redbook will provide the latest information on consumption, but no major data will hit markets.

“As we approach the 2009 holiday season, at best, retailers are hoping for flat performance compared to last year,” Ellen Zentner from BTMU. She called the new fashion mantra “flat is the new up.”

9:45: ― Thomas Hoenig, president of the Kansas City Fed, speaks to an economic forum sponsored by the Fed’s Denver branch.

10:00 ― House Financial Services hearing on Capital Market Issues. 

  • Treasury Auctions:
  • 1:00 ― 4-Week Bills
  • 1:00 ― 3-Year Notes ($39 billion) 
  • 3:00 ― STRIPS

Wednesday:

Wednesday is also light on data, but at 7am the weekly report from the Mortgage Bankers Association will say whether mortgage rates remain below 5% for a third consecutive week. Low rates should help spur last-minute purchases just as the tax credit for first-time home purchases expires in November.

“Although there seems to be limited room for further declines in mortgage rates, a last minute rush by first homebuyers who are qualified for the one-time tax credit may boost purchase filings,” said analysts from Nomura.

10:00 ― House Financial Services hearing on Derivatives.

2:30 ― Senate Banking Committee hearing on “Securitization of Assets: Problems and Solutions.”

3:00 ― Consumer Credit isn’t often a key report, but banks are holding standards tight and consumers are shifting to savings mode, which gives this monthly report additional emphasis. In July credit outstanding fell by a record $21.6 billion, but though the underlying pace of contraction appears to be accelerating, analysts believe credit should fall by “only” $8.5 billion in August due to the success of the cash-for-clunkers incentive program.

“For the long term, lower US consumer borrowing is clearly a positive and will likely be an important part of rebalancing the global economy,” said analysts from Nomura Global Economics. “For the short-term, however, efforts to reduce debt are a negative for consumer spending, all else equal. If the aggressive pace of debt repayment continues, it may hinder the ability of the economy to emerge from recession.”

  • Treasury Auctions:
  • 1:00 ― 10-Year Notes ($20 billion)

Thursday:

8:30 ― Initial Jobless Claims rose last week, halting a three-week streak of weekly declines. Economists believe the general trend is still downward, with the median forecast at 540k this week, compared to 551k in the week before. The weekly numbers continue to indicate major declines in payrolls, so it will take a huge surprise for markets to become optimistic on the labor front.

10:00 ― Wholesale Trade has been in decline for 11 months as businesses adjust to the new economic reality. Economists expect the trend to continue in August, though forecasters from BBBA note that industrial production has been rising, business confidence is ticking upwards, and the inventory to sales ratio has been rising.

“In order to bring this ratio back to normal levels, firms will have to increase production,” they said. “Therefore, inventory accumulation is likely to contribute positively to GDP growth in the near future.”

10:00 ― Senate Banking Committee hearing on "Future of the Mortgage Market and the Housing Enterprises." 

2:00 ― House Financial Services subcommittee hearing on FHA Capital Reserves, Assumptions, Predictions and Implications for Homebuyers.

  • Treasury Auctions:
  • 1:00 ― 30-Year Bonds ($12 billion)

8:45 pm ― Kansas City Fed President Thomas Hoenig speaks for the second time this week, to an economic forum sponsored by the Fed’s Oklahoma City branch.

3:00 ― Federal Reserve releases latest data on its purchases of mortgage-backed securities.

7:00 pm ― Fed Chairman Ben Bernanke speaks.  

Friday:

8:30 ― The week’s last data point may be the most important. The Trade Balance showed the deficit deepening to $32.0 billion in July, and analysts expect it to sink to $33.0 billion in August. Exports have been rising strongly for the past three months but should only remain steady this month, while imports could keep rising as crude prices rose 1.7%.

“Overall, both exports and imports should continue to grow, which would be good news for the recovery in world trade,” said economists at IHS Global Insight. “As the U.S. inventory cycle turns upwards, and firms need to replenish stocks, we expect the resulting import bounce to outpace the rise in exports. That means a wider trade deficit — but in a context of stronger growth.”

12:15 ― Federal Reserve’s Vice Chairman Donald Kohn speaks.