The Day Ahead: Productivity, FOMC, Treasury Auction

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Investors are squeamish ahead of key productivity data this morning as well as this afternoon’s policy statement from the Federal Reserve.

Before Tuesday’s opening bell, Dow futures are trading 54 points lower at 10,612 and S&P 500 futures are down 7.25 points to 1,118.40.

Light crude oil is 1.31% lower at $80.41 per barrel, and Spot Gold is off 0.33% to $1,196.70.

Key Events Today:

8:30 ― The Productivity & Costs report for the second quarter is expected to reflect the slowdown in GDP. In Q1, when GDP rose an annualized 3.7%, productive jumped 2.8% and labor costs were slashed by 1.3% ― a great outcome for businesses. In Q2, with GDP growing by by only 2.4%, productivity is expected to advance just 0.2%, while labor costs are anticipated to have risen 1.5%, according to economists polled by Reuters.

“The recent surge in productivity is over,” said economists at IHS Global Insight. “In recent quarters, companies have been able to raise productivity by cutting costs and working their employees harder. Going forward, companies will need to add workers to increase output. This increase in employment is what the economy needs to get back to self-sustained growth.” 

10:00 ― After increasing 0.5% in May, Wholesale Inventories in June are anticipated to rise 0.4%. Predictions range from +0.1% to +1.0%, according to Reuters. Economists will be watching the results closely as the Q2 GDP numbers could be revised depending on the results.

“We look for a 0.6% increase of wholesale inventories in June which is slightly stronger than the assumptions used in the BEA's estimate of GDP,” said economists at Nomura. “If that is the case, the tracking estimate of Q2 GDP would be revised up to 2.0% from our current estimate of 1.9%.”         

2:15 ― This week’s key release is the FOMC Meeting Announcement ― the policy statement released by the Federal Reserve after a two-day meeting on monetary policy. It’s a virtual certainty that the Fed will keep interest rates in a band between zero and 0.25%, which means all focus is on the statement. Themes include how the Fed will characterize the recent slew of disappointing economic numbers, what the current outlook is, and whether it will embark on more quantitative easing.

“There is a high likelihood that the Fed will modify its balance sheet tactics,” said economists at IHS Global Insight. “Mortgage principal repayments to the Fed are likely to be reinvested in new mortgage debt and treasury bonds so as to keep the Fed's balance sheet stable, rather than gradually declining. This would be tantamount to a modest easing in monetary conditions, and the markets have for the most part discounted this action. There is also a relatively low probability that the Fed could vote to expand its balance sheet by several hundred billion dollars in a move to beef up quantitative easing measures.”

Surveying recent speeches by FOMC members, economists at BBVA said the central bank is “becoming more concerned” about slowing growth. 

“A topic of discussion during this week’s meeting could be the possibility of additional quantitative easing,” they wrote. “Nevertheless, we do not expect the committee to implement any policy measures just yet. Given the current economic outlook and the environment of low inflation, we anticipate the FOMC will vote to maintain the current fed funds rate. We continue to expect the first rate hike to occur in 3Q10.”

Treasury Auctions:

  • 11:30 ― 4-Week Bills
  • 1:00 ― 3-Year Notes