The Week Ahead: Waiting on Further Confirmation of Recovery
No significant data comes out Monday but the rest of the week should bring further confirmation that the economy turned a corner as the third quarter began in July. Thursday’s retail sales report is expected to show a broad rebound led by the “cash for clunkers” car-buying program that buoyed spirits in the last week of the month.
Consumer sentiment is also expected to increase, while jobless claims and inflation each moderate. All in, the week ahead should bring further optimism to the markets.
“Reports and indicators from last week continued to build a strong case that the economy is now on the cusp of a recovery,” said economists from IHS Global Insight. “Indicators next week will almost be universally positive, confirming indeed that a production recovery started with a bang in the month of July.”
Aside from data, the Federal Reserve will host its two-day monetary policy meeting beginning Tuesday. Analysts broadly expect policy to remain unchanged, but they will be looking for signs that the exit strategy is already in motion.
Early Monday morning, futures are trading lower slightly, but that probably has more to do with profit taking from Friday’s gains. It certainly doesn’t seem like a bad time to sell: the S&P 500 has improved 14.5% since July 10 and a staggering 49.4% since March 10.
Key Releases this Week:
Tuesday:
8:30 ― With fewer workers and little pressure on wages, it’s no surprise the second-quarter report on Productivity & Costs is expected to show labor costs falling but productivity rising. Analysts expect that productivity advanced 5.5% between April and June, compared with just +1.6% in Q1, while unit labor costs likely gained 3.0% after falling 2.8% from January to March. Some of this report’s details were already released in the GDP report, so there should be little room for surprises.
“Productivity's strong second quarter performance reflects vigorous cost cutting that has supported profits,” said IHS Global Insight. “Gains in the third quarter may not be as strong, but still be respectable and should provide further support to corporate earnings momentum.”
Wednesday:
8:30 ― The US Trade Balance shrunk to $26.0 billion in May, a level not seen in nearly ten years, but in June a surge in oil prices is expected to cause the value of imports to expand in June, causing the deficit to widen. The consensus is -$28.5 billion. With petroleum excluded, however, underlying trend should be more encouraging, as a weaker greenback should help boost exports and hurt imports.
“As both domestic and global demand remain weak due to the ongoing recession, both imports and exports are forecasted to drop further in June,” predict the economics team at BBVA. “The decline in imports, however, is expected to be slower than that of exports because the 17.7% jump in oil prices in June could help to offset the downward pressures from demand. As a result, the trade deficit could expand after contracting in May.”
2:00 ― Hopefully markets don’t give much attention to Treasury’s Budget Statement, as it’s hard to be encouraged knowing that from October to June, the government created a fiscal debt of $1.1 trillion. Bloomberg News notes that over the past ten years the July deficit has averaged $31.7 billion, while the average for the past five years has been $49.2 billion. What’s in store for 2009? Analysts expect July’s deficit to be $190 billion. To some extent, this is old news, but reminders don’t exactly cause rallies.
2:15 ― Federal Reserve chairman Ben Bernanke, who prizes transparency, was clear in his bi-annual testimony last month that the central bank would continue to hold monetary policy at an accommodative level for the medium-future. So analysts have low expectations for the announcement from the FOMC Meeting. The short term interest rate for lending to banks should remain between zero and 0.25%. Attention will instead shift to Fed commentary on the economic outlook, as well as new remarks on the impending exit strategy.
Analysts at IHS Global Insight said the central bank’s exit strategy is already in motion, but an unwinding in the balance sheet won’t be seen just yet. “Although the Fed's programs to purchase treasury bonds and mortgage debt are not expected to be changed, the Fed's total balance sheet is expected to continue to shrink on net over the next several months,” they said.
Thursday:
8:30 ― Media have been discussing the success of the “Cash for Clunkers” program ad nauseam recently, and the impact of the program should be seen in the July survey of Retail Sales. Economists expect the report to see a 0.8% boost in June after a 0.6% gain in May.
“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.
With auto dealers excluded, the gain should be a more 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.
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.
Friday:
8:30 ― The Consumer Price Index is expected to be tame in July, especially when compared to the 0.7% advance seen in June, which was led by energy costs. With oil costs moderating in July, the CPI is expected at just +0.1%. Core prices, which exclude volatile energy and food components, is expected to come in at +0.2%, just as in June.
Economists at BMO Capital Markets said the “Cash for Clunkers” program will have a huge impact on the core CPI. “An average $4,000 rebate on an average $28,000 vehicle price represents a more than 14% price reduction,” they wrote in a client note. “This alone should lop 0.2 percentage points off the core CPI, resulting in a flat figure, risking the first negative monthly change in 27 years and leaving the core inflation rate running at 1.4% y/y (well below the Fed’s 1.7% to 2.0% long-term projection).”
Analysts at IHS Global Insight also believe the report will be quiet in July, but they focus on energy costs. “Pricing pressures continue to be contained as only tentative signs of a turnaround emerge,” said a weekly client note. “Energy prices should not repeat their volatility of recent months, with gasoline likely posting only a small seasonally adjusted decline of just over 1%. Excluding food and energy, core consumer prices are likely to remain resilient, recording another 0.2% gain, further dimming the threat of deflation.”
9:15 ― The first Industrial Production report of the third quarter is expected to give signs of stabilization in July. The median forecast is +0.6%, with forecasts in a wide range from -0.3% to +1.5%. This follows a 0.4% fall in June and a 1.2% nosedive in May.
“Although levels are expected to remain well below those of last year, the pace of decline could begin to stabilize,” said forecasters at BBVA. “In addition, inventory levels are low, so it is anticipated that businesses will need to restock in the near future, which will prompt a resumption in production.”
10:00 ― The last report of the week will give some indication of how consumers are feeling in the first two weeks of August. The Reuters/U of M Consumer Sentiment report is expected to rebound to 68.5 after dipping almost 5 points to 66.0 last month. Once again it’s the “Cash for Clunkers” program that’s stealing some credit here, while rising stock prices provide optimism that the worst of the crisis ended months ago.
Weighing on the report is, of course, the 9.4% unemployment rate. But at least the slide in payrolls last month was the smallest in 11 months. That may not help the index of current conditions, but projections for six months hence could see a boost.
It’s also worth noting that on Saturday, President Obama stated: "This month's jobs numbers are a sign that we've begun to put the brakes on this recession and that the worst may be behind us."