The Day Ahead: Trade Balance, Budget, Auction, FOMC Meeting
After two pretty light days that have caused markets to tumble, Wednesday offers a busy schedule with a mix of fresh data and government policy. The S&P 500, which fell 1.3% yesterday ― its biggest slide in a month ― is looking moderately positive this morning along with the Dow and Nasdaq, but that could change quickly if the Trade Balance at 8:30 comes in worse than anticipated.
Once that report comes out, markets will be looking to the FOMC meeting in the afternoon, which comes out just after the Treasury’s Budget Statement for July.
The FOMC will almost certainly maintain short-term interest rates in the zero to 0.25% range, but markets are looking for comments on its exit strategy from its massive involvement, including whether the central bank plans to extend its plans to purchases government debt.
“Unlike the Bank of England, the Fed isn’t likely to expand its bond purchase program, of which it has completed about one-half,” said analysts from BMO Capital Markets in a morning note. “Of interest is whether it actually declares that it will allow the Treasury purchase program to expire as scheduled in September, or whether it delays that decision until the September 22-23 policy meeting.”
Key Releases Today:
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.”
1:00 ― The Treasury Department will auction $23 billion 10 yr Treasury notes. This auction has potential to influence mortgage rates
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 interest rates “exceptionally low…for an extended period.”
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.