The upcoming week will be dominated by the publication of the FOMC monetary statement on Wed. Later that night Vice-Chair Donald Kohn will be addressing an ECB monetary conference, which will be closely watched by markets on both sides of the Atlantic to ascertain if the growing rift between the Fed and ECB is becoming wider. Financial Markets Summary For The Week of June 23-27
The upcoming week will be dominated by the publication of the FOMC monetary statement on Wed. Later that night Vice-Chair Donald Kohn will be addressing an ECB monetary conference, which will be closely watched by markets on both sides of the Atlantic to ascertain if the growing rift between the Fed and ECB is becoming wider. The week will be framed by the release of consumer confidence estimates for the month of June by the Conference Board (Tuesday) and the University of Michigan (Friday). Wednesday will see the release of the durable goods and new homes sales reports for May. Thursday will see the publication of the weekly jobless claims series, the final estimate of the Q1’08 GDP and the existing home sales report for May. The week will conclude with the personal expenditure and PCE deflator for May.
The week of June 23-27 will see a light week of Fed talk, as is custom in advance of FOMC meeting. On the 25 th both Vice Chair Kohn and St. Louis Fed President Bullard will speak at an ECB conference on monetary policy. Given the increasing divergence in monetary policy by the Fed and the ECB, global markets will be closely monitoring Mr. Kohn’s late evening address in front of an European audience to ascertain if the Fed and the ECB will continue to move in different directions and estimate the possible dislocation in markets if that distinct possibility comes to pass.
Chart of The Week
Consumer Confidence (June) Tuesday 10:00 AM
The primary narrative in what is becoming a record dive in consumer confidence is clearly the rising cost of gasoline, the fall in home prices and the non-trivial impact that it has made on consumer sentiment and spending. Adding to the steady downbeat trend in the data has no doubt been, the five consecutive months of declines in the labor sector and the very difficult environment for consumer, that even with their one time rebates in hand, look to at best tread water in light of rising inflation. We expect that the headline consumer confidence for the month of May will decline to 56.6
Durable Goods Orders (May) Wednesday 08:30 AM
The 67 orders for aircraft at Boeing and another month of modest orders from the defense department should be the only net positives in the durable goods orders series for the month of May. Given the continuing weakness in the auto sector, our bearish forecast of a -0.5% for the headline and -1.9% in the core ex-transportation may be a bit on the optimistic side.
New Home Sales (May) Wednesday 10:00 AM
The inventory levels in the new home series, which stand at 10.6 months, is still far too high to stimulate risk taking among consumers. We use the term “risk taking” with specificity because given the sheer volume of stock in the series, a move towards purchasing a new home does entail the risk that over the first year or two of ownership the overall value of the home could fall. This is not lost among consumers that have vigorously moved to the sidelines. While, we acknowledge that the combination of modest rates and accommodative sellers in the building community could provide a transitory increase in the headline, we think that we are still some months away from the housing sector stabilizing. We anticipate that demand for new homes will fall to 495K for the month of May.
FOMC Rate Decision (June-25) Wednesday 02:15 AM We expect the Federal Open Market Committee to hold rates steady when the latest policy communiqué is released. Our assessment of the upcoming monetary statement is that the Fed will take a hawkish turn, but will not provide an explicit indication of a rate hike at the August meeting. We anticipate that the committee will use the pricing paragraph to reinforce their recent tough rhetoric on inflation to shape a change in the balance of risks. While the statement may shade that balance towards inflation, as we think it should, the committee will largely remain in a data dependant position for some time.
GDP Q1’08 Final Estimate
The final estimate of GDP for the first quarter of 2008 should arrive at a 1.0% rate of growth on the back of a 1.0% rate of personal expenditures. The primary catalyst for growth during the first three months of the year was the solid gain in net exports, without which, the economy would have contracted for the quarter.
Jobless Claims (Week Ending 22 June) Thursday 08:30 AM
The claims series has made a steady upward march in to the 350k territory where it has stayed for the past two weeks. We expect it to modestly decline back towards its four week moving average of 375K for the week ending 22 June. At this point firms have been careful not to reduce their workforce after closely managing it during the economic expansion. However, with firms now having to grapple with a sharp escalation in the cost of inputs and basic operation, they may be tempted to being to furlough more workers than initially planned to protect profit margins and limit the pass through of costs downstream to consumers.
Existing Home Sales (May) Thursday 10:00 AM
In contrast with the continued downward spiral in the new home series, we do the possibility of a one-month increase in the headline for existing homes. Our provisional forecast of an increase to 5.04mln is predicated on the -8.0% y/y decline in the median price of a home combined with what was a still quite accommodative rate of interest. However, we are not calling a bottom to the market. We do think that the a possible increase in demand, will be a one time phenomena, because in June potential buyers will have observed a steady increase in 30yr mortgage rates that will move to curtail any potential breakout for the existing home series. It is still our assessment that the market will not observe stabilization in demand for new homes until Spring 2009.
Personal Income/Spending (May) Friday 08:30 AM
We expect that personal income will increase 0.2% in May and spending will advance 0.6% for the month. The weak labor market and rising costs are working in tandem to curb an overall appetite for new spending. The one major catalyst for any potential move to the upside will be the rebate checks that stimulated a 1.0% rise in advance retail sales for the month. In our assessment much of that action was located at discount chains and gasoline stations, and we do expect the real, inflation adjusted increase in spending to arrive flat for the month.
Personal Consumption Expenditure Deflator Friday 08:30 AM
The Fed’s preferred indicator of inflation should see a modest increase in core rates that should compliment another increase in the headline. We expect that the core PCE deflator will increase 0.2% month over month and 2.2% year over year. Our above consensus forecast is predicated on what we expect to be a slow and steady bleed through of headline prices into the core rate. Much has been made in recent weeks about the lack of observable impact on core pricing. It is our assessment that rates of headline and core pricing will continue to increase and our one-year ahead core forecast implies a strong move to 2.6% with risk to the upside. The recent breakout in hawkish rhetoric from Federal Reserve members is direct attempt to manage inflation expectations in advance of what the Fed surely expects will be a general increase in core prices on the back of the staggering increase in headline costs that have been observed over the past number of months.
University of Michigan (June-Final) Friday 10:00 AM
We expect that the general downward trend in consumer sentiment will continue when we expect the headline for the final June estimate to decline to 56.0. The record decline in consumer confidence has been increasingly driven by the sharp escalation in the cost of gasoline. Even with the one time stimulus of the rebate checks, which did act as a catalyst for an increase in nominal sales in May, did not provide any marginal support to consumer confidence. With more pain at the pump on the way throughout the remainder of the summer, risk will be to the downside in just about all consumer sentiment surveys for the foreseeable future.