US Week Ahead: A Hectic Week on Data & Earnings

Despite a rather hectic week of economic releases; earnings news will likely steal the show this week. Big names on the earnings calendar this week include Goldman Sachs, JPMorgan, Bank of America, Citigroup, GE, Intel, Google, IBM, and Johnson & Johnson. However, a recent mixture of good and bad economic news, including decreasing consumer sentiment, rising unemployment, and dreadful retail sales have raised concerns over the potential for a prolonged recession. Therefore, it’s important we pay close attention to Tuesday’s retail sales and PPI data, Wednesday’s CPI and industrial production data, and finally Thursday’s jobless claims number, all of which have the potential to move the market in one direction or another. Here is the remainder of the calendar:

Monday July 13^th:

2:00PM: Treasury Budget (Risk: Upside, Market Reaction: Marginal): The current Bloomberg consensus for the Treasury’s monthly budget report is –US$97bn compared to –USD187.7bn a month prior. These large deficits have been fueled by TARP expenditures and buying federal housing agency debt. But, several companies have recently paid back TARP funds, which will likely reduce the level of this month’s deficit.

Tuesday July 14^th:

7:45AM: ICSC-Goldman Store Sales (Risk: Downside, Market Reaction: Marginal): This weekly index tracks aggregate store sales across major US retailers, accounting for roughly 10% of total retail sales. Given recent data supporting an increasing US saving rates and a worsening employment situation, this index could face some downward pressure. Last week’s number indicated a 0.1% increment in store sales over the previous week.

8:30AM: Producer Price Index (Risk: Downside, Market Reaction: Moderate/Significant): Higher energy prices and a small increment in food prices will likely lead to a higher headline number for the PPI, while core-PPI should remain relatively unchanged. According to Bloomberg the current consensus forecast for the PPI and core-PPI is 0.8% and 0.1%, respectively. Any significant upward surprise in this index could amplify rhetoric among inflation hawks. This index is considered a forward looking indicator to profits and the CPI.

8:30AM: Retail Sales (Risk: Neutral, Market Reaction: Significant): The effect of higher gasoline prices in June could cause retail sales to surprise to the upside. But, factoring out gas, recent weakness in other sales indicators imply that June’s sales data will be flat to negative. According to Bloomberg the current market consensus for retail sales and retail sales-ex autos is 0.5% and 0.6%, respectively. Retail sales plunged at the end of last year and have essentially remained flat this year.

10:00AM: Business Inventories (Risk: Neutral, Market Reaction: Marginal): On the back of a decline in wholesale inventories, business inventories will likely decline again in June after declining the previous eight months. Look for auto and retail inventories to continue their decline. According to Bloomberg the current market consensus for business inventories is a monthly change of -0.8%. The good news is that with inventory levels so low once a recovery does begin we could see a jump in manufacturing as companies look to replenish their stocks.

Wednesday July 15^th:

7:00AM: MBA Purchase Applications (Risk: Neutral, Market Reaction: Marginal): This index, which tracks new mortgage applications tends to be a reasonable forward looking indicator for home sales, but issues including customers filling out numerous applications could skew the index. Last week the purchase index rose 6.7%, while the refinance index increased by 15.2% on the back of relatively low mortgage rates.

8:30AM: Consumer Price Index--CPI (Risk: Downside, Market Reaction: Significant): As with the PPI, a recent rise in energy prices will likely add some upward pressure on the headline index, while core CPI should remain relatively constant relative to last month. According to Bloomberg the current consensus forecast for the CPI and core-CPI is 0.7% and 0.1%, respectively. Any significant upward surprise in this index could amplify rhetoric among inflation hawks; the inverse is true with a downward surprise.

8:30AM: Empire State Manufacturing Survey (Risk: Downside, Market Reaction: Marginal): This index tracks manufacturing activity in New York state across 175 different companies in a variety of industries. Recent weakness in the overall manufacturing sector will likely add some downside pressure to July’s release. According to Bloomberg, the current market consensus for the general business conditions index is -4.5, compared to -9.4 a month prior. It will be important to monitor the general business conditions, new orders, and prices paid components of the index, all of which were negative last month. Conversely, the future general business conditions index rose last month.

9:15AM: Industrial Production (Risk: Downside, Market Reaction: Significant): Continued weakness in manufacturing sector will likely add downward pressure to the overall index. According to Bloomberg, the current market consensus for June’s IP is a monthly change of -0.7% with a capacity utilization rate of 67.8%. In June capacity utilization stood at 68.3%, or 12.6% below its 1972-2008 average.

10:30AM: EIA Petroleum Status Report (Risk: Neutral, Market Reaction: Moderate): This report highlights domestic petroleum inventories, which could have a significant impact on the energy sector.

2:00PM: FOMC Minutes (Risk: Neutral, Market Reaction: Marginal): Given the three week lag between the FOMC meeting and the release of the minutes this should have only a marginal effect on trading. But, the minutes could elaborate the rationale behind the FOMC’s decision, and give some clues to future decisions, in which case the market could move on the release.

Thursday July 16^th:

8:30AM: Jobless Claims (Risk: Upside, Market Reaction: Significant): Last week’s better than expected initial jobless claims may have been exaggerated by inaccurate seasonal adjustment factors stemming from the timing of automotive and other manufacturing lay-offs, which could be repeated this week. According to Bloomberg the current consensus for initial jobless claims stand at 535K, compared to 565K last week. Although, I do believe we will continue to see a downward trend in the number of new claims, the level last week's number implied is too optimistic.

9:00AM: Treasury International Capital Data (Risk: Neutral, Market Reaction: Marginal): This data highlights the flow of financial instruments to and from the US. Thus, indicating foreign demand for US financial instruments, which tends to have a stronger impact on the dollar and bond markets compared to equities.

10:00AM: Philly Fed Survey (Risk: Downside, Market Reaction: Moderate): This index, which tracks manufacturing activity within the Philly Fed’s district, is correlated to both the ISM and Industrial production indices. According to Bloomberg the current market consensus for the general business conditions index is -5.0 versus -2.2 a month prior. Continued weakness in manufacturing will likely place downward pressure on this index.

10:00AM: EIA Natural Gas Report (Risk: Neutral, Market Reaction: Moderate): This report highlights domestic natural gas inventories, which could have a significant impact on the energy sector.

1:00PM: Housing Market Index (Risk: Downside, Market Reaction: Moderate): The housing market index, published by the National Association of Home Builders, indicates the demand for housing combined with consumer sentiment towards the housing market. The index is calculated by using a weighted average of the following indices; present sales of new homes, sale of new homes expected in the next six months, and traffic of prospective buyers in new homes. Increasing unemployment coupled with waning consumer confidence could place some downward pressure on this index.

4:30PM: Fed Balance Sheet & Money Supply (Risk: Neutral, Market Reaction: Marginal): Since the Fed’s shift to quantitative easing, the balance sheet has become one method to measure to the Fed’s effectiveness. The market will pay close attention to the reserve bank credit component, which measures factors supplying providing reserves into the banking system. Last week the Fed’s balance sheet shrunk to $1.977 trillion from $1.989 trillion the previous week.

Friday July 17^th:

8:30AM: Housing Starts (Risk: Downside, Market Reaction: Marginal/Moderate): After experiencing an unexpected bump in May housing starts are likely to decline in June. According to Bloomberg the current market consensus for starts is 530K, compared to 532K last month. Weak demand for homes will likely place downward pressure on this index.

Have a good weekend!

The Week Ahead: Fed Cuts and Bank Failures

Despite the news from Bear Stearns and a weak retail sales report, the Dow actually ended the week up 0.48%. Nonetheless, there isn’t much else to boast about; the NASDAQ ended unchanged while the S&P500 lost 0.40%. However, the CPI release surprised the market by coming in well below expectations and showing no increase for either the core or headline indices. This development was mostly sidelined by the problems at Bear.

But looking forward; this week it’s all about the Fed. Despite the encouraging CPI report the Fed will not view one month’s data as the beginning of a trend; they will remain very vigilant over inflation. However, the news from Bear Stearns and growing trouble in the financial sector will cause the Fed to cut rates by 75bps. We do not believe the Fed will move a total of 100bps given their current concerns over inflation. If the Fed was to move a total of 50bps verses 75bps and the market reacted adversely it would potentially open the window for an additional inter-meeting rate cut, which the Fed would like to avoid. As we have said before we feel one of the best indicators for the Fed’s move is what the market is currently pricing in. The Fed typically does not disappoint the market. (For a more detailed analysis on Fed cuts and inflation please look at our posts from March 11^th titled “Inflation, Inflation, Inflation” & February 27^th titled “Fed Cuts & Inflation”)

Effective Fed Funds rate pre-March 2008, implied Fed Funds rate post, as of March 14th.

Monday March 17th:
8:30AM: Empire State Manufacturing Survey (Risk: Neutral) The Bloomberg consensus survey indicates the market is currently expecting a reading of -6.3, this would be an improvement from last’s month unexpected drop to -11.7, but still in negative territory. This survey is one of the first indicators monthly indicators released covering the manufacturing sector and thus it is used as a tool to help forecast the overall ISM number. A negative reading of this survey combined with negative readings from the Philly Fed and the Chicago-NAPM can indicate a slowdown in the ISM.

9:15AM: Industrial Production (Risk: Downside) The Bloomberg consensus survey indicates the market is currently expecting a reading of -0.1% on production and a 81.3% capacity utilization rate, compared to 0.1% and 81.5% on production and capacity utilization, respectively. The recent slowdown observed in manufacturing could adversely impact production.

Tuesday March 18th: Fed Day!
8:30AM: Housing Starts (Risk: Downside)- According to Bloomberg.com the market is currently expecting housing starts to total 0.99mn. Permits continue to decline, inventories continue rising, we just don’t see much upside potential for this indicator. (For more information please read our post on the Housing Crisis from March 5^th titled ‘How will it end?’)

8:30AM: Producer Price Index (Risk: Neutral/Slight Upside)- According to Bloomberg.com the market is currently expecting PPI and Core PPI to increase 0.4% and 0.2%, respectively.

2:15PM: Fed Announcement (Risk: Neutral/Slight Upside)- We expect the Fed will cut rates by 75bps and continue to hold a negative bias. We expect the Fed will indicate that they will continue monitoring inflation, and that downside risks to growth still exist and will continue to affect employment. They may also mention in more detail their concerns about the financial sector after the Bear Stearns bailout and surprise rate cut on Sunday.

Wednesday March 19th:
None

Thursday March 20th:
8:30AM: Jobless Claims (Risk: Neutral)- According to the consensus survey Jobless Claims are expected to come in at 360K, still above our 350K threshold.

10:00AM: Leading Indicators (Risk: Neutral)- Bloomberg.com currently states a market consensus of +0.3% M/M change for the leading indicators.

10:00AM: Philly Fed Survey (Risk: Neutral)- Bloomberg.com indicates the market is expecting a reading -20.0 verse -24.0 last month. As with the Empire Survey being released earlier in the week, the Philly Fed will be the second release to address the health of the US manufacturing sector.

Friday March 21st:
Market Closed (Good Friday)

Investment Idea:

Please look at the posting from March 9^th. Also, we have begun looking at long dated Citigroup calls as a possible investment idea. At the same time, we are very concerned about Lehman Brothers and expect to see its shares catch a strong bid.