Economics Week Ahead: GDP & Earnings Steal the Show

We have a rather tumultuous week in terms of economic data, which will focus on the US housing sector, consumer confidence, durable goods, and US GDP. The week kicks off Monday morning with the US Census Bureau reporting June’s new home sales. Recent housing data has been indicative of a bottom for the sector, so it will be important to see whether new home sales data confirms this trend. Mid-week the market will focus on June’s durable goods, looking for any signs of a potential turnaround in industrial production, which experienced a 13.6%yoy decline in June. The week’s main economic event is taking place on Friday with the Commerce Department’s release of the advanced 2Q09 GDP estimates. They will also be releasing changes to the benchmark methodology, which could cause some revisions to past data. But again, this week’s earnings calendar will overshadow most of the week’s economic news. Big names reporting this week include Chevron, Walt Disney, Travelers, Verizon, Viacom, Exxon Mobile, Amgen, Norfolk Southern, Genco Shipping, DryShips, Visa, and International Paper. There will also be a record US$115bn long-dated Treasury auction occurring this week, which coupled with better than anticipated earnings has put some downward pressure on Treasury prices.

Monday July 27^th:

10:00AM: New Home Sales (Risk: Upward, Market Reaction: Significant): Attractive mortgage rates combined with tax incentives and relatively low home prices should place some upward pressure on this release, but sustained weakness in the labor market will prevent this index from realizing its full potential. The current Bloomberg consensus for new home sales is 350K, compared to last month’s reading of 342K.

Tuesday July 28^th:

7:45AM: ICSC-Goldman Store Sales (Risk: Negative, 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 0.5% gain in store sales over the previous week.

10:00AM: S&P Case Shiller Home Price Index (Risk: Neutral, Market Moderate: xx): The S&P Case Shiller HPI is reported monthly, but on a two month lag. Last month’s report showed the rate at which home prices were declining began diminish, with some major cities even experiencing modest gains. I anticipate this month’s release will reaffirm that trend. But, we would still need to see significant improvements in those regions, which were the hardest hit by the drop in prices, before we can see a strong overall recovery.

10:00AM: Consumer Confidence (Risk: Downside, Market Reaction: Significant): Weakness in the labor market could adversely impact consumer confidence, overshadowing the recent spike in equity prices. Supporting this is the fact that last week’s Reuters/UofM Consumer Sentiment Index fell to 66 in July from 70.8 a month prior. It will also be important to monitor changes in the expectations index, which has remained elevated, and could help buffer any negative surprises in the current conditions index. The current Bloomberg consensus forecast for July’s consumer confidence reading is 50.0, versus an outcome last month of 49.3.

10:00AM: Janet Yellen, San Francisco Federal Reserve Bank President, speaks on the economic outlook to the Idaho/Oregon Bankers Association.

Wednesday July 29^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 1.3%; while the refinance index increased by 4.0% on rising, but still relatively low mortgage rates.

8:30AM: Durable Goods Orders (Risk: Downside, Market Reaction: Significant): This index could face some negative pressure this month as June’s ISM, Philly Fed, NY Fed indices all indicated contractions in new orders. The current Bloomberg consensus forecast is a month over month change of -0.5%, compared to last month’s reading of 1.8%. In May this index was down roughly 26%y/y.

8:30AM: William Dudley, New York Federal Reserve Bank President speaks to the Association for a Better New York on factors driving U.S. growth and inflation.

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

2:00PM: Fed Beige Book (Risk: Neutral, Market Reaction: Marginal): This report, which is released two weeks before FOMC meetings, outlines economic conditions across the Fed’s 12 districts. Indications of a return to growth for any of the fed’s districts could produce some positive headlines.

Thursday July 30^th:

8:30AM: Jobless Claims (Risk: Downside, Market Reaction: Significant): As expected, initial claims experienced a significant uptick last week to 554K from 522K, after two solid weeks of declines. This increase will likely be continued this week as erroneous seasonal adjustments from early auto plant closures continue to correct themselves. Nevertheless, barring recent data, I due anticipate we will see a modest recovery in claims data over the coming months.

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.

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 decreased to US$2.024trn from US$2.057trn. The fed’s balance sheet has slowly been shifting away from emergency lending facilities to Treasuries, agency debt and mortgage-backed securities to help bring down interest rates.

Friday July 31^st:

8:30AM: GDP (Risk: Neutral, Market Reaction: Significant): This will be the key release for the week as investors continue trying to gauge the longevity of the current recession. The current Bloomberg consensus forecast for Real GDP (Q/Q) SAAR is -0.7%, compared to a prior reading of -5.5%. Additionally, the Commerce Department will be releasing their benchmark revisions, which could cause some revisions to past data. In the eyes of the market, this release will likely support the view that there is light at the end of the tunnel. But, make no mistake about it, we are still in the midst of a prolonged recession, which though easing likely won’t abate over the next several months. This data will also reaffirm the Central Bank’s current accommodative policy stance.

8:30AM: Employment Cost Index (Risk: Downside, Market Reaction: Marginal): The current Bloomberg consensus forecast for the ECI is a quarter over quarter change of 0.3%, compared to a first quarter reading of 0.3%. Interestingly, last quarter’s growth rate was the lowest in the 27 year history of this index. Weakness in the labor market combined with cost cutting, affecting benefits, could place some additional downward pressure on this index.

9:45AM: Chicago PMI (Risk: Neutral, Market Reaction: Moderate): The current Bloomberg consensus forecast for the Chicago PMI Business Barometer Index is 44, versus June’s reading of 39.9. Any reading below 50 indicates a contraction. This index includes both manufacturing and non-manufacturing companies. It will be important to monitor the new orders, employment, and prices paid indices, all of which are currently well below the breakeven of 50.

3:00PM: Farm Prices (Risk: Neutral, Market Reaction: Marginal): Given the relationship between farm prices and food prices, this index could have implications on future headline CPI and PPI.

Enjoy the weekend!

Consumer Sentiment Falls on Jobs Weakness

The Reuters/University of Michigan consumer sentiment index dipped for the fist time in five months to 66, compared to a market consensus of 65 for July. At the same time the July expectations index increased to 63.2 versus July's preliminary reading of 60.9. The drivers behind this month's declines were derived from weakness in the labor market and wages. This reading implies that consumers remain concerned over the current economic conditions, and will likely keep spending restrained until a brighter outlook for the employment situation emerges.

Existing Home Sales Beat Estimates, Rise 3.6%

US existing home sales came in above the market consensus, rising 3.6% at an annualized rate of 4.89mn. Single family home sales increased by 2.4%, while condo/coop sales increased 14.0%. The months supply of home also improved moving to 9.4 months, compared to 9.8 in May. The median home price rose 4.1%, but still remains negative on a yearly basis. All in all, low prices combined with attractive mortgage rates are helping to stabilize the housing sector.

On a personal note, I was recently speaking to a developer in Boston who said business is once again picking up, but without private financing taking on new projects could be tough. He indicated that local banks were still hesitant on financing new deals, even in cases were the relationship has spanned decades. However, he is still working on several projects in Cambridge, and seems cautiously optimistic about the future.

Initial Claims Climb 30K to 554K

As I anticipated, and explained in my US Week Ahead, initial claims experienced a significant uptick this morning, which will likely be continued next week. In reality, this increment was probably due to a correction in what has been overly optimistic data stemming from erroneous seasonal adjustment factors.

Fed Chairman Bernanke in his recent testimony to Congress discussed the fact that weakness in the jobs sector and housing market will continue to be an Achilles heel for a US economic recovery. But, I anticipate that, excluding the anomalous data over the past three weeks, claims will slowly begin to improve. However, given such a weak base and initial claims forward looking ability to predict payrolls, it is very probable the overall employment situation will still get worse before it gets better. The unemployment rate likely to move above 10%. Typically, an initial claims level of around or below 350K would lead to increases in payrolls, but we are still far from those levels.

US Initial Claims

Source: St Louis FRED

Leading Indicators Up: A Good Sign for the Economy

The index of leading indicators was up in June by 0.7%, or slightly above the market consensus of 0.5%. At the same time May's number was revised up to 1.3% from 1.2%. This is the third consecutive month of gains for the index. In the release the Conference Board was quoted as saying, "The behavior of the composite indexes suggest that the recession will continue to ease and that the economy may begin to recover in the near term." The LEI tends to be a good forward looking indicator towards industrial production and the ISM. Seven out of ten of the LEI sub-components were positive for the month with the biggest gains coming from the yield curve and building permits; while money supply was the weakest component. The Conference Board also released June''s coincident and lagging indices, both of which were down.

US Economic Week Ahead: Cue Earnings

After last week’s barrage of economic data, this week is relatively light. The few exceptions will be Monday’s leading indicator release, Thursday’s jobless claims and existing home sales data, and Friday’s consumer sentiment report. This week’s claims data will likely take on added importance as the market tries to decipher the impact early auto plant shutdowns may have had on the index’s seasonal adjustment factors, leading to better than expected claims data over the past couple weeks. Additionally, starting on Tuesday Fed Chairman Ben Bernanke will deliver his semi-annual monetary policy testimony to House Financial Services Committee, which will almost certainly generate some headlines. But, earnings will again steal the spotlight this week with roughly 33% of the companies in the DJI and 25% of the S&P500 set to report. Some of the major names include Apple, Microsoft, Boeing, Caterpillar, UPS, Morgan Stanley, Yahoo, EBay, Amazon, Texas Instruments, and Advanced Micro Devices.

Monday July 20^th:

10:00AM: Leading Indicators (Risk: Neutral, Market Reaction: Maringal/Moderate): The leading indicators index is a composite index of ten economic indicators considered to be forward looking to economic activity, these include among others jobless claims, building permits, stock prices and the University of Michigan expectations survey. The index climbed in both May and April by 1.2% and 1.1%, respectively. The market is currently anticipating a 0.5% increment in June’s release.

Tuesday July 21^st:

7:45AM: ICSC-Goldman Store Sales (Risk: Negative, 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 0.9% decline in store sales over the previous week.

8:30AM: Chicago Fed National Activity Index (Risk: Neutral, Market Reaction: Marginal): The CFNAI is an index of 85 separate data sets designed to represent national economic activity and inflationary pressure. A reading of 0 indicates the economy is growing at the historical trend while a negative or positive result indicates the economy is growing below or above its historical average, respectively. Given the volatile nature of this index the three month moving average is typically quoted. This index remains somewhat obscure in the mainstream media and is likely to have a minimal impact on trading. I anticipate that we will see a marginal improvement from last month’s reading of -2.67 based on improving economic data,

10:00AM: Fed Chairman Ben Bernanke delivers his semi-annual monetary policy testimony to House Financial Services Committee

Wednesday July 22^nd:

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 fell 9.4%; while the refinance index increased by 18.0% on the back of relatively low mortgage rates.

10:00AM: Fed Chairman Ben Bernanke delivers his second day of semi-annual monetary policy testimony to House Financial Services Committee

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

Thursday July 23^rd:

8:30AM: Jobless Claims (Risk: Downside, Market Reaction: Significant): After two consecutive weeks of positive surprises, stemming from what was likely erroneous seasonal adjustment factors caused by early auto plant shut downs, we will likely see a correction. The current Bloomberg consensus stands at 560K compared to last week’s reading of 522K.

9:30AM: Fed Governor Daniel Tarullo testifies to the Senate Banking Committee, FDIC, and SEC on regulatory restructuring

10:00AM: Existing Home Sales (Risk: Downside, Market Reaction: Moderate/Significant): The Bloomberg consensus for existing home sales stands at 4.850 compared to last month’s reading of 4.770. It will be important to watch the inventory levels, which last month declined to 9.6 months from 10.1 months, the month prior. But, a recent article in the WSJ highlights the fact that a glitch in the California Association of Realtors computer system may have been inflating the number of homes sold in San Diego over the past several months, which means we will likely see some downward revisions.

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.

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 increased by US$34.2bn to move back above US$2 trillion.

Friday July 24^th:

10:00AM: Consumer Sentiment (Risk: Neutral, Market Reaction: Significant): Rising stock prices and receding energy prices should bode well for this index, but could be offset by continued weakness on the labor front. The current Bloomberg consensus for July’s final consumer sentiment index is 65.0 compared to mid-July’s reading of 64.6.

Enjoy the weekend!

June Housing Starts Show Big Gains

June housing starts came in this morning well above expectations increasing 3.6%, totaling 582K (SAAR) units. Economists has been anticipating 530K. This is the index's second consecutive month of gains, which could indicate some stabilization for the sector. There were also some positive revisions to April's and May's starts numbers. The increase was due to a 14.4% increment in single-family home starts, while multi-family housing starts actually declined by 25.8%. Regionally, the South experienced the largest increase in starts with a gain of 13.9%, while the West was the weakest with a gain of only 1.9%. Housing permits were up 8.7% in June. Overall this is a positive report for the housing sector, but we will need to see significant improvements in the level of foreclosures and the supply glut currently on the market prior to any true recovery.