7/21/2008 12:58:40 AM Financial markets got some respite last week, as stocks rallied on the back of the not-so-disappointing results from financial firms. Does that signal a change in economic fundamentals? It definitely doesn't look so. The June retail sales, though have improved, was not as strong as in May. This is a natural corollary of a rock-bottom consumer confidence, which is now lingering at a 30-year low. On a more negative note, the 1-year inflation expectations are at its highest level in 30 years.
All these signals forebode a recession. Nevertheless, we haven't yet witnessed negative growth in the current down cycle, although most of the past recessions are confirmed only after they have come and gone. In the near term, growth is likely to be supported by the tax-rebate induced spending and an improvement in the trade deficit, resulting in 2.6% growth in the second quarter. Nevertheless, Lehman Brothers expects a slow motion recession, matching the previous recessions both in terms of the rise in the unemployment rate and the lagged drop in inflation.
That said, markets are hopeful that the government and the central bank would act proactively, devising novel ways of dealing with the crisis, just as it had done in the recent past in the wake of the credit crisis. Accordingly, further Fed easing is expected early next year, while another fiscal stimulus package is also not ruled out, which may together set the stage for an eventual recovery.
Last week, the Commerce Department reported anemic retail sales growth for June. The headline number showed 0.1% growth in June. Spending on food and energy remained strong, with the higher spending reflecting increases in prices and not demand. Excluding auto sales, sales were up 0.3%, with the bulk of increase due to higher gasoline sales. The core retail sales, which exclude gasoline, building materials and autos, rose 0.3%.
All these signals forebode a recession. Nevertheless, we haven't yet witnessed negative growth in the current down cycle, although most of the past recessions are confirmed only after they have come and gone. In the near term, growth is likely to be supported by the tax-rebate induced spending and an improvement in the trade deficit, resulting in 2.6% growth in the second quarter. Nevertheless, Lehman Brothers expects a slow motion recession, matching the previous recessions both in terms of the rise in the unemployment rate and the lagged drop in inflation.
That said, markets are hopeful that the government and the central bank would act proactively, devising novel ways of dealing with the crisis, just as it had done in the recent past in the wake of the credit crisis. Accordingly, further Fed easing is expected early next year, while another fiscal stimulus package is also not ruled out, which may together set the stage for an eventual recovery.
Last week, the Commerce Department reported anemic retail sales growth for June. The headline number showed 0.1% growth in June. Spending on food and energy remained strong, with the higher spending reflecting increases in prices and not demand. Excluding auto sales, sales were up 0.3%, with the bulk of increase due to higher gasoline sales. The core retail sales, which exclude gasoline, building materials and autos, rose 0.3%.
On the inflation front, the Labor Department's producer price inflation report showed a sharp increase in the headline index, driven by significant increases in prices of food and energy. However, core producer prices were well behaved. On a year-over-year basis, producer and core producer prices showed 9.2% and 3% growth, respectively. Meanwhile, the consumer price index for June climbed 1.1%, mainly due to an above-trend 0.3% increase in owners'-equivalent rent, which showed the biggest increase since January. The component has about 25% weight in the CPI basket, and therefore cannot be shrugged off completely.
The New York Fed's empire state survey showed a modest improvement, though it suggested that manufacturing activity continues to be in the contraction zone. However, new orders and shipments improved. The backlog of orders index continued to decline, albeit at a slower rate.
Although at the outset, the industrial production report appeared stronger than expected, a careful analysis of the details revealed weakness. Manufacturing output was boosted by vehicle production, as striking workers returned to the floor. Additionally, the volatile mining and utility production showed sharp increases.
The minutes of the June 24-25 meeting released last week revealed that some of the FOMC members were of the view that some policy firming is appropriate very soon, if not at this meeting, due to their belief that downside risks have diminished. However, others reiterated that the high level of risk spreads and the restricted availability of credit suggested that financial conditions were not yet accommodative. Focusing more on uncertainty in the outlook, the minutes said that the outlook for both economic activity and price pressures remained very uncertain, and thus the timing and the magnitude of future policy actions were quite unclear.
The upcoming week's economic calendar is fairly light with only a few second-tier economic reports due out for release. Much of the focus is likely to shift to the two housing market reports of the week, namely the existing and new home sales reports for June. Additionally, traders may also pay heed to the Commerce Department's durable goods orders report for June, the final reading of the University of Michigan's consumer sentiment index for July and the Conference Board's leading economic index for June.
The Beige Book is also likely to be sifted to gain an understanding of the Fed's understanding of how economic conditions are panning out in the different Federal Reserve districts. Additionally, markets may react to the regularly scheduled weekly oil inventory and jobless claims reports.
Economists have muted expectations regarding the leading economic indicators for June due to a decline in the manufacturing workweek, a decline in stock prices and an increase in initial jobless claims for unemployment benefits. However, the declines are likely to be mitigated due to increases in money supply and building permits, and the positive slope between the 10-year Treasury yield and the Fed finds rate.
Soft aircraft orders are likely to exert downward pressure on durable goods orders for June. Nevertheless, orders could receive some support from a modest gain in autos. Machinery orders are also expected to show some strength.
Meanwhile, new home sales are expected to show another month of declines in June, reflecting the still-weak builder sentiment. Going by the weak pending home sales index for May, which is considered as a leading indicator to existing home sales, one can expect a decline in sales of already constructed houses.
Monday
The Conference Board is scheduled to release a report on the U.S. leading index for June at 10 AM ET on Monday. The consensus estimate calls for a decline of 0.1% for the month.
The leading indicators index edged up 0.1% in May, benefiting from a positive performance by stock prices. The indexes of coincident indicators and lagging indicators also rose by 0.1% and 0.2%, respectively.
Tuesday
Philadelphia Federal Reserve President Charles Plosser is due to speak about the U.S. economic outlook at 8:30 AM ET on Tuesday.
Wednesday
Federal Reserve Governor Frederic Mishkin is scheduled to speak at a Bank of Canada Economic Conference at 10 AM ET on Wednesday. On the same day, Federal Reserve Vice Chairman Donald Kohn will speak on transparency at 11:15 AM ET.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET on Wednesday.
The oil inventory report for the week ended July 11th showed that crude oil stockpiles rose by 3 million barrels to 206.9 million barrels. Gasoline and distillate inventories rose by 2.4 and 3.2 million barrels, respectively. Refinery capacity utilization averaged 89.1% over the four-weeks ended July 11th, the same as in the previous week.
The Federal Reserve is due to release its Beige Book, which is a compilation of anecdotal evidence on economic conditions from each of the 12 Federal Reserve districts, at 2 PM ET on the same day. The report is normally released about two weeks before the monetary policy meeting is held.
Thursday
The Labor Department is due to release its customary weekly jobless claims report for the week ended June 14th at 8:30 AM ET on Thursday.
The initial claims for unemployment benefits increased 18,000 in the week ended July 12th to 366,000 from the previous week's revised average of 348,000. Economists expected claims to increase to 380,000 from the initially reported figure of 346,000 for the previous week.
The four-week average- a more reliable measure declined 4,500 in the recent reporting week to 376,000. Continuing claims, which measure the number of people receiving ongoing unemployment help, declined 81,000 in the week ended June 5th to 3.122 million.
New York Federal Reserve Bank President Timothy Geithner is due to testify before the House at 10 AM ET on the same day.
The National Association of Realtors' is scheduled to release its report on existing home sales for June at 10 AM ET on Thursday. Economists estimate existing home sales of 4.95 million for the month.
Existing home sales, including single-family, townhomes, condominiums and co-ops, rose 2% to a seasonally adjusted annual rate of 4.99 million units in May compared to the previous month. On the other hand, year-over-year, sales of existing homes declined 15.9%. The national median existing home price was down 6.3% from a year-ago to $208,600. However, housing inventories at the end of May fell 1.4% to 4.49 million existing homes available for sale, representing a 10.8-month supply at the current sales pace compared to 11.2-month supply in April.
Friday
The final reading of the University of Michigan's consumer sentiment index for July is due to be released at 10 AM ET on Friday. The report is expected show that the headline index was at 56.3, slightly off the mid-month reading of 56.6.
The Commerce Department is also due out to release its new home sales report for June at 10 AM ET on Friday. The consensus estimate calls for a drop in new homes sales to 505,000.
In May, sales of new one-family houses fell 2.5% to a seasonally adjusted annual rate of 512,000. Annually, sales plummeted 40.3%. The median sales price of new houses sold fell at a monthly rate of 5.13% to $231,000, while inventories of new homes at the end of May was 453,000, representing a supply of 10.9 months at the current sales rate compared to 10.7 in the previous month.
The Commerce Department is set to release its durable goods orders report, which gives the value of orders placed for goods designed to last for more than 3 years, at 8:30 AM ET on Friday. Economists look forward to a 0.15 increase in the durable goods orders for June.
New orders for durable goods rose slightly in May following a 15 decline in April. The marginal gain came about due to a rebound in orders for transportation equipment, which rose 2.5%. Shipments of manufactured durable goods declined 1.1%, while unfilled orders climbed 0.9% and inventories edged up 0.4%.
The New York Fed's empire state survey showed a modest improvement, though it suggested that manufacturing activity continues to be in the contraction zone. However, new orders and shipments improved. The backlog of orders index continued to decline, albeit at a slower rate.
Although at the outset, the industrial production report appeared stronger than expected, a careful analysis of the details revealed weakness. Manufacturing output was boosted by vehicle production, as striking workers returned to the floor. Additionally, the volatile mining and utility production showed sharp increases.
The minutes of the June 24-25 meeting released last week revealed that some of the FOMC members were of the view that some policy firming is appropriate very soon, if not at this meeting, due to their belief that downside risks have diminished. However, others reiterated that the high level of risk spreads and the restricted availability of credit suggested that financial conditions were not yet accommodative. Focusing more on uncertainty in the outlook, the minutes said that the outlook for both economic activity and price pressures remained very uncertain, and thus the timing and the magnitude of future policy actions were quite unclear.
The upcoming week's economic calendar is fairly light with only a few second-tier economic reports due out for release. Much of the focus is likely to shift to the two housing market reports of the week, namely the existing and new home sales reports for June. Additionally, traders may also pay heed to the Commerce Department's durable goods orders report for June, the final reading of the University of Michigan's consumer sentiment index for July and the Conference Board's leading economic index for June.
The Beige Book is also likely to be sifted to gain an understanding of the Fed's understanding of how economic conditions are panning out in the different Federal Reserve districts. Additionally, markets may react to the regularly scheduled weekly oil inventory and jobless claims reports.
Economists have muted expectations regarding the leading economic indicators for June due to a decline in the manufacturing workweek, a decline in stock prices and an increase in initial jobless claims for unemployment benefits. However, the declines are likely to be mitigated due to increases in money supply and building permits, and the positive slope between the 10-year Treasury yield and the Fed finds rate.
Soft aircraft orders are likely to exert downward pressure on durable goods orders for June. Nevertheless, orders could receive some support from a modest gain in autos. Machinery orders are also expected to show some strength.
Meanwhile, new home sales are expected to show another month of declines in June, reflecting the still-weak builder sentiment. Going by the weak pending home sales index for May, which is considered as a leading indicator to existing home sales, one can expect a decline in sales of already constructed houses.
Monday
The Conference Board is scheduled to release a report on the U.S. leading index for June at 10 AM ET on Monday. The consensus estimate calls for a decline of 0.1% for the month.
The leading indicators index edged up 0.1% in May, benefiting from a positive performance by stock prices. The indexes of coincident indicators and lagging indicators also rose by 0.1% and 0.2%, respectively.
Tuesday
Philadelphia Federal Reserve President Charles Plosser is due to speak about the U.S. economic outlook at 8:30 AM ET on Tuesday.
Wednesday
Federal Reserve Governor Frederic Mishkin is scheduled to speak at a Bank of Canada Economic Conference at 10 AM ET on Wednesday. On the same day, Federal Reserve Vice Chairman Donald Kohn will speak on transparency at 11:15 AM ET.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET on Wednesday.
The oil inventory report for the week ended July 11th showed that crude oil stockpiles rose by 3 million barrels to 206.9 million barrels. Gasoline and distillate inventories rose by 2.4 and 3.2 million barrels, respectively. Refinery capacity utilization averaged 89.1% over the four-weeks ended July 11th, the same as in the previous week.
The Federal Reserve is due to release its Beige Book, which is a compilation of anecdotal evidence on economic conditions from each of the 12 Federal Reserve districts, at 2 PM ET on the same day. The report is normally released about two weeks before the monetary policy meeting is held.
Thursday
The Labor Department is due to release its customary weekly jobless claims report for the week ended June 14th at 8:30 AM ET on Thursday.
The initial claims for unemployment benefits increased 18,000 in the week ended July 12th to 366,000 from the previous week's revised average of 348,000. Economists expected claims to increase to 380,000 from the initially reported figure of 346,000 for the previous week.
The four-week average- a more reliable measure declined 4,500 in the recent reporting week to 376,000. Continuing claims, which measure the number of people receiving ongoing unemployment help, declined 81,000 in the week ended June 5th to 3.122 million.
New York Federal Reserve Bank President Timothy Geithner is due to testify before the House at 10 AM ET on the same day.
The National Association of Realtors' is scheduled to release its report on existing home sales for June at 10 AM ET on Thursday. Economists estimate existing home sales of 4.95 million for the month.
Existing home sales, including single-family, townhomes, condominiums and co-ops, rose 2% to a seasonally adjusted annual rate of 4.99 million units in May compared to the previous month. On the other hand, year-over-year, sales of existing homes declined 15.9%. The national median existing home price was down 6.3% from a year-ago to $208,600. However, housing inventories at the end of May fell 1.4% to 4.49 million existing homes available for sale, representing a 10.8-month supply at the current sales pace compared to 11.2-month supply in April.
Friday
The final reading of the University of Michigan's consumer sentiment index for July is due to be released at 10 AM ET on Friday. The report is expected show that the headline index was at 56.3, slightly off the mid-month reading of 56.6.
The Commerce Department is also due out to release its new home sales report for June at 10 AM ET on Friday. The consensus estimate calls for a drop in new homes sales to 505,000.
In May, sales of new one-family houses fell 2.5% to a seasonally adjusted annual rate of 512,000. Annually, sales plummeted 40.3%. The median sales price of new houses sold fell at a monthly rate of 5.13% to $231,000, while inventories of new homes at the end of May was 453,000, representing a supply of 10.9 months at the current sales rate compared to 10.7 in the previous month.
The Commerce Department is set to release its durable goods orders report, which gives the value of orders placed for goods designed to last for more than 3 years, at 8:30 AM ET on Friday. Economists look forward to a 0.15 increase in the durable goods orders for June.
New orders for durable goods rose slightly in May following a 15 decline in April. The marginal gain came about due to a rebound in orders for transportation equipment, which rose 2.5%. Shipments of manufactured durable goods declined 1.1%, while unfilled orders climbed 0.9% and inventories edged up 0.4%.
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