This week could confirm that broad-based stabilization has, in fact, taken hold in the economy, or, some downward surprises could indicate that stocks were too optimistic as the benchmark S&P 500 advanced nearly 50% from early March to last week.
Carl Weinberg, chief economist at HFE, is of the school believing that recovery will be a slow process. “The global economy may have stopped contracting, but the declines in GDP to date have left economies severely depressed,” he said a weekly note. “Higher interest rates will further hinder the recovery from depression, and rising prices will erode consumers’ real incomes.”
Many analysts believe the economy cannot recovery until the housing market, which played the prime mover in the financial crisis, has recovered. Whether that’s the case will become clearer this week, with Housing Starts & Building Permits scheduled for Tuesday, Existing Home Sales slated for Friday, and several minor housing reports scattered throughout the rest of the week.
Real estate and other data are expected to be mostly positive this week. Aside from data, earnings reports from retail stores could also shake markets, as Home Depot, Sears and Target all report for the second quarter this week.
In the headlines this morning is news that Japan has exited recession after five quarters. Second quarter GDP expanded 0.9%. Though that was actually a bit below the consensus call, it’s far better than the 3.1% contraction in Q1, revised up from a preliminary reading of -3.8%.
Key Releases This Week:
8:30 ― The NY Fed’s Empire State survey, this month’s first manufacturing report, is expected to rebound into growth mode after coming in just below that threshold in July. The median forecast looks for +5.0 score, moving up from -0.6 in July and -9.4 in June. Part of the optimism is due to the +5.9 score registered by New Orders last month.
9:00 ― Treasury releases the latest TIC flows report, which tracks the volume of investments flowing in and out of the country. Net long term TIC flows are expected to rebound to $17.5 billion in June, after slumping to $19.8 billion in May.
1:00 ― The first bit of real estate data this week is a minor one. The Housing Market Index is a sentiment-based index tracking builder confidence, which sunk to many new lows in the crisis as rising foreclosures, excess inventory, and falling prices all hurt the prospects for constructing new homes. The nadir was an 8-point reading in January, but in July the report advanced two points to 17. Any continued improvement will be good news for the housing market.
8:30 ― Housing Starts increased more than 20% between May and June, which would cause some to call for a moderation in July simply on technical reasons. But, in fact, the median forecast looks for another advance in July, which would be the third consecutive gain. The median forecast looks for housing starts to advance 2.7% to an annual pace of 598k in July, while building permits are expected to gain 1.3% to 575k.
Details of the report have been more mixed than the headline would suggest, as single-family starts have been improving rapidly, while multiple-family unit starts have been erratic, dropping 26% last month after surging 66% in May.
“Builders have pared back on inventory and are starting to build new homes,” said analysts from IHS Global Insight. “We are thus expecting another steady improvement in single-family starts and permits for July. The market for multiple-family homes is still slumping, however, and July's numbers will reflect this fact. This market will not improve until credit conditions in the market for commercial real estate loans improve.”
The economics team at BBVA points out residential construction “remains at extremely low levels with housing starts more than 40% below those of last year,” adding that a quick recovery will be hindered by more foreclosures, which continue to put deflationary pressures on prices. “As a result, we might need to see price stabilization and inventory reduction in the market for existing homes in order for there to be a strong recovery in housing starts,” they wrote in a client note.
8:30 ― The Producer Price Index index is unlikely to gather many followers this week given that the more important consumer price index was released last week. But for all the wonks out there: total PPI is set to fall 0.3% in July after an energy-led 1.8% increase in June. Strip out energy and food prices, and core PPI should gain 0.1% after 0.5% gain in the prior month (driven by auto prices).
“Overall, core producer prices remain more than 3% above those of last year, which could help to offset the effect of declining wages, producers’ primary cost, on consumer prices,” said economists at BBVA in weekly forecasting note.
8:30 ― Jobless Claims have been difficult to read recently due to seasonal issues related to auto-sector layoffs. The 4-week average is currently 565k new claims per week, which is a decent improvement from the 616k average for June, but no improvement has been seen over the past two weeks. In addition, while investors look for signs that the economy is rebounding, it’s hard to be too optimistic when more than two million people are filing for employment benefits each month.
Analysts at BTMU note that “initial jobless claims below 360K tend to indicate a growing labor market,” a figure that seems a far way off. And even when firings come to a standstill, it’s not clear just how quickly hirings will resume.
10:00 ― The Leading Indicators Index is a composite index that looks for turning points in the economy. Analysts believe it should repeat June’s +0.7% performance in July, providing broad-based confirmation that the recession is at an end, even though the labor market remains dreadful.
“Since April, the LEI has posted three consecutive increases, primarily driven by a rise in investor sentiment, the stock market, consumer expectations, and a pick up at the nation’s manufacturers,” said Ellen Zentner, senior macroeconomist at BTMU.
Zentner cites positives contributions from “a gain in manufacturing hours, more favorable delivery times at manufacturers, and lower unemployment claims.” But her forecast is just +0.2% overall, as “lower building permits and a drop in consumer expectations will weigh on the LEI in July.”
10:00 ― Unlike the Empire State survey for New York, the Philadelphia Fed’s manufacturing survey declined in July, and while the majority of analysts believe there will be improvement this month, not a single one looks for growth. The median forecast is -1.0, a 6.5-point gain from July. In the larger picture though, that’s a whole lot better than the -41 reading in February.
Expect forecasts to change after the NY Fed’s Empire State survey is released on Monday.
10:00 ― The last bit of data this week will be a big one to the real estate market. The Existing Home Sales survey is set to advance for the fifth straight month, as homebuyers take advantage of reduced prices and the $8,000 government tax credit.
Sales should advance 2.5% in the month, pushing the annualized pace past 5 million for the first time in nine months.
Though overhang has fallen during the summer, more foreclosures will keep inventories high and prices low, note analysts at BBVA.
10:00 ― Just as the housing data is being published, Federal Reserve chairman Ben Bernanke will speak on ‘the Year of Crisis’ at the Kansas City Fed's annual Jackson Hole conference.
Sal Guatieri from BMO Capital Markets doesn’t expect any real news from the statement. “He isn’t likely to stray from last week’s policy statement message that the economy is stabilizing though far from a durable recovery, warranting neither more stimulus nor the active withdrawal of the stimulus already in place for some time.”