Monday, July 26, 2010

A Practical Guide to this Week's Economic Releases

With the much criticized, but hardly surprising, results of European bank stress tests out of the way, the U.S. Treasury market's attention has already turned to this week's three coupon auctions and a barrage of scheduled economic releases.

Among the various economic reports on this week's calendar, certain of them occupy a more prominent role, as they have the potential to provide fresh insights into the state of economic activity at the turn of the quarter.

Although generally (and appropriately so), the Consumer Confidence/Sentiment indicators are considered as "soft" data in that they reflect psychology rather than actual activity, the July reading of the Conference Board's Consumer Confidence Index (Tuesday) is a little more meaningful than usual. The series showed a particularly sharp decline of nearly 10 points to 52.9 in June and the consensus seems to be looking for an additional modest drop in July. However, given the sheer magnitude of June's decline, and given that the index had also stood at more elevated 57.7 in May, the potential exists for a moderate rebound from July's level to the mid-50s area. This is not an unreasonable expectation, in view of an overall more resilient stock market this month, one of the factors- besides perceptions of labor market conditions- that tend to influence the confidence surveys.


Durable goods orders, a key but often hopelessly volatile measure of momentum in the manufacturing sector, fell 0.6% in May but is expected to rise modestly (around 1%) in June, boosted by a rebound in the transportation component and, specifically, aircraft orders for the month. If ex-transportation orders manage to eke out a gain in June, that would be fairly significant in that this will be following a 1.6% gain in such orders in May. Given some uneasiness created by an unexpectedly lower ISM reading in June, back-to-back gains in the ex-transportation durable goods orders should help restore confidence in the underlying momentum of the manufacturing sector.

It is for the same reason that Friday's Chicago PMI should be viewed as the third key economic release of the week. The series was relatively little changed in June at 59.1 vs. 59.7 in the prior month, not retreating by nearly as much as the national ISM. The consensus seems to be that the Chicago PMI will catch up with the cooling reflected in last month's ISM and retreat by an additional 2 to 3 points to the 56-57 range in July. While the broader premise of a modest interim downshifting in manufacturing activity in the midst of a waning inventory cycle is reasonable, a decline of the magnitude expected by the consensus in July is far from assured. In fact, if the Chicago PMI holds up in the vicinity of its June level, this would trigger a nearly automatic upward revision to expectations about next Monday's July ISM (currently expected to edge lower to 55 from 56.2 in June).

The Q2 GDP data on Friday are unlikely to be materially important to the market, as they will reflect the distinct softening in economic activity that had already become apparent in the partial data for the quarter and which has already been largely discounted. The directionless behavior of initial unemployment claims, and their distinctly choppy pattern in the last few weeks due to anomalies in the normal seasonal shutdown of auto plants, both have delegated the series to a second-row seat in terms of significance for the time being and this is unlikely to change with this week's number- almost irrespective of what the number actually is. It is hard to imagine the Q2 Employment Cost Index on Friday becoming any one's real focus, given that wage and price pressures are broadly viewed as a non-issue in the current environment. Finally, Friday's Reuters/University of Michigan Consumer Sentiment index for the entire month of July is likely to represent a simple, inconsequential, fine-tuning to its early-month reading of 66.5...

...and, of course, this morning's 24% jump in June's new home sales is not particularly telling of anything either, as it represents only a partial rebound from a disastrous 36.7% cratering of such sales in May.

All in all, the first three reports we identified above (Consumer Confidence, Durable Goods Orders, Chicago PMI) as standing out in this week's crowded calendar have the potential to paint a picture of a somewhat more resilient than generally assumed economic recovery, following a string of at times very disappointing data in the last several weeks.

Anthony Karydakis