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US Week Ahead: A Hectic Week on Data & Earnings

July 11th, 2009 Michael McDonough Comments off

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 13th:

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 14th:

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 15th:

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 16th:

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 17th:

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!

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US Economic Week Ahead: The Calm after the Storm

July 3rd, 2009 Michael McDonough Comments off

This week’s economic calendar is relatively quiet, especially compared to the hustle and bustle of last week. Monday’s non-manufacturing ISM report starts the week off, followed by Wednesday’s consumer credit report, Thursday’s jobless claims data, and Friday’s US trade statistics and consumer sentiment. The impact of this week’s non-manufacturing ISM report could be somewhat subdued since its release comes after June’s employment report; negating the importance the report’s employment index. But, significant declines or advances in the report’s business activity index could help shift market sentiment. This week’s big headlines, however, will likely be driven by the start of the 2Q09 earnings seasons, with Alcoa set to announce earnings on Wednesday. There is also a G8 summit taking place this week in Italy, which could produce some headlines. Here is this week’s US economic calendar:

Monday July 6th:

10:00AM: ISM non-manufacturing Index (Risk: Neutral, Market Reaction: Moderate/Marginal): The non-manufacturing ISM index will likely experience its third consecutive monthly rise. The current Bloomberg consensus for the index is 46.7 compared to last month’s reading of 44.0. The market would take any positive surprises to this index as good news echoing better than anticipated data in the manufacturing sector pointing towards a less severe recession. It will also be important to pay attention to non-manuf. ISM’s new order index, which tends to be a forward looking indicator for the primary business activity index. Since June’s employment report has already been released the employment index is essentially a non-factor.

Tuesday July 7th:

7:45AM: ICSC-Goldman Store Sales (Risk: Downside, Market Reaction: Marginal): This weekly index tracks same store sales at major US retailers, account for roughly 10% of total 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 1.6% increment in store sales over the previous week.

Wednesday July 8th:

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. A recent drop in refinancing activity caused this index to drop 18.9% on a weekly basis last week, while the level of mortgages to purchase new homes dropped by 4.5%.

3:00PM: Consumer Credit (Risk: Downside, Market Reaction: Marginal): Consumer credit has contracted quite severely over the past several months as saving rates rise and banks tighten consumer credit. The current Bloomberg consensus indicates a month over month change of –US$7.5bn compared to –US$15.7bn a month prior—the second biggest drop on record. Given recent deterioration in the employment situation and a drop in consumer confidence we could see this indicator disappoint.

Thursday July 9th:

Same Store Sales: (Risk: Downside, Market Reaction: Moderate): This monthly release breaks out same store sales data for individual retail chains. Like weekly the ICSC-Goldman Store Sales index, recent data supporting an increasing US savings rate and a worsening employment situation coupled with deep discounts at some stores, will likely place some downward pressure on same store sales.

8:00AM: Federal Reserve Governor Elizabeth Duke: Is speaking at the FDIC’s Interagency Minority Depository Institutions National Conference in Chicago. This could create some headlines.

8:30AM: Initial Claims (Risk: Neutral, Market Reaction: Significant): The current Bloomberg consensus forecast for initial claims is 610K versus last week’s number of 614K. It is likely that after Thursday’s disappointing employment data the market will become more sensitive to changes in claims, as it is an excellent forward looking indicator toward payroll data. I anticipate both initial and continuing claims data will improve as the month progresses.

Friday July 10th:

8:30AM: International Trade (Risk: Neutral, Market Reaction: Marginal/Moderate): The current Bloomberg consensus for the US trade balance is –US$28.8bn versus last month’s reading of –US$29.2bn. Recent increments in oil prices could add to the current deficit, while placing upward pressure on the import price index.

9:55AM: Consumer Sentiment (Risk: Neutral, Market Reaction: Marginal/Moderate): The current consensus on Bloomberg for the Reuters/University of Michigan Consumer Sentiment Index stands at 71.5 versus last month’s result of 70.8. The sentiment index is broken up into two parts, current conditions and future expectations. Investors are likely to focus more on this report after last week’s disappointing consumer confidence number. A positive or negative surprise in this index could impact the day’s trading.

10:00AM: Treasury Secretary Tim Geithner: Is set to testify before the House Financial Services and Agriculture Committees on derivatives regulation. This could create some headlines.

Have a good weekend!

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U.S. Week Ahead: ISM and Employment Steal the Show

March 30th, 2008 Michael McDonough Comments off
Looking back to last week, as we expected the market was unable to maintain the upward momentum it experienced the week prior. This was due to weaker than expected data from the consumer sector and financial related news. The Dow and S&P500 ended the week down 1.17% and 1.08%, respectively, and we could have more bad news this week.

There is a significant chance we could see the probability of a 50bp cut rise this week after the ISM and employment data are released

Source: Cleveland Fed

This week has its fair share of important data releases; underscored by Tuesday’s ISM release and Friday’s pivotal employment report. We believe both of these indicators have considerable downside risks as the economy moves further into a recession. Here’s why, the charts below show the performance of the ISM and the change in nonfarm payrolls over the last 50 years (recessions highlighted in gray). As you can see from the charts, we haven’t begun to touch the lows for these indicators during a recession. In fact, over the past 50 years the ISM has averaged 42.6, while the change in payrolls has averaged -154K during recessions. To make matters worse, in nearly every case the ISM moved sub-40, while in every case the net change in payrolls broke -300K. As these indicators continue to deteriorate, it will become more apparent, that this crisis isn’t solely contained in the financial economy. However, we believe the Fed’s response up to this point has been the correct one for a slowdown in the real economy. This should help curtail long-term sustained losses in these indicators when compared to past recessions. Nevertheless, things will get worse before they get better.


ISM performance over the past 50 years (recessions highlighted in gray)

Source: BBerg

Change in nonfarm payrolls over the past 50 years (recessions highlighted in gray)

Source: BBerg

Let’s take a look at the some of the important indicators coming out this week in the US :

Monday March 31st:
9:45AM: NAPM-Chicago (Risk: Downside)- According to the consensus survey the market is expecting a reading of 46.0, compared to 44.5 the previous month. We believe the NAPM will continue to deteriorate as the economy moves into a recession.

TBD: Annual Crop Planting Report- The Department of Agriculture’s annual crop planting report is something I have never really looked at in much detail. However, this year investors are using it as an indicator towards the commodity. The report is considered a bellwether for farming in the year ahead. In any case, this report will likely have an impact in the commodities market, so keep an eye out. This report outline’s farmers intentions to plan crops; the USDA will release actual numbers in June.

Tuesday April 1st:
10:00AM: ISM Manufacturing Index (Risk: Downside)- The BBerg consensus survey is anticipating a release of 48.0 versus 48.3 the previous month. As we outlined in the text above we believe there are considerable downside risks to this indicator, given it has averaged 42.6 during recessions over the last 50 years.

10:00AM: Construction Spending (Risk: Neutral)- The consensus survey is anticipating a change of -1.1% m/m vs. -1.7% m/m last month. What will be important to look at in this release is the change in non-residential construction. Non-residential construction has remained resilient during the current crisis, but it has begun to falter. Last month private non-residential construction spending moved negative for the first time during this crisis, and we believe this may be the start of a trend.

Wednesday April 2nd:
8:15AM: ADP Employment Report (Risk: Downside/Neutral)- This release will be used to help gauge the change in Friday’s employment report.

10:00AM: Factory Orders (Risk: Neutral)- The consensus survey is anticipating a release of -0.6% m/m compared to -2.5% the month prior. Factory orders should continue to slow-down as the economy cools down.

Thursday April 3rd:
8:30AM: Jobless Claims (Risk: Neutral)- According to the consensus survey the market is expecting weekly jobless claims of 366K. This number should remain within recession territory (+350K), which does not bode well for the overall employment situation.

10:00AM: ISM Non-Manufacturing Index (Risk: Neutral)- The consensus survey is anticipating a reading of 49.0 compared to 50.8 the month prior.

Friday April 4th: Employment Day!
8:30AM: Employment Report (Risk: Downside)-
The BBerg consensus survey is expecting a 50K decline in non-farm payrolls and an unemployment rate of 5.0%. We believe there is significant downside risk for both of these indicators, and believe it is possible we could see a large spike in both (as we outlined in the text above).

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Week Ahead: The Potential to be a Downer

March 23rd, 2008 Michael McDonough 1 comment
As I expected the Fed cut rates by 75bp. However, we did see Governor Plosser and Fisher dissent on the decision, both wanting smaller cuts. This is interesting news because I now believe we may be closer to the end of the current rate cut cycle than I originally thought. This may be good news for the Fed. Recently, there has been a lot of chatter in the markets over the US encountering a possible liquidity trap, like that in Japan. However, with the two dissentions on Tuesday’s vote markets are now pricing in a lower probability of more significant rate cuts at April’s meeting, meaning the Fed may have found a way to reduce or end the current rate cut cycle, before rates became low enough to invoke a liquidity trap, and importantly, without disappointing market expectations. You can see from the chart below that after Tuesday’s announcement market expectations shifted to a 2.00% fed funds rate vs. 1.50% prior to the announcement.


The Cleveland Fed’s Implied Probabilities for the April meeting outcomes as shown that the magnitude of the expected rate change has declined significantly

Source: Cleveland Fed

This week has the potential to bring some negative consumer focused news to the market place. It is likely GDP will be revised downwards, housing numbers will continue to disappoint, and PCE will help convince a few more people a recession has arrived. We are not sure if the market will have enough upside momentum to keep up last week’s gains through-out this week. For those of you looking at global markets, make sure you keep an eye on Taiwanese markets which are set to rally after the big victory of the ‘China friendly’ party in the country’s Presidential elections.

Let’s take a look at the some of the important indicators coming out this week in the US :

Monday March 24th:
10:00AM: Existing Home Sales (Risk: Downside) The Bloomberg consensus survey indicates the market is currently anticipating a reading of 4.85mn units, this would be slightly lower than last month’s 4.89mn reading. There hasn’t been much good news in any of the housing market indicators, and considering the difficulty in acquiring home loans I do not see much upside. We should continue to see inventories increase, and prices falling.

Tuesday March 25th: Fed Day!
10:00AM: Consumer Confidence (Risk: Neutral)- According to Bloomberg.com the market is currently expecting a reading of 73.0 vs. 75.0 last month. We have already seen a substantial drop in the confidence numbers and imagine it will stay around these levels for some time. Minor changes in the Consumer Confidence numbers are not overly important. However, what is important is large swings, such as the major drop we have experienced at the beginning of this year.

Wednesday March 26th:
8:30AM: Durable Goods Orders (Risk: Downside)- According to Bloomberg.com the market is currently expecting a reading of 0.7% m/m vs. -5.3% m/m previously. We have seen continued weakness in the manufacturing sector and imagine this weakness will be reflected in the durable goods number.

10:00AM: New Home Sales (Risk: Downside)- According to Bloomberg.com the market is currently expecting a reading of 575K vs. 588K previously. For the same reasons as Existing Home Sales outlined above.

Thursday March 27th:
8:30AM: GDP Final (Risk: Downside)- According to the consensus survey the market is expecting a reading of 0.6%q/q SAAR, or no change from the preliminary reading. However, I believe there could be more downside in this number than upside and thus believe there is a chance the number could somewhat disappoint.

8:30AM: Jobless Claims (Risk: Neutral)- According to the consensus survey the market is expecting a new jobless claims of 370K,vs. 378k last week. I still continue to monitor this release as one of the most important for the employment situation.

Friday March 28th:
8:30AM: Personal Income and Outlays (Risk: Downside)-
According to the consensus survey the market is expecting 0.3%m/m and 0.1%m/m for personal income and personal outlays, respectively. Rising energy and food prices in February will likely eat into the consumer spending figures out pacing the rise in personal income. Remember, about 70% of US GDP is based on consumer spending.

10:00AM: Consumer Sentiment (Risk: Neutral)- According to the consensus survey the market is expecting a reading of 70.0 for consumer sentiment vs. 70.8 last month. After experiencing a large downward swing at the beginning of this year I expect sentiment to stay around this level for the time being.

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The Week Ahead: Fed Cuts and Bank Failures

March 16th, 2008 Michael McDonough Comments off

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 11th titled “Inflation, Inflation, Inflation” & February 27th 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 5th 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 9th. 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.

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Now What? The Week Ahead

March 9th, 2008 Michael McDonough Comments off

Last week’s performance was pretty much in-line with our expectations, as outlined in our March 2nd post. But what’s going to happen this week? The beginning of this week is going to be relatively quiet on the data front. However, we will be ending the week with some important consumer related data including CPI, Retail Sales, and Consumer Sentiment (See calendar below).

Nevertheless, the main question this week will be whether or not the Fed cuts rates before the March 18th meeting and if so by how much. First the easier question, we anticipate the cut will be 75bp. Now the harder one, we think that we are close enough to the March 18th meeting for the Fed to wait. However, this will be very market dependent. If the market experiences a significant sell-off, then we are likely to see the Fed to act early. Typically, when the Fed delivers unexpected news (such as a rate cut) it usually occurs between 8:15AM and 8:30AM, so please be on the lookout if this scenario does plays out.

If you believe, like us, the Fed would intervene to stem any significant sell-off, then this week could turn into a good buying opportunity. Essentially, the potential Fed rate cut would work as a partial hedge against market risk, not a bad deal. The Fed has a tendency of not disappointing market expectations, and this will not change in the short-term, especially now. So if the market does experience a significant sell-off we would expect the Fed to act (as they did on Jan. 22nd) and potentially generate at least a short-term rally (See chart below for SP500 performance during the Jan. 22nd cut). At the same time, if the market does not experience a sell-off, the increased likelihood of a 75bp cut at the next Fed meeting should help bolster market performance.

S&P500 performance during Jan. 22nd inter-meeting rate cut


Market performance will remain very dependent on news from the financial industry and economic data releases. Here are the economic releases that could affect the market this week:

Monday March 10th:
None

Tuesday March 11th:
8:30AM: International Trade (Risk: Neutral)- According to Bloomberg.com the market is currently expecting a trade deficit of USD59.5bn vs. USD58.8bn last month.

Wednesday March 12th:
None

Thursday March 13th: Key Day in a Quiet Week
8:30AM: Retail Sales (Risk: Slight Upside)- According to the consensus survey Retail sales are expected to increase 0.2% M/M for both the headline and core reading. There could be some upside to this release from better than expected sales figures for discount retailers such as Wal-Mart

8:30AM: Import Prices (Risk: Slight Downside)- Bloomberg.com currently states a market consensus of +0.6% M/M change in import prices. Increased commodity and food prices will continue to put pressure on import prices. The big concern is how strong the pass-through effect will be to the overall CPI.

8:30AM: Jobless Claims (Risk: Downside)- Bloomberg.com currently states the market is expecting a reading of 358K. We find this to be one of the most important indicators for the health of labor market. Given continues weakness in the labor market, and signs that the commercial construction industry may be on the verge of slowing; we believe this number has the potential to surprise to the upside. Basically, any reading below 350K is considered relatively healthy, and above could warn of a recession. The 4wk moving average currently stands at 359,500. Non-farm payrolls tend to be a lagging indicator of overall economic health, while jobless claims tend to be a leading indicator, hence its importance.

10:00AM: January’s Business Inventories (Risk: Neutral)- The consensus survey expects business inventories to increase 0.5% M/M.

Friday March 14th:
8:30AM: Consumer Price Index (Risk: Neutral/Slight Downside)- The consensus survey is expecting a 0.3% and 0.2% M/M increase in CPI and Core CPI, respectively. Growing food prices, high commodity prices, and a weak dollar will continue putting upward pressure on CPI. However, how much of this will be nullified by decreased demand is yet to be seen. For more on the importance of inflation and Fed Cuts please see our Feb. 27th posting (http://fiateconomics.blogspot.com/2008/02/fed-cuts-inflation.html).

10:00AM: Consumer Sentiment (Risk: Downside)- The market is currently expecting a reading of 69.5 after experiencing a free fall last month to 69.6. Given last month’s drop it is hard to make an accurate measurement, but we believe it is likely to come in below current expectations.

*Investment Idea:

We believe the fact that the Fed has always delivered news of inter-meeting rate changes to the market at around 8:15AM EST can be used to our advantage. Take this for example, if the market experiences a significant sell-off and an inter-meeting cut seems likely, you could purchase futures on U.S. Indices just prior to the 8:15AM EST expected announcement. If the cut does occur, then we should see a rally in future prices, and the position could be unwound within 15 minutes. If a rate cut does not occur, the position could be sold within a very short time frame helping to minimize any losses. Since you are only holding the position for a short period of time downside risk should be relatively mild, while potential upside if the cut does occur could be significant. However, you could face other risks such as negative company or sector news being released while you are holding the position. This notwithstanding, if this scenario comes about we believe the risk is worth the potential short-term gain.

*There is substantial risk in trading futures, so please make sure you know what you are doing! Also, this is an investment idea not advice so trade at your risk.

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A Potential for Blood-letting: The Week Ahead

March 2nd, 2008 Michael McDonough Comments off
This week has some serious downside potential… Lets take a look at some of the more important indicators, and see which direction we think the risk lies verse expectations.

Monday:
10:00AM: ISM Mfg. Index (Risk: Downside)- Currently, the market expects a reading of 48.1, verse 50.1 from the prior month. We believe given the poor performance of the regional surveys (Philly & NY Fed) and consumer confidence we could see some downside risk to the markets expectations. At the same time, it will be very important to look at the new orders and prices paid sub-component of the report. New orders tends to be a rather good forward looking indicator for the index, and of course prices paid will tie in heavily to current inflation concerns. Bottom line, we could see a strong headline number and still see the market catch a bid, or vice versa based on these sub-components.

10:00AM: Construction Spending (Risk: Downside)- The market is anticipating a 0.7%m/m decline in construction spending. The reason we see a downside risk to this indicator is because housing related indicators have continue to decline, and the most recent Senior Loan Officer Survey indicated a further tightening to lending standards. This data will, despite its importance, likely take a back seat to the ISM report being released at the same time. This release will most strongly be felt in the homebuilder stocks (ex. ETF: ITB). This indicator also tends to be a good indicator of the effectiveness of Fed Policy.

Tuesday:
None

Wednesday:
8:15AM: ADP Employment Report (Risk: Neutral)- Not much I can say about this, other than it will set the mood for Friday’s Non-farm release, and get a lot of media attention. If this release were to come in higher than expectations we could see a slight rally in the market. However, the inverse is true as well. Currently, the market wants to see news that would support a rate cut, but at the same time not signal an imminent recession.

8:30AM: Productivity and Costs (Risk: Neutral)- We do not expect many changes from the previous number. However, pay attention to any outliers as it will affect the market.

10:00AM: Factory Orders (Risk: Neutral)- The market is currently expecting a reading of -2.5%, based on the recent weakness in durable good orders. We feel this expectation prices the weakness in durable goods in fairly well. This would be the first decline in factory orders in 5 months.

10:00AM: Non-Manufacturing ISM (Risk: Neutral/Slight Upside)- The markets expects Non-Manufacturing ISM to come in at 47.5, after falling to 44.6 last month from well above 50. Though not as important as the manufacturing ISM, this indicator is starting to garner more attention. However, we do not believe this indicator will be enough to turn-around market sentiment if the week plays out as we are expecting.


Thursday:
8:30AM: Jobless Claims (Risk: Neutral)- We believe the initial claims number will remain above 350K, with the 4wk moving average continuing to edge up. This is bad news for the market. Initial jobless claims tend to be one of the best forward looking indicators at predicting a recession. A number below 350K tends to be safe, and above that level the probability of a recession increases dramatically.

Friday: The Main Event!
8:30AM: Employment Report (Risk: Negative)- Currently, the market anticipates an unemployment reading of 5.0% (vs. 4.9%) and an increase in non-farm payrolls of 25K. However, given the recent weak performance in initial claims we believe February’s number has the potential to disappoint. We will further clarify our view once we see this week’s jobless claims data and the ADP report.

Conclusion:
The bottom line is we expect another volatile week of trading without much upside. However, we could see another good buying opportunity come the end of the week. We believe once the market comes to a consensus on whether there will be or not be a recession in the US a lot of the volatility caused by uncertainty will be taken out of the markets and we may start to see the beginning of a sustainable recovery, of course the recovery would be quicker given the latter scenario.

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