The Week Ahead

The section below provides some observations on this week’s key economic releases. Alongside the preview are questions that markets, the media and, yes, economists are likely to be asking as the data is released.

1. The housing market was at the forefront of the economic and fi nancial meltdown we saw in late 2008 and early 2009. We think housing, (sales of new and existing homes, housing prices and housing starts) has now fi nally entered a bottoming process
   

2. Existing home sales fell 38% from late 2005 through January 2009, and have been bouncing along the bottom since then
   

3. Pending home sales, which tend to lead existing home sales by one of two months, rose for the third consecutive month in April, suggesting an ongoing rebound in existing home sales through the end of Q2 2009
   
   
4. Supply of existing homes for sales is down from its peak in early 2008, but remains elevated relative to its history. The market will want to see further improvement in this metric before it is convinced that the housing recovery is for real.
   
   
5. This report also has data on existing home prices, and existing home prices have now posted three consecutive month-over-month gains (February, March and April). However, the data are not adjusted for seasonality, and since the bulk of home sales (60%) occur in the spring and summer, home prices also tend to rise in the spring and summer.
   
   
6. On a year over year basis, existing home prices are down 15.4%, an improvement from the -17.5% year over year drop recorded in January 2009. But it’s not yet clear that housing prices have turned the corner.
   
   
7. Because existing home sales are counted when a sale is “closed”, and not when the contract is signed, and there is typically a lag of a month or so between a signed contract and closing, these data are not likely to have been impacted by the recent rise in mortgage rates. Looking ahead, the rise in mortgage rates remains a threat to any recovery in housing Source: Realtor, Cencus, Haver Analytics

FOMC Decision (Wednesday, June 24)

1. We don’t expect the Fed to tighten until the middle of 2010.
   
   
2. With the Fed funds rate pinned between 0.0% and 0.25%, the FOMC’s monetary policy instrument is the size and composition of the Fed’s balance sheet, or its quantitative easing regime
   
   
3. The debate at the June 24 meeting will center on the Fed’s balance sheet and in particular on the size of its purchases of Treasury notes and mortgage backed securities and the speed at which they are buying them. The Fed will address this in the FOMC statement that is usually released at 2:15 PM ET
   
   
4. In our view, the Fed needs to begin to prepare the market for its “exit strategy” from quantitative easing soon
   
   
5. The market expects the FOMC to upgrade its assessment of the economy at the meeting, However, the market’s expectations about any shift in the size and composition of the Fed’s balance sheet are all over the map, which could set the market up for a surprise

May Durable Goods Orders (Wednesday, June 24)

1. Although we have already digested qualitative reports on business spending in May, the release of the May durable goods orders report represents the fi rst “hard” data on business capital spending (durable goods shipments), future capital spending (durable goods orders) and business inventories in May
   

2. We expect that business capital spending remained weak in Q2 (after a disastrous Q1), and that big inventory destocking that crushed gross domestic product (GDP) in Q1 could persist into Q2 2009
   
   
3. The market will want to focus on shipments and orders for capital goods, excluding aircraft. These “core” shipments and orders are highly correlated to the business spending portion of GDP
   
   
4. The market will also try to discount any weakness in the report related to the auto sector. All of Chrysler’s assembly plants were shuttered in May, and several GM plants were shut down to reduce inventories

May New Home Sales (Wednesday, June 24)

1. The housing market was at the forefront of the economic and fi nancial meltdown we saw in late 2008 and early 2009. We think housing, (sales of new and existing homes, housing prices and housing starts) has now fi nally entered a bottoming process
   
   
2. Due to the 80% drop in housing starts over the past three years, the inventory of unsold new homes is close to its long term average
   

3. New home prices were down 15% in April 2009 versus April 2008. The market would view any signs that new home prices have bottomed as yet another sign that the overall housing market was in the bottoming process

Q1 Real GDP (Thursday, June 25)

1. This is the fi nal revision to Q1 GDP
   
   
2. It should not be a market mover
   
   
3. The market’s focus now is on the pace of economic activity in Q2 2009 and over the second half of 2009 and beyond

May Consumer Spending and Personal Income (Friday, June 26)

1. Consumer spending accounts for two thirds of GDP
   
   
2. After a solid Q1 led by spending on necessities, consumer spending stalled in April
3. Retail sales were strong in May, as were vehicle sales
   
   
4. The May consumer spending and income data is the most comprehensive look into the health of the consumer
   
   
5. This report also has data on infl ation, and in particular, the core personal consumption defl ator, which is the Fed’s preferred measure of infl ation
   
   
6. The infl ation data in the May report is likely to be tame, and supportive of our thesis that defl ation, not infl ation is the Fed’s biggest worry in 2009

Weekly Data:

ICSC Chain Store Sales (Tuesday, June 23) Weekly Mortgage Apps (Wednesday, June 24) Jobless Claims (Thursday, June 25)

Weekly Retail Sales: for the week ending June 20 (Tuesday, June 23)

1. Any negative impact from higher gasoline prices or higher mortgage rates?
   
   
2. Any positive impact from rising equity prices and rising consumer confi dence?
   
   
3. Any signs that discretionary spending is returning? It was quite weak in May and into early June
   
   
4. Retail sales are still facing tough comps from last year’s stimulus checks
   
   
5. Has the unseasonably cool and rainy weather in June impacted sales?
   
   
6. June and July are typically “throwaway” months in retail. The next “key” month for retail is August, the beginning of back-to-school shopping season

Jobless Claims for the week ending June 20 (Thursday, June 25)

1. What will the impact be from the scheduled GM shutdowns and any lingering impact from the Chrysler bankruptcy?
   
   
2. What impact (if any) will there be from the culling of the nation’s auto dealer network?
   
   
3. Can the U.S. economy build on the improvement in the labor market we have seen over the past few months?
   
   
4. The four-week average on claims stands at 615,750 down about 43,000 from the peak of 658,750 in early April 2009
   
   
5. In the past, a drop of 40,000 from peak in the four week average on claims has signaled the end of recession is near (give or take a month or two)