Key Events This Week:
No significant economic events today but the Treasury will issue debt for the first time since being downgraded to AA+ by Standard & Poor's.
11:30 - 3-Month Bills
11:30 - 6-Month Bills
8:30 - It's well-known the Productivity & Costs report won't be a harbinger of optimism. Second-quarter growth was just 1.3%, slower than anticipated, which means unit labor costs, which are calculated based on output, were on the rise from April to June while productivity was minimal or in decline.
The median estimate is for a 0.8% drop in productivity and a 2.3% rise in labor costs, thanks largely to more hours worked.
Moreover, the report includes three years of revisions to reflect the recent, slower estimates for GDP.
"The release will include revisions showing that productivity growth has been weaker than current estimates indicate, in line with the downward revisions to growth in the GDP accounts," said economists at IHS Global Insight, who predict Q2 productivity to drop at an annualized rate of 0.7%, with labor costs up 2.6%.
"Productivity growth in 2009 should be revised down a full percentage point, and while 2010 productivity growth may be revised up, first quarter 2011 productivity growth, currently estimated at 1.8%, will likely be revised down more than two percentage points," they added. "The near term outlook for productivity is not a happy one. We expect its growth to remain sluggish over the next several quarters."
"Productivity appears to have fallen faster than previously reported during the recession and recovered less quickly following," added economists at Citigroup, who anticipate a worse-than-consensus 1.2% cut in productivity and a 1.7% gain in labor costs. "The lower productivity figures should translate into smaller declines in unit labor costs during the recession and larger increases in recent quarters."
2:15 - A changing economic outlook will be the focus of the FOMC Meeting Announcement. So will be the possibility of more quantitative easing. Safe to say the overnight lending rate isn't changing from the zero to 0.25% range any time soon, but it's difficult to say whether more monetary easing is in the cards. This statement will be scrutinized closely.
"We see little chance of significant interest rate or asset purchase program changes at the Fed's August FOMC meeting, though there's a possibility of tweaks to the Fed's portfolio reinvestment program," said economists at Janney Capital Markets. "With the federal government in full-on cutback mode, the only source of additional policy stimulus falls to the monetary authorities."
"The only problem," Janney continues, is that "additional monetary stimulus has very little chance of actually stimulating anything. Regardless of how it was packaged, QE2 was really a deflation-prevention mechanism more so than a growth aid. By virtue of there being little deflation risk today, there's likewise little use for QE3-style balance sheet expansion at the Fed."
Note that Chairman Ben Bernanke will not hold a press conference afterwards, as he did in the prior two meetings. According to Nomura Global Economics, Bernanke will next speak on August 26 at the Kansas City Fed's annual Jackson Hole conference.
11:30 - 4-Week Bills
1:00 - 3-Year Notes
10:00 - Wholesale Inventories grew 1.8% in May and were up 15.5% over the last 12 months. The June report is expected to see another large increase, at 1%, though there is "notable downside risk to this forecast because of the outsized jump in May of 1.8% and the delayed feed through of lower petroleum prices," according to Nomura Global Economics.
Economists at Janney Capital Markets warn about listening to perpetual optimists who can spin the inventory story both ways.
You'll see them "say that a) inventory builds mean future sales prospects are great or b) inventory liquidations mean that sales are ahead of plan and therefore we'll need more production to keep up," Janney notes. "That double standard is inherently unfair, and those optimists are claiming that inventory builds so far in 2011 imply stronger second half prospects. We disagree, as the builds could just as easily reflect slower-than-anticipated sales."
2:00 - Economic commentary on the Treasury Budget Statement for July is sparse. The median estimate is a deficit of $140 billion; estimates of the gap range from as little as $90 billion to much as $147 billion. These compare with a July 2010 deficit of $165 billion and a July 2009 deficit of $180.1 billion
"The budget deficit in July likely ran narrower compared with -$165 billion in the same month of last year because of strong corporate tax receipts performance during the month," said economists at Nomura Global Economics. "We forecast a July 2011 budget deficit of $147 billion."
1:00 - 10-Year Notes
8:30 - The monthly Trade Balance is anticipated at $48 billion in June, slightly narrower than the $50.2 billion reported for May but still quite a bit larger than the $43.6 billion reported for April. The value of imports is anticipated to slow due to falling prices, while exports should stay roughly stable.
"We expect a reversal of most of the previous month's deterioration in the trade deficit in June," said economists at Citigroup. "Petroleum imports probably fell sharply as both price and volume declined at a time when seasonal factors were looking for an increase. While customs duties indicate a rise away from oil, the net effect on is a decline in imports. Exports probably rebounded modestly, led by aircraft."
A weakened dollar and expanding exports in the service sector should narrow the monthly deficit, according to forecasters at BBVA.
"Import prices were down slightly in June and likely deflated the value of imports, while a slower-than-expected recovery of the U.S. economy may have reduced demand for other imported goods," they said. "Auto imports have been declining as a result of the Japanese earthquake disruptions, however supply chains are expected to recover in the coming months. Thus, we expect only limited improvements in the overall trade balance."
8:30 - With the four-week average at 407,750 - the lowest since the mid-April - the Initial Jobless Claims report has been providing a semblance of hope that the third-quarter growth is better than what other reports are suggesting. The last report, called "clean" by the Dept. of Labor, showed 400k new claims, the lowest figure since early April (the prior week's 398k was revised upward).
How will the first week of August hold up? Views are mixed. The median estimate is 403k, which would mark the fourth week that claims hold near the 400k mark. But predictions range from 390k to 420k.
"There is a risk that claims were substantially higher amid a partial shutdown of the Federal Aviation Administration," said economists at Citigroup, who predict 400k claims. "Roughly 4,000 employees and 70,000 construction workers laboring on assorted FAA projects were sidelined between July 23 and August 5. As the end of the furlough was marked with the passage of a congressional funding bill, affected workers probably filed for unemployment benefits ahead of the deal."
11:30 - 30-Year Bonds
8:30 - The week's biggest report, Retail Sales, should help the market forecast how third-quarter GDP is shaping up. Thankfully, the estimates are actually pretty good. The median forecast expect retail sales to grow 0.5% in July, with estimates ranging from 0.1% to 1.5%. In June the index grew only 0.1%, just enough to erase a 0.1% loss in May.
However, the details are a bit troubling and don't point to sustained growth for the rest of 2011.
One major factor helping the July figure is auto sales, which contributes 0.5 percentage points to the 0.9% forecast from Nomura Global Economics. Otherwise they expect sales to increase 0.4%, with 0.2 percentage points stemming from gasoline stations sales.
"Light vehicle sales improved to 12.2 million units in July as the supply chain disruptions from Japan's earthquake in mid-March started easing and some pent-up demand was released," added economists at IHS Global Insight. "Retail sales excluding autos are expected to rise 0.3% in July, after being flat in June. Gasoline stations' sales should rise, but that's not good news since gasoline prices rose over 10 cents per gallon over the course of the month."
Janney Capital Markets offered some interesting details: "We see higher car sales pulling all-items retail activity higher, even though a substantial portion of the 7% increase in auto sales was fleet-driven. On the core side, clothing sales seem to have had a tough time, evidenced by same store sales declines even at the likes of Walmart. Higher cotton prices, which have finally filtered down through the supply chain, have a significant role to play, and the reduced sales points out what occurs when producers and retailers attempt to raise prices into a stagnant consumer climate."
"On balance," they concluded, "it looks like July's results will be a poor setup for the August - September back to school retail season, the second most important sales period of the year."
9:55 - "Frightened" might be the feeling I have writing about where Consumer Sentiment will be in August. The index dropped to its lowest since March 2009 at 63.7, and that was on July 29 - the following six sessions saw the Dow plummet 796 points. According to The Wall Street Journal, market capitalization in the S&P 500 fell $844 billion in the first week of August. So... how will consumers feel about that?
Economists, I dare say, are out to lunch entirely on this one. The consensus estimate is 63.0, with estimates ranging from 59 to 66. Those expecting an uptick say little more beyond that a "bounce" often occurs after a larger-than-anticipated dip.
Forecasters at IHS Global Insight are more sensible, predicting "another hit in early August" with the index falling to 59.
"Consumers have been pounded with bad news and the negativity from the debt ceiling crisis threw more fuel onto the fire," they wrote. "The housing market is not going anywhere, food prices are still increasing, the stock market is in a tizzy, household net worth is falling, employment growth has slowed, the European debt crisis is back in full swing, and if all this was not enough - gasoline prices increased during the month of July."
More sensible analysis could be found at Citigroup: "Consumer sentiment likely fell again in early August after a dramatic drop in July. Equity market movements have cut into household wealth, and economic pundits have highlighted the risk of recession."
10:00 - After posting a 1% gain in May, Business Inventories are to grow 0.6% in June. This might sound good, but it's arguable these apparently healthy gains won't be matched by sales, and that would leave businesses with stock-filled shelves and little demand later in the year.
According to BBVA, inventories are approaching three-year highs.
"Declining consumer confidence and weak demand has contributed to high inventories for manufacturers, retailers, and merchant wholesalers," they wrote. "Durable goods inventories increased in June, mostly due to transportation equipment, and nondurables are likely to continue the 6-month upward trend. Thus, we expect business inventories to remain high in June."
Citigroup points out that inventories have already been growing the past 17 months, and they are optimistic it could keep going.
"The rapid rise in inventories may have further to run, they added. "Stockpiles have not yet matched the previous cyclical peak."