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Key U.S. Data Releases and Events10 Oct 08Over the weekend, markets will be waiting for news of any initiatives coming from the G-7 finance ministers, central bankers, and the IMF meetings. Economic indicators next week will be positive on the side of inflation, but negative on the side of growth. Last week's severe downward pressure on equity prices is a harsh reminder of how severe the global liquidity and credit squeeze had become by early October. Credit growth in the United States slowed down in the third quarter of 2008 to below the overall nominal growth rate of the economy, indicating that deflationary pressures from the stressed banking system were mounting to critical levels. The belated rate cuts by the FOMC and other central banks, consequently, got a "too little, too late" reaction. Severe problems in the European banking sector led to continued upward pressure on LIBOR rates, with the TED spread moving up to historically high levels. Fortunately, in the U.S. markets, the Federal Reserve was supplying massive increases in TAF liquidity at a cost of only 1.4%, and that will blunt at least some of impact of further sharp rises in LIBOR funding. The Fed recently quadrupled the monthly volume of TAF funds available in October, and will also make forward TAF funds available for November and December. It is also directly intervening to make purchases in the commercial paper market. In order to lift these heavy weights, the Fed's balance sheet is expected to expand by about $600 billion in the next month. Over the weekend, markets will be waiting for news of any initiatives coming from the G-7 finance ministers, central bankers, and the IMF meetings. It is unlikely that these meetings will produce a miracle solution. But what initiatives should they be considering? Given the magnitude of the crisis, a package of measures could include (1) injections of public capital to the banking system; (2) public guarantees of bank deposits and bank lending; (3) fiscal stimulus; and (4) more amplified liquidity programs and interest-rate reductions. Essentially, the public sector must act to backstop credit availability and final demand in the economy. Moral hazard worries must be postponed to another day. Economic indicators next week will be positive on the side of inflation, but negative on the side of growth. Producer prices are expected to decline sharply for the second consecutive month, although consumer prices will see a mild increase as gasoline prices have been stubborn to follow crude oil downwards, partly because of refinery outages due to the hurricanes. Offsetting the positive news on inflation, retail sales are expected to decline in September, and industrial production will be pummeled lower by the hurricanes and the Boeing strike. The third quarter of 2008 is expected to close with a whimper. KEY U.S. DATA RELEASES THIS WEEK Wednesday, October 15 – Producer Price Index (Sep.) Total Core What to Look For
Implications We expect producer prices to decline 0.7%, following August's 0.9% retreat. The weakening economy is dampening demand for all fuels, with the energy index expected to fall 3.5%. This is also helping to relax cost pressures, bringing down food prices roughly 0.3%, for their first decline since February. Excluding food and energy, we expect "core" producer prices to rise 0.3% in September, inching up from the 0.2% pace posted in August. High materials costs in previous months are still working their way through. Now that these pressures are being relieved expect the core rate to fall back over the rest of 2008. Wednesday, October 15 – Retail Sales (Sep.) Total Less Autos What to Look For
Implications Retail sales fell an estimated 1.3% in September, as consumers retrenched in response to tumbling stock prices, declining employment, and tightening credit conditions. Auto dealers were hit especially hard, as unit sales of light vehicles dropped from an annual rate of 13.7-million units in August to 12.5 million in September. Chain-store sales fell 1.4% month-on-month (and were up just 1.0% year-on-year), reflecting widespread weakness in spending on apparel, home furnishings, and other discretionary products. Thursday, October 16 – Consumer Price Index (Sep.) Total Core What to Look For
Implications The decline in energy prices that brought about last month's CPI decline will not repeat itself in September, as gasoline prices remained flat during the month. Although decelerating, the anticipated 0.4% increase in food prices will keep the headline projection positive. Look for core prices to rise 0.2% in September, the same as in August, with the worsening growth outlook holding price increases down. Thursday, October 16–Industrial Production (Sep.) Global Insight: -2.8% What to Look For
Implications Industrial production was hammered by the hurricanes of September and the strike at Boeing, which hit an industrial sector already in cyclical retreat. The storms Gustav and Ike were timed for maximum damage to September monthly numbers, with output still reeling from the first storm when the second hit. Lost oil and gas production will take a full percentage point off output, lost refining trimming another 0.9 point, lost chemical output costing just under half a percentage point, and the Boeing strike another half point. To top things off, September was an all-around bad month, with worker hours off 1%. Electricity output should have rebounded after a mild August, but storm outages from Texas to Ohio trimmed the turnaround, while the automotive rebound from a dismal August was minor. Refining and chemicals will bounce back in October, but the underlying tone keeps deteriorating. Friday, October 17 – Housing Starts and Building Permits (Sep.) Starts Permits What to Look For
Implications Housing starts are down 60% from their peak—single-family starts are down nearly two-thirds. Yet, the outlook is still grim. The number of unsold homes on the market remains near record levels, and may climb because of rising foreclosures. Builders are adjusting quickly to these deteriorating market conditions. Indeed, single-family permits dropped more than 5% in both July and August. For September, we are expecting more grim numbers, with starts falling 6%, to 850,000 (annual rate). Friday, October 17 – Michigan Consumer Sentiment Index (Preliminary Oct.) Global Insight: 60.0 What to Look For
Implications The Reuters/University of Michigan index of consumer sentiment is expected to show about a 10-point drop, from 70.3 in September to 60.0 in early October. This would leave the index only slightly above its recent low of 56.4 in June. The deepening financial crisis, huge losses in stock market and housing values, and mounting job losses are raising anxiety about current and future economic conditions. The last time sentiment fell this sharply in one month was September 2005, around the time of hurricanes Katrina and Rita. There is probably a further decline to come, since the average reading for the first half of the month will not reflect the full impact of the stock market's collapse. by Brian Bethune and Nigel Gault
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