By Theresa Sheehan
PRINCETON (MNI) – The third week of August is typically a sleepy
one but as this August has shown repeatedly, nothing can be taken for
granted. Yet, it will take a lot to distract attention from
Friday’s speech by Federal Reserve Chairman Ben Bernanke at the
annual Jackson Hole symposiuim sponsored by the Kansas City Fed.
Bernanke’s scheduled remarks at 10:00 ET on Friday are highly
anticipated by markets. Last year’s speech signaled the Fed’s intention
to respond to the economic slowdown with further large-scale asset
purchases, which the FOMC subsequently announced in early November 2010.
Last year it was a slowing in growth plus the risk of deflation
that prompted the Fed to act. This year, the FOMC has already responded
to a persistent slowing in growth and provided guidance on the fed funds
rate target to markets. However, inflation risks are more toward the
upside, and the Fed will be cautious about providing more stimulus.
The statement released after the August 9 meeting explicitly said
the fed funds rate target range of 0%-0.25% would remain in place until
mid-2013, depending on developments. Issuing such guidance was one of
the tools for providing additional accommodation that Bernanke outlined
in his semiannual monetary policy testimony on July 13. The Fed’s next
best option was making further asset purchases or increasing the average
maturity of the existing portfolio. If Bernanke does signal further
accommodation, we think it will be in the form of increasing the average
maturity of its portfolio. We believe that a third round of asset
purchases would be a hard sell both to hawks and doves, but maintaining
the size of the portfolio while extending its duration could be an
acceptable alternative.
We will also note that Kansas City Fed President Thomas Hoenig is
nearing the end of his term. He has previously announced that he will
retire in early October near the anniversary of his taking office on
October 1, 1991. He is by far the longest serving of the District Bank
presidents. His successor has not be been named.
Hoenig is not a voter on the FOMC this year. Back in 2010 he set a
record by dissenting at every meeting, citing the risks of creating
“future economic and financial imbalances” that could increase inflation
and unsettle inflation expectations. However, there are plenty of hawks
on the Committee, and the most recent vote of 7-3 suggests that concerns
about policy being too accommodative for too long will not go unvoiced.
Economic Reports
A light data calendar is spread out of the week, with a few
highlights.
The second estimate of second quarter GDP will be released at 8:30
ET on Friday. It could be revised a bit higher, and that would certainly
help lighten some of the gloom about economic conditions. However, the
third quarter in nearly 2/3 gone, and attention will be focused on
fresher data.
The advance report on durable goods orders for July at 8:30 ET on
Wednesday should seesaw back to an increase. The 1.9% decline in June
was attributable to some softness in civilian aircraft. Boeing has
reported a rise in new orders for July, so an increase is probable.
Also, there may be some upward revision to the June data as a few orders
from late in the month make it on to the books.
The Richmond Fed’s Manufacturing Survey for August at 10:00 ET
joins the reports from the New York and Philadelphia Feds. Conditions in
the manufacturing sector are feeling the pinch of heightened uncertainty
about the outlook. The Kansas City Fed’s survey of manufacturing will
be released on Thursday at 11:00 ET.
Consumer confidence was battered in late July/early August by a
series of discouraging reports about economic conditions, and by the
contentious negotiations over increasing the statutory debt limit and
cutting the government budget. The preliminary Reuters/University of
Michigan Consumer Sentiment Index fell to 54.9, near the readings seen
during the last recession. This number is likely to be revised up, but
it will still be consistent with signs that consumer continue to be
worried about another recession. The final index will be released at
9:55 ET on Friday.
The report on sales of new single-family homes in July at 10:00 ET
Tuesday should reflect some of the same struggles the existing home
market is facing. Although mortgage rates are at historic lows, getting
approved for a mortgage is more difficult, and getting the bank to agree
on the home value is even more so. Potential homebuyers are also
reluctant to commit to a purchase when prospects in the labor market are
looking worse. Good affordability is not proving to be much of an
incentive as it has in the past.
The FHFA House Price Index for June at 10:00 ET on Wednesday should
show further easing in the declining trend for home prices, but will
still be consistent with softness which is in part related to the large
number of foreclosed and distressed properties on the market.
Initial jobless claims for the week ended August 20 at 8:30 ET on
Thursday could offer a little more assurance that the labor market is
in better shape than it was earlier in the summer, although levels
remain elevated. At the moment, the 19-week trend appears to be stuck
near the 400,000 mark.
Data on mass layoff activity for July at 10:00 ET on Tuesday should
reflect some large-scale job cuts in a few industries, notably the
closing of the Borders retail chain and a couple of financial
institutions. Government layoff activity will continue, although most of
that associated with the end of the school year will have taken place in
the prior month.
Treasury Auctions
Treasury will auction new 2-, 5-, and 7-year notes on Tuesday,
Wednesday, and Thursday. All of these issues will settle on Wednesday,
August 31. There will be no more new auctions announced until the next
leg of the quarterly refunding on Thursday, September 8.
** Stone & McCarthy Research Associates **
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