Fed "slow walking" QEIII to market´s chagrin. Equity indices nose-dived following the release of the minutes from the Fed´s June 20 meeting. Investors were disappointed that only two members (neither of whom is likely voting this year) are ready to pull the trigger on further easing. Our assessment of the minutes, however, is that support for QEIII is growing among the members, but the committee will take its time in making a decision. The next step will be another downgrade to the Fed?s outlook. At that point, the Fed will strike again.
Latest data suggest slightly weaker GDP growth in Q2. Trade data for June showed a narrower deficit thanks to steady exports and a drop in the oil import bill. The federal deficit came in just shy of $60 billion in June, up nearly $17 billion from a year ago, thanks to higher outlays. Defense spending was weaker than expected. The wholesale trade report for May showed a bit more inventory accumulation in April than initially thought. Taken together, these data indicate a slightly weaker GDP growth profile for the second quarter. We have revised our estimate down from 1.5% to 1.4%. But the slowdown in growth from the first quarter is still largely the result of softer consumer spending.
Housing data to show some steady improvement. In an unexpected twist, the housing market is starting to look like one of the bright spots in the US economy, particularly with manufacturing on the ropes due to the global demand slowdown. Housing starts are expected to have advanced in June after a decline in May, while positive signs from mortgage application data and a boost in initial contract signings point to stronger home re-sales last month. Meanwhile, retail sales were probably lackluster in June outside of autos. Recent evidence on consumer credit leaves us wondering whether households are turning to credit cards to meet necessary expenses. Manufacturing production likely turned higher in June, but as with retail sales, strength was probably concentrated within autos.
Fed Chairman Bernanke delivers his semi-annual Monetary Policy Report to Congress this week. As always, markets will sift his words for clues about QEIII. At the June 20 meeting, Bernanke didn´t support the move. Only two committee members? presumably Evans and Rosengren based on their recent speeches - did. But since then, we?ve had another weak jobs report and a drop in the ISM Manufacturing Index to below the 50-mark. We think that the Fed will announce QEIII at the December meeting. So, next week´s testimony could be too soon for Bernanke to start sending signals. Instead, he will likely say that further easing is possible if conditions deteriorate, keeping the possibility of QEIII alive without offering commitments. However, there is a chance that the Fed will move sooner given the recent evidence on the economy, perhaps at the September meeting when they will next have a chance to downgrade the outlook. If so, the testimony could include some stronger language. One possibility is that Bernanke lays out policy options the Fed could take, similar to his address at the Fed´s 2010 Jackson Hole conference prior to the announcement of QEII.
Tuesday, July 17 ? Industrial Production (Jun.)
Industrial production should firm 0.3% as a modest increase in core manufacturing combines with a solid 1% gain in motor vehicle production. Most of the manufacturing gain will be on the durable goods side, but a late rise in refinery operations could boost petroleum output. Outside of manufacturing, electricity production was likely down, despite the late-June heat wave, as the earlier part of the month was relatively mild.
Wednesday, July 18 ? Housing Starts (Jun.)
June housing starts are projected to rebound, following a small decline in May. Permits will decline slightly on a drop in multifamily units in the South. Trends in the housing permits numbers imply that we should continue to see improvement in both single-family and multifamily starts over the next few months.
Thursday, July 19 Existing Home Sales (Jun.)
Pending home sales jumped 6% in May, but mortgage applications to purchase increased by less than 1% in both April and May. Based on these readings, we expect that final sales of existing home increased by 1.5% in June.
