The minutes of the FOMC meeting held at the Fed on 5 August will be released. The press release after the meeting showed the committee members to be less anxious than earlier about economic growth and inflation, which is chiefly due to the fall in energy and food prices. The interesting point of the minutes is again the difference of opinion among the committee members. Some of the presidents of the Federal Reserve Banks want to raise interest rates because they worry that the sharp rise in energy and food prices will result in higher wage rises and sharper price rises of other goods. The Board members including Mr Bernanke want to leave interest rates unchanged because the price rise have had little effect so far on other goods.
In that connection it will be interesting to see to what extent the members have been calmed by the fall in commodity prices of energy and food. On 5 August, the oil price had fallen to USD 118.7, i.e., it was 20% lower than at its peak. Moreover, the commodity prices of food have fallen again, which means that the two factors that pulled up the commodity prices the most have fallen back.
However, there are no decisive signs that the fronts have softened. The latest announcements by Lacker and Fisher indicate that they are still hawkish. But it is clear that the fall in energy and food prices must have strengthened the arguments against a hike.
As mentioned earlier, we expect the Fed to lower interest rates twice. This is because unemployment looks set to increase, and unemployment is, after all, one of the most important parameters of the Fed. Naturally, we also expect the inflation rate to decline in the course of the next six months.
This week's other highlights
- The US: home sales, home prices, consumer confidence, personal income and consumption
- The euro zone: Consumer prices and unemployment
- Germany: consumer prices and IFO
- The UK: House prices
- Japan: Consumer prices
In the course of the week
Germany: consumer prices for the German states
At 3.3%, the German consumer prices were unchanged in July. The German consumer prices are the first indication of the flash estimate of inflation in the euro zone which will be announced on 29 August. Therefore the indicator will attract much attention.
The UK: house prices from Nationwide - August
UK house prices have been falling for nine consecutive months. In July, the fall was 1.7% m-om and 8.1% y-o-y.. This is the lowest it has been since the series began in 1991.
We expect the housing market to remain soft for some months yet, with home prices falling further. The ratio between housing sales and the stock of unsold houses in the RICS survey - which is a good indicator of future house prices - is still falling, and the number of mortgage loans used for buying a home has fallen to an all-time low since the start of the series in 1993. Home sales are hampered by tighter credit conditions and expectations of further price falls.
Monday
The US: home sales - July
Existing home sales have fallen by 33% since the autumn of 2005, but over the past 7-8 months there has been some stabilisation in home sales, and it is, of course, doubtful if the trend continues. The development will also be of relevance to house prices in future.
The stabilisation of home sales comes after an improvement of the fundamental factors for home purchases. This is due to a combination of falling interest rates, lower home prices and rising household income. The problem is just that the real rate of interest has risen sharply since the beginning of the year. The yield on 30- year mortgage bonds with which US homeowners prefer to fund their homes is now at the upper end of the range we have seen for the past few years.
The latest signals for home sales in July indicate a fall. True, the number of pending home sales has been stable, which indicates stable home sales. On the other hand, applications for mortgage loans have fallen further, and banks are announcing new tightenings of credit conditions, particularly for mortgage borrowers. There is thus a risk that home sales will weaken again.
Also, there is focus on the number of homes for sale. The stock of homes for sale is on the rise again after falling in late 2007. The time it takes to sell a house has risen to 11 months which is the second highest since the mid- 1980s.
Tuesday
The US: house prices, Case-Shiller og Ofheo - June
There are various measurements of house prices in the US. This week data from Case- Shiller and Ofheo will be announced. Case-Shiller measures the price development of homes in the large cities. That is why Case- Schiller often rises/falls more than the entire housing market. In April house prices had fallen by 16.9% over the past twelve months, which is the sharpest fall since the start of the data collection (1988). However, we have seen the fall in house prices slow down lately, which may reflect a stabilisation in home sales.
This week will also see the release of Ofheo prices, which are particularly interesting in the light of recent weeks' crisis at Fannie Mae and Freddie Mac. Ofheo only measures the price development of houses financed through the two mortgage credit institutions Fannie Mae and Freddie Mac. Unlike Case-Shiller, Ofheo disregards the most expensive houses (so far those worth more than USD 417,000) and houses financed by means of sub-prime loans. This means that Ofheo takes into account those houses whose prices are obviously the most stable ones. This is evident from the fact that house prices measured by Ofheo fell by 'only' 4.8% to May y-o-y.
As mentioned above, home sales have tended to stabilise, but there are still a lot of homes for sale, and that will increase the downward pressure on house prices. Prospects are, therefore, that house prices have further to fall. Contrary to the findings of Case-Shiller, we have seen home prices fall faster recently.
We expect a further fall in both house indices in June.
The US: consumer confidence - August
Consumer confidence as reported by the Conference Board is usually the most important consumer confidence indicator. Consumer confidence has declined by almost 55 points over the past 12 months, which is the largest fall ever (since the series started in 1968). It shows that the consumers have been subjected to what has been dubbed the perfect storm, i.e. falling employment, rising unemployment, high energy and food prices, falling house prices, lower rates of wage increases and more reserved banks. The only encouraging element is the tax cuts, and they ceased to have effect at mid-July.
In July we saw a certain stabilisation of consumer confidence which may be due to a combination of the effect of the tax cuts and falling energy and food prices.
Consumer confidence is expected to be affected by the following factors:
- the flare-up of the financial crisis has obviously not induced optimism, yet equity prices have been edging up since mid-July;
- interest rates on mortgage loans, on the other hand, have risen further;
- employment fell again in July, and unemployment shot up again;
- petrol prices fell to well below USD 4;
- The other consumer confidence indicators, ABC and the University of Michigan, have actually risen slightly.
We expect a small rise in consumer confidence in August because energy prices have fallen back and consumer confidence has already fallen substantially, i.e. most of the bad news has already been discounted.
The financial markets will also focus on consumers' assessment of the labour-market situation through their assessment of 'how difficult it is to get a new job' and 'plenty of new jobs'. The rise in unemployment in recent months is expected to make consumers more pessimistic still.
The US: new home sales - July
New home sales is an important indicator, since it traditionally bottoms out 2-4 months before the end of a recession. The sales are also important because construction firms have a large stock of newly-constructed houses for sale, and there is little prospect of a rise in house construction before those stocks have been reduced. Moreover, new home sales have already fallen by 62% since the index topped in the autumn of 2005, and it is anybody's guess whether the fall will continue. Over the past four months, new home sales have stabilised, while existing home sales have been more or less stable for the past 7-8 months. The question is whether this latest development will continue. We doubt it for the following reasons:
- Home buyers may be discouraged by rising mortgage yields, and banks are very reluctant to grant loans for home purchases
- The number of applications for mortgage loans is falling sharply.
- Builders are still highly pessimistic about sales
- The disposable income index has fallen after a period of rises
There is good news:
- Pending home sales have shown some stabilisation over the past six months
On the whole, we expect a minor fall in new home sales in July.
The US: minutes of the FOMC meeting on 5 August
See 'This week's highlight'.
The euro zone: M3
M3 is still extraordinarily affected by the turbulence in the financial markets, portfolio switches, etc., and is therefore to a less extent in focus as an inflation indicator. The oil price, inflation expectations and the risk of secondround effects, on the other hand, are in focus. Continued strong growth in lending, which will be announced at the same time as M3, attracts more attention, and these data are always noticed by the ECB and commented on at its monthly press conferences together with M3. For some time, growth in household lending has been in a falling trend while corporate lending has not turned until lately. It is quite important to note whether this is a new trend and naturally the development in household lending should also be noted.
Germany: IFO
IFO has been very strong for a long period of time, but it has come back to earth again. IFO has fallen quite sharply in the past two months - and is about to reach the same level as the development in the PMIs. The current level signals that growth will slow down somewhat in coming quarters. In the latest PMIs for August, there was a major fall in Germany, indicating that IFO falls again, although falling commodity prices of food and oil prices in particular have the opposite effect.
Wednesday
The US: Durable goods orders - July
Durable goods orders are an indicator of the demand for industrial products, and the indicator is thus important as to the assessment of the future industrial production. However, new orders fluctuate heavily thanks to orders for transportation equipment, including private aircraft (from Boeing).
Generally we have seen a very moderate fall in durable goods orders and thus they have done much better than they did during the recession in 2001. Some of the improved development can, however, be attributed to higher price increases in 2008 than in 2001, since new orders are measured as sales and not only as the number of orders. Another reason may be that consumers have financial problems this time, while the corporate sector is still in good shape. In 2001 it was the other way round, thus affecting durable goods orders, since the larger part of the buyers is companies.
We assess, however, that the slowdown in the economy will also affect new orders, which is due to the following:
The ISM order index has fallen to 45, which is the lowest level since the recession in 2001. Boeing reports a small rise in new orders from June to July. Car sales, on the other hand, have fallen sharply, and this will dampen orders from this sector.
One of the sub-components is investment orders exclusive of defence and aircraft, and thus an indicator of corporate investment. These investments are interesting because they almost always fall during a recession. The surprising thing is that new orders for investment goods have increased since the beginning of 2007. We expect that new orders for investment goods will start to fall in coming months, which can be attributed to the slowdown in the economy (capacity utilisation in the manufacturing industry has declined) and also, companies' financing costs have increased in line with the banks' tightening of credit conditions and higher yields on corporate bonds.
Japan: consumer prices - July
Rising global food and energy prices have pushed Japanese consumer prices to the highest level since 1998. We expect that inflation remains high at about 2% y/y in July, since the effect of the significant fall in the oil price as from the end of July will probably not be reflected in the inflation data for this month.
In spite of the significant increase in consumer prices, by Japanese standards, there are no any indications that inflation is generally on the increase. Core inflation (exclusive of food and energy) increases by only 0.1% y/y, wage growth is again close to zero after being positive for a little while and economic growth is in the doldrums.
Japan: unemployment - July
The slowdown in economic growth has started to affect the labour market, and companies are under pressure from several fronts, including high commodity prices and lower domestic and global demand. This has caused a rise in the unemployment rate from 3.6% in mid-2007 to currently 4.1%, and the number of new jobs and the number of vacant jobs per applicant are on the decline. We expect this trend to continue.
Japan: industrial production - July
After a long period of fair increases, the industrial production weakened in the past months, and in y/y terms it is flat. This reflects that the slowdown in growth in Japan and in the global markets is becoming increasingly pronounced and coincides with a slowdown in exports. We expect that the weak development continues, which is also reflected in the forward-looking indicators such as the PMI.
Thursday
The US: GDP, Q2
GDP rose a bit less than expected in Q2, but there are indications that growth will be revised up. At first a rate of 1.9% was recorded. This is due to the fact that the deficit on the balance on goods and services has been lowered. Thus we expect growth to land above 2% in Q2. But this is the second time that these data are announced, and since we are already well into Q3, it is relatively historical data.
Norway: wage growth in the manufacturing industry - Q2
Strong growth over a long period of time and a tight labour market have resulted in significant wage increases, and with a wage growth rate of approx. 5-6%, Norway stands out compared with other countries. Wage growth is strongest in the manufacturing industry (6.5% y/y) while wages in the construction and retail sectors increased by approx. 5% y/y.
We expect that wage growth in Q2 will be high since the labour market normally turns at a later point than the rest of the economy. In spite of high inflation, growth in real wages is still significant, which has a supportive impact on consumer spending which is, however, squeezed from other fronts, e.g. high interest rates and falling house prices. Norges Bank is concerned about the strong rate of growth in wages, and it is one of the reasons why recently, interest rates have been raised repeatedly.
Friday
The US: personal income and consumption - July
These economic indicators include personal income, consumption (personal) and the personal consumption expenditure deflator exclusive of food and energy (the Fed's preferred inflation indicator). The interest in the latter has fallen in the wake of the fall in energy and food prices. On the other hand, personal consumption will attract some attention since most market participants expect that it will be personal consumption that will send the economy into recession.
Personal consumption adjusted for price increases declined in June and has generally showed falling growth lately. This is due to the adverse effects from which the consumers are hit in the form of falling employment, rising unemployment, rising prices for food and energy, falling house prices and banks which are less willing to grant loans. Although commodity prices of energy and food have fallen, it has not been passed on to the been passed on to the consumers (if petrol prices are disregarded). Thus there are still indications that the consumers will be under pressure.
The fall in retail sales of 0.1% combined with significant price increases in July indicates a new fall in personal consumption in July.
The US: Chicago PMI - August
The Chicago PMI is one of the regional sentiment indicators used to gauge sentiment in the business sector; it gives an indication of the development in ISM. But Chicago PMI shows wider fluctuations than ISM, and during some periods the fluctuations of Chicago PMI are almost unrealistic so Chicago PMI should be interpreted with care.
In July it was 50.8, which is largely on level with ISM. In addition to the total index, attention should be paid to new orders, employment and the price index.
The euro zone: consumer prices - July
Consumer prices are high and much too high for the liking of the ECB. Moreover, the high rate of inflation is deadly to growth in consumer spending since it erodes households' purchasing power. In July the annual rate of increase was unchanged compared with June at 4.0%, but in real terms it rose by almost 0.1 percentage point (0.086 percentage point to be exact). We do not expect that inflation will increase further from the current level, since commodity prices of oil and food have fallen somewhat from the very high levels.
The euro zone: unemployment - July
Unemployment seems to have bottomed out for now. However, it is still low and is assessed to be lower than the structural unemployment rate - as stated by the OECD. But the cold winters which have started to blow over Europe have started to affect the labour market. The number of unemployed has increased in the past four months and if it continues to increase it will be noticed by the ECB. For the period ahead, a weaker labour market will reduce the risk of core inflation which will fall due to rising unemployment, which will reduce the wage requirements.
Jyske Markets - FX Research http://www.jyskebank.dk/finansnyt
The analysis is based on information which Jyske Bank finds reliable, but Jyske Bank does not assume any responsibility for the correctness of the material nor for transactions made on the basis of the information or the estimates of the analysis. The estimates and recommendation of the analysis may be changed without notice.