Asian stock markets closed higher today with the Nikkei up by +0.32%, Hong Kong up +2.86%, China closing +0.49% and Australia closing +1.59%. The European stock markets are higher this morning with the European DJ Stoxx 50 up +0.15%.
This week’s US economic schedule is fairly busy and caps off with Fed Chairman Bernanke’s speech on Friday at the annual Fed symposium in Jackson Hole, Wyoming. The markets will be hoping for some further analysis from Mr. Bernanke of the recent banking crisis and further hints on the Fed’s current policy stance. The Fed has so far indicated that it plans to continue to focus on the real economy and take care of the current banking system crisis with temporary reserve injections. The marketplace has so far accepted that policy. However, there is likely to be a steady drip of bad news over the next several months tied to losses by financial institutions and problems in the housing/mortgage market, thus keeping the market on edge and providing underlying support for the US credit market.
Today brings the July existing home sales report (expected -0.9%). Tomorrow brings Aug US consumer confidence (expected -8.1 to 104.5), the Aug Richmond Fed report (expected -3.0 to 1.0), and the minutes of the Aug 7 FOMC meeting. Wednesday brings the 2-year T-note auction. Thursday brings Q1 GDP revision (expected +4.1% vs. +3.4%) and the 5-year T-note auction. Friday brings July personal income/consumption and the core PCE deflator (expected +2.0% vs. +1.9% in June), Aug Chicago Purchasing Managers index (expected -0.7 to 52.7), July factory orders (expected +0.8%), and the final-Aug US consumer confidence index from the University of Michigan (expected -0.5 to 82.8).
Fed policy – The financial markets last week scaled back expectations for Fed easing after the Fed’s 50 bp discount rate cut on Aug 17 succeeded in calming the risk waters and allowed global stock markets to recover. The S&P 500 index in the past 1-1/2 weeks has rallied by a total of 7.9% from the 5-month low posted on Aug 16, the day before the Fed’s discount rate cut. The S&P 500 has retraced 59% (in price terms) of the 11.9% plunge seen from mid-July through mid-August.
The marketplace has given up on a near-term emergency Fed rate cut, but the market is still fully discounting a 25 bp rate cut at the next FOMC meeting on Sep 18. However, the market is expecting only an 88% chance of a second 25 bp cut at the following meeting on Oct 30-31 versus full expectations earlier last week for that cut. Over the next year through Aug 2008, the market is expecting an overall 50 bp easing and a 56% chance of a further 25 bp easing. That is substantially less than expectations at the peak of the crisis for an overall 100 bp rate cut in the next year. The Dec federal funds rate contract bottomed out at 4.495% last Tuesday (discounting a 75 bp easing by year-end), but then moved sharply higher by 21.5 bp to 4.71% by Friday, taking away expectations for nearly one full 25 bp easing by year-end.
Existing Home Sales – Today’s July existing home sales report is expected to show a -0.9% decline to 5.70 mln units, adding to the -3.8% decline to 5.75 mln units seen in June. The June level of 5.75 mln units was a 5-year low and any decline in today’s report would represent a new 5-year low. Existing home sales have fallen to where they were in 2002 before the housing boom, and are now down by a total of 20% from the record high of 7.21 mln units posed in Sep 2005. Home sales are likely to continue to trail off in coming months due to much-tighter mortgage underwriting criteria since fewer people can qualify for a mortgage. The housing market is in dire need of some new home buying to help reduce the supply of existing homes on the market, which was at a 15-year high of 8.7 months in June. Today’s existing home sales data is for July, before the mortgage crisis started in early-August and really roiled the mortgage markets. Today’s data is therefore old and will not indicate how potential homebuyers reacted in August. Nevertheless, the market last Friday received a little positive news when July new homes sales were reported at +2.8% to 870,000 units, which was stronger than market expectations for a decline to 820,000 units. That meant that new home sales at least had a little momentum going into August.
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