Tuesday, July 10, 2012

Our Thoughts & Estimates Regarding Some Economic Indicators ...

The equity market was a volatile one today with the S&P 500 being up as much as 9 points (or 0.7%) in the morning and down as much as 16 (or -1.2%) in the afternoon.  It closed down 11 points, or -0.8%.  From a technical standpoint, it came very close to ending the day below the 23.6% Fibonacci retracement level, 1340, that we have mentioned before.  If it had closed below that, 1310 would've been on the horizon.  Losses were pared a bit during the last 20 minutes, as some either began bargain hunting or short covering going into tomorrow's release of the June FOMC minutes.  We do not expect to see anything surprising in that release.  While most of the economic data continues to disappoint, somewhat supported by AA's performance (closed down 4.1%), we believe hope for a QE3 has kept the equity market above its support levels.

Regarding this week's economic indicators, consumer credit (released this morning) was once again significantly above expectations.  We were not very surprised nor delighted as we understand that in order for the US to maintain or even increase its consumption habit, consumer credit has to grow, given lack of much growth in wages.

NFIB's (National Federation of Independent Business) small business optimism index came in below expectations.  There were signs of weaknesses across the board in this report, from jobs, investment plans and earnings, to consumer spending.

We think initial jobless claims will come in below the 375K consensus on Thursday, which would be positive for the market.  However, we might not see much of a reaction as it won't take long for the market to digest the fact that the decline was due to a holiday (4th of July) shortened week.  We believe there is a chance that some may not have submitted their claims forms due to the short week.

The producer price index (PPI) will be released on Friday.  We estimate Y/Y and m/m declines of 0.4% and 1.1%, respectively.  This is mainly driven by decline in oil prices along with not much growth in wages or the economy as a whole.  Although we have not estimated core PPI, we do expect that figure to increase, unlike the headline PPI figure.  We do not expect the economy to pick up, however we will see higher headline PPI during the next few months as chances of a military conflict with Iran and/or instability within the Strait of Hormuz may increase.  In addition, if the recent heat wave continues, farmers will be facing additional costs which may show up in the PPI.

University of Michigan's first round of July consumer confidence study also will be released this Friday.  We do not have an estimate for it, but think it will come in below the 73.5 consensus.  Positive impact of lower gasoline prices will be offset by lack of enough job and wage growth.

Our estimate for next week's consumer price index (CPI) is a 12-month increase of 0.8% and a m/m decline of 0.8%.  This is driven by the decline we have seen in gasoline prices, along with not much improvement in unemployment and wages.  Unfortunately, it appears that the last two have more of a negative impact on consumer demand, and offset the positive impact that the first one has on disposable income.  We note that we are not yet aware of what the June CPI consensus is.  We may provide estimates for next week's release of June industrial production and capacity utilization, either at the end of this week or early next week.


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