Financial Markets Summary For The Week of September 8-12

The week of September 8-12 will see a heavy week of US macro data. Inflation will be at the forefront with import prices and producer prices released on Thursday and Friday, while the advance retail sales estimate for August to close out the week figures to be the primary market moving release of the week. The week will kick off with the Tuesday publication of the July pending home sales release. The majority of the data for the week will be published on Thursday, which will also see the release of the July trade balance, weekly jobless claims and US monthly budget statement. Friday will also see the publication of the University of Michigan's preliminary estimate of consumer sentiment for September.

Fed Talk
The only Fed speaker scheduled for the week is FRB Dallas President Fisher, who will speak in Austin, Texas, topic and time TBA on Monday, September 8. The remainder of the week falls under the traditional blackout period on Fed talk ahead of the September 16 FOMC meeting.

Pending Home Sales (July) Tuesday 10:00 AM
Pending home sales for July should fall -1.3% after a strong 5.3% uptick in June. The modest increase in sales activity during the summer months of 2008 has been fueled by purchases of foreclosed homes in the existing stock of houses. According to the National Realtors Association, up to 40% of all homes purchased in the existing home sales report fall under that category. This number will probably have to increase given the quantity of Alt-A and prime borrowers that are expected to see their homes enter into foreclosure over the coming months. Some cash buyers and other well positioned consumers may find good opportunities to re-enter the housing sector over the next several months, but we do not think in the short-term that this will be sufficient to clear the outsized level of inventories currently on the market.

Trade Balance (July) Thursday 08:30 AM
The price of West Texas intermediate crude oil hit its recent peak on July 14 at $146.13 per barrel. This should provide a bit of a drag on the recent improvement in the trade deficit. We expect that deficit should increase modestly to -$58.5bln for the month. However, the real dollar goods balance should continue to see modest declines and the external sector should continue to provide support for overall economic activity during the third quarter of 2008.

Import Prices (August) Thursday 08:30 AM
US inflation indicators should see their first sign of relief reflecting the decline in headline costs. We expect that import prices will fall -0.7% the month vs. the previous 1.7% increase in July. On an annual basis, import prices should show a 19.8% increase. The primary catalyst behind the August headline decline should be the fall in petroleum costs.

Initial Jobless Claims (Week ending Sep 7) Thursday 08:30 AM
Initial claims should fall back slightly to 440K during the upcoming week. Over the next several weeks look for the weekly claims series to be quite volatile on the back of dislocation in the labor sector due to the series of hurricanes that look to hit the Southeast portion of the United States.

US Budget Statement (August) Thursday 2:00 PM
The US budget statement should continue to spill red ink again in August, when our forecast suggests that the deficit should grow to -$107.1bln for the month. The combination of increased outlays, falling tax revenues that final rebate checks being cashed should push the deficit higher for the second straight month.

Producer Price Index (August) Friday 08:30 AM
The market will focus on what we expect to be a decline of -0.4% m/m in headline costs for producers. This improvement, which should be driven by the fall in oil costs, has been widely priced in to expectations. However, we note that core prices can be expected to rise 0.3% m/m and 3.8% y/y in additional the 10.2% annual increase in headline prices. For the past several months we have pointed out the risk due to rising total intermediate costs, which are up 16.6% annually on a headline basis and 10.2% in the core. Fueling this rise has been the 23.9% increase in the cost of material for non-durable manufacturing, 36.4% cost of processed fuels and lubricants and 12.5% advance in the cost of materials for durable manufacturing. We do not think that these costs will be receding anytime soon and the risk of inflation into the core will continue for some time even as headline costs continue to abate. Most importantly, this is what led the Kansas City, Chicago and Dallas Fed regional banks to ask for a 25 basis point hike in the discount rate to 2.5%. According to the three Fed regional banks "higher input costs were being passed through to product prices and that inflation expectations had risen and judged that the upside risks to inflation were of greater concern than the downside risks to growth."

Advance Retail Sales (August) Friday 08:30 AM
The retail sales environment during the month of August should reflect the increasing strains that have become quite visible on the consumer. With the impact of the stimulus fading and a lackluster late summer sales season in the auto and back to school sales, we think that overall sales should see a tepid increase of 0.1% in the headline and a -0.2% in the core, with risk to the downside in both. Anecdotal reports from retailers do not bode well for the series and the typical later summer surge associated with the fall school season looks to have failed to materialize. Should the Redbook and retail chain reports come in below our modest expectations, we will revise down our forecast accordingly.

University of Michigan Consumer Confidence (September) Friday 08:30 AM
The recent decline in the price of gasoline should continue to provide support to consumer confidence, which seems to have reached cyclical lows during June. The preliminary September estimate of consumer sentiment should rise to 63.9 as the recent fall in headline prices is passed through to consumers in the guise of cheaper prices for energy. We think that the modest outbreak in optimism is likely to be transitory once consumers, especially those in the Northeast and upper Midwest, turn their attention to the cost of heating oil and electricity costs during the upcoming winter months ahead.