Financial Markets Summary For The Week of September 29-October 3

The week of September 29-October 3 will see very important data that will provide information on the condition of the consumer and the labor sector. The major data risk for the week will occur with the Monday release of the August personal and income statement and the Friday publication of the September estimate of non-farm payrolls. We look for modest declines in real spending and a loss of -105K payrolls with the unemployment rate increasing to 6.2%. Tuesday will see the release of the September Chicago PMI, estimate of consumer confidence by the Conference Board and total vehicle sales. The Institute for Supply Management estimate of activity in the manufacturing sector will be published on Wednesday and their read of service sector activity will be released on Friday. Thursday will see the release of weekly claims and factory orders.

Fed Talk

After a very eventful few weeks, the market will have an eye on Fed talk during the upcoming week. On Monday Kansas City Fed President Thomas Hoenig will speak on the economy and monetary policy. St. Louis Fed President Bullard will speak on Friday, time and topic TBA.

Personal Income/Spending (August) Monday 08:30 AM

Our forecast implies that on a nominal basis income and spending should see a modest 0.1 increase and no change respectively. However, on an inflation adjusted basis, we anticipate that spending should see the third straight negative posting and arrive down at -0.3% for the month. With personal disposable income looking to see a third straight month of contraction the condition of the consumer is looking more precarious. While consumer have observed some relief due to falling gasoline prices, it has not been sufficient to stimulate an increase in retail sales. Our forecast of personal consumption for Q3'08 stands at -1.0%.

PCE Deflator (August) Monday 08:30 AM

The Fed's preferred measure of inflation should see a modest increase in the core rate. Our forecast implies a month over month increase of 0.2% and the annualized rate should advance 2.5% for the month. With the near catastrophe in the financial system, the Fed will not be focused on price stability for the foreseeable future. Price stability in the near term is still a function of past monetary policy and the run up in headline costs. We expect to see core rates continue to build over the next few months. However, should aggregate demand contract or demand for commodities resume their recent downward trend, we could see headline and core inflation peak sometime later this year. Nevertheless, due to the increase in Federal spending on the back of the bailout of the U.S. financial system, we do believe that conditions are being put in place that will stimulate a long term move in inflation well above the current implied target range of the Fed.

Chicago PMI (September) Tuesday 09:45 AM

The estimate of manufacturing activity in the upper Midwest should see a second consecutive month of solid gains. Our forecast implies a reading of 54.0 on the back of another month of strong new orders and production to meet foreign demand. Yet, the 54.0 forecast does suggest slower growth than was seen in August and it is an open question whether purchasing managers sentiment can remain elevated under conditions of weakening consumption and the ongoing problems in the auto sector. Even amidst of falling input prices, we think that the severe disturbance in the domestic system of credit should weigh heavily on the minds of purchasing managers concerned over access to capital. Thus, the risk for the month is to the downside.

Consumer Confidence (September) Tuesday 10:00 AM

An interesting confluence of events should provide a test of the durable psyche of the consumer. Although, the cost of gasoline provided a brief source of support to consumer confidence, the recent near shutdown of the domestic system of credit and the proposed $700bln bailout by the U.S. Treasury should offset whatever positive change in consumer sentiment that had been building. We expect a modest decrease in sentiment to 55.0 for the month and major downside risk throughout the remainder of the year.

Domestic Vehicle Sales (September) Tuesday-Throughout The Day

The condition of the consumer and uncertainty over the economic outlook should continue to dampen enthusiasm for purchases of vehicles, whatever their national origin in September. The double barrel blast of a weakening labor sector and disturbance in the system of credit should again offset the aggressive discounting to clear inventories on the part of automakers. We expect the sale of domestic vehicles to fall to 10.1mln and total vehicle sales to decline to 13.3mln.

ISM National Manufacturing (September) Wednesday 10:00 AM

The ISM's estimate of national manufacturing conditions should see a sideways move in September with firms seeing a positive turn in the cost of commodities, but a modest decline in export orders and a very soft environment in domestic demand. Our forecast implies that both new orders and production activity should see downward movement and suggests that risk for the month is to the downside

Initial Jobless Claims (Week ending Sep 27) Thursday 08:30 AM

Jobless claims should see a slight moderation to 470K for the week ending September 27. The four-week moving average inside the initial claims series has continued to climb steadily over the past several weeks. We think that the headline should see a modest adjustment downward, but the overall trend in the series should continue to move upward. As conditions in Texas and Louisiana adjust, we do expect to see some moderation in the headline, but the continuing claims series will continue rise.

Factory Orders (August) Thursday 10:00 AM

After five straight months of gains in factory orders on the back of demand from the external sector and orders for civilian aircraft, we expect to see a decline in the headline of -4.1%. Orders at Boeing for the month remain weak and demand for durable goods should see a modest decline after two very strong postings.

Non-Farm Payrolls (September) Friday 08:30 AM

The labor sector should continue to see another month of declines. Our forecast implies that the establishment survey should see a decline of -105K and the household estimate should see an increase in the rate of unemployment to 6.2%. We expect to see an outsized decline of -50K in the manufacturing sector, along with continuing declines in the goods producing, construction and service sector. We expect that the positive contributions to the payroll situation of the healthcare and government sectors will be more than offset by the contraction in the aforementioned areas of the economy and the risk of further deterioration in both the headline and unemployment rate during the month should not be discounted.

ISM Non-Manufacturing (September) Friday 08:30 AM

Our forecast of service sector activity in September suggests that the headline should moderate to 50.0 on the back of a deteriorating labor sector and outlook among the consumer. Indicators of personal consumption in the non-manufacturing sector for the month all imply a further decrease in overall spending among consumers. With personal disposable income falling over the past two months consumers are not well positioned to increase discretionary spending on non-essential items.