Merk Economic Calendar:
Week Ahead in U.S. Financial Markets (October 27-31 2008)

By Joseph Brusuelas (Chief Economist)

Financial Markets Summary For The Week of October 27-31 2008

The week will see another heavy slate of economic releases, corporate earnings and events on the horizon. The primary event on the calendar is the October 28-29 meeting of the FOMC where we expect the Fed to reduce the Federal Funds rate by 50bps. First tier releases for the week will be the advance estimate of Q3 GDP on Thursday and the personal income and spending report the following day. The week will kickoff with the September new home sales on Monday and the Conference Boards' estimate of consumer confidence on Tuesday. The FOMC meeting that afternoon should overshadow the durable goods report that looks to be quite weak. Jobless claims on Thursday and the Chicago PMI, UMICH estimate of consumer sentiment and PCE deflator report on Friday will close out the week.

Fed Talk

As is custom the week of the FOMC meeting on 29 October there will be no Fed talk.

Corporate Earnings

The week will see another heavy slate of earnings announcements that will feature Verizon and Lorillard on Monday and Centex the following day. Wednesday will see Moody's and GM publish their earnings, followed by Exxon, Motorola and gaming concerns Las Vegas Sands and Wynn on Thursday. The week will close with Chevron announcing its earnings.

New Home Sales (September) Monday 10:00 PM

Sales of new homes have lagged those of existing homes as individuals that are in a position to meet the rigorous standards required by banks appear to be more interested in purchasing foreclosures at distressed prices from the banking community. While credit conditions in September remained tight, the market will not observe the full impact of the recent intensification of the credit crisis on the purchase of new homes until the October sampling period. Our forecast implies that 440K homes were purchased during the month.

Consumer Confidence (October) Tuesday 10:00 AM

Despite the recent decline in the cost of gasoline, we anticipate that the Conference Board's estimate of consumer confidence will decline to 49.7 in October. The seizing up of the credit markets and the ensuing decline in the Dow should provide the trigger for consumer confidence to fall back to a multi-year low in the headline.

Durable Goods (September) Wednesday 08:30 AM

Weakness in orders from abroad and on a domestic basis should be on vivid display as the market readies itself for another set of dismal data from the industrial sector. The combined impact of the Gulf Coast hurricanes, the strike at Boeing and diminished demand from the external sector should facilitate a decline in the headline of -2.9% and a fall in the ex-transportation estimate of -3.1%, with risk to the downside.

FOMC Meeting Wednesday 2:15 PM

With credit conditions still mixed and the real economy illustrating signs of increasing strains, we expect that the FOMC will reduce the federal funds rate to 1.0% when it meets on October 28-29. Over the past three months, the inflation picture has turned. Clear signs of relief for headline prices on the back of the substantial moderation in commodity and energy prices has paved the way for an another cut in the federal funds rate to address both the financial meltdown and the decelerating economy. Moreover, the decline in the cost of crude goods for producers has turned decisively to the downside and this should provide the space for the Fed to continue to address the ongoing issues in the financial system in such a way that it does not require the committee over the next few months to test the zero bound. In our estimation, the Fed is not eager to push the Federal Funds rate below .75% and the market may be observing one of last cuts out of the committee for sometime.

GDP Thursday 08:30 AM

The primary narrative that should develop in the aftermath of what will almost certainly be a negative print on GDP will be the precipitous decline in personal consumption. Personal spending, which accounts for nearly 70% over overall, output should decline -1.5% for the quarter. In our estimation, the rate of personal consumption as a percentage of overall growth will see declines in coming years as trade and government spending play a larger role in the economy. Our forecast implies a -0.7% rate of growth for the third quarter of 2008

Jobless Claims (Week Ending October 25) Thursday 08:30 AM

Initial claims spiked up for the week ending October 18 due to continuing stress in labor markets and the ongoing problems in Texas caused by Hurricane Ike. We expect that the stress in the Galveston and Houston areas will begin to abate and the headline in claims should fall gently back towards 470K. However, the overarching problems in the labor market continue to increase, as evidenced by the elevated reading of 3.72ln in the continuing claims series. The stress in credit markets and decline in demand will put additional pressure on the labor sector and we do anticipate that both the headline and continuing claims will see deterioration well into 2009.

Personal Income/Spending (September) Friday 08:30 AM

A deteriorating labor sector and a consumer clearly in the process of retrenchment should provide a -0.3% decline in personal income and a -0.4% fall in individual consumption. The declining trend in overall consumption, which has been observed in the September retail sales and same store sales data began before the recent turbulence in the financial system and freezing up of the credit market. The September data is but a prelude for the more painful decline that we expect the market to observe in October. More importantly, real consumption should see its third negative posting in the past three months and set the stage for what will be a very difficult final quarter of the year

Personal Consumption Deflator (September) Friday 08:30 AM

The Fed's preferred measure of inflation, the PCE deflator should see some significant improvement in headline inflation and a modest advance in the core. We expect see the headline increase 4.0% vs. the 4.5% recorded in July, while the core should observe an increase of 0.1% m/m and 2.5% y/y. The decline in headline costs and reduction in demand for services should provide the conditions for the core rate to begin seeing further declines in the core year over year rate later this year.

Chicago PMI (October) Friday 9:45 AM

The lack of new orders being filled in the auto and civilian aircraft industry should continue to plague regional and national manufacturing surveys for the month of October. We suspect that the sharp downturn in the September data will spillover into the following month and offset whatever confidence in the industrial sector that might have otherwise developed due to the sharp adjustment downward in the cost of basic inputs. We anticipate that the Chicago PMI will see a decline to 47.1 for the month.

University of Michigan Consumer Sentiment (October-Final) Friday 10:00 AM

After an outsized decline on the back of the meltdown in credit markets and the ensuing decline in the Dow, we expect the University of Michigan's estimate of consumer sentiment to hold steady at 57.5, with a risk to the downside. The fall in the price of gasoline, which would have normally acted as a catalyst for upward movement in consumer sentiment, has been offset by the growing sense of fear among the pubic regarding their own economic outlook and that of the country as a whole. We do not expect consumer sentiment to see a meaningful recovery anytime soon.

Joseph Brusuelas
Chief Economist
Merk Investments

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