The Fed Steps Up This Week Amid Improving Data And Turmoil In Iraq - Here's Your Complete Preview
"The committee is likely to make some upgrades to its description of the economic outlook in the post-meeting statement and its economic projections," said Goldman Sachs' Jari Stehn. "Although the committee will need to reduce its 2014 real GDP growth forecast to take into account the Q1 disappointment, we would expect the committee to reduce its unemployment rate forecast and lift its inflation forecast slightly."
Meanwhile, traders have escalating turmoil in Iraq to contend with.
Here's your Monday Scouting Report:
Top Story
- Iraq: Last week, Sunni jihadi movement ISIS (or the Islamic State of Iraq and the Levant) took Mosul, the second largest city in Iraq. This has energy markets spooked and oil prices have been surging.
Citi's Ed Morse believes the near-term effects could be limited. But persistent turmoil could become a problem. From his Friday note to clients: "The longer the insurgency lasts and the more divisive it becomes, the more difficult it will be for Iraq to even approach its potential to sustain production at 6-m b/d or more, with radical implications for oil markets at a time of growing lost production worldwide due to intensifying disorder in a growing number of petroleum-producing countries."
Economic Calendar
- Empire Manufacturing (Mon): Economists estimate this regional activity index fell to 15.0 in June from 19.01 in May. "All of the notable sub-indices showed strength on the month, with the shipments and employment indices both hitting multi-year highs," said Barclays economists who forecast a 19.0 print. "Although the new orders index was not quite as strong, rising to just 10.4 in May, it still bodes well for a pick-up in manufacturing activity in the second quarter."
- Industrial Production (Mon): Economists estimate production climbed 0.5% in May with capacity utilization increasing to 78.9%. "Manufacturing hours worked jumped 0.6% in the employment report, as the average factory workweek rose to the highest level since 1945," noted Morgan Stanley's Ted Wieseman. "Industry figures point to a small pullback in motor vehicle assemblies ahead of a sharp planned ramp up in June and July after the surge in May auto sales, and a bit of further normalization in utility output may be a slight drag on the headline, but overall IP and the key manufacturing gauge should both be up substantially."
- NAHB Housing Market Index (Mon): Economists estimate this homebuilder sentiment index increased to 47 in June from 45 in May. "The rise in mortgage applications for home purchases thus far in June and consistent increases in construction employment in recent months provide support for the index," said Nomura economists.
- Consumer Price Index (Tues): Economists estimate CPI climbed 0.2% month-over-month or 2.0% year-over-year in May. Excluding food and energy prices, they estimate core CPI rose by 0.2% and 1.9% respectively. "The year-to-year figures have risen abruptly in recent months, but that mostly represents basis effects, as the year-ago figures were extremely soft," said Citi's Peter D'Antonio. "We don't think there has been a sudden change in the underlying path of inflation. Note: Food prices have shot higher in the past three months. We believe this was a lagged response to the drought. Higher feed prices caused livestock owners to cull their herds, which in turn has tightened the market for meats (resulting in higher prices). In the past three months, food prices have increased by 1.5%, driven by a 4.0% jump in meat prices.
- Housing Starts (Tues): Economists estimate starts fell 3.9% in May to an annualized pace of 1.030 million units, while building permits increased 0.1% to 1.060 million. Here's Credit Suisse: "The pace of US housing starts shot 13.2% higher in April on a 39.6% leap in multifamily starts. (Single family starts edged up only 0.8% that month.) This alone would be sufficient reason to expect some giveback in May. But we note that construction hours worked slipped last month, and the NAHB housing market index edged lower, two factors that also point to a negative May reading. "
- FOMC Decision (Wed): Economists expect the Federal Open Market Committee to taper its quantitative easing program by another $10 billion (Monthly Treasury purchases will be reduced to $20 billion from $25 billion and monthly mortgage securities purchases will be reduced to $15 billion from $20 billion). The FOMC statement and updated economic projections will be released at 2:00 p.m. ET. It's worth noting this will be the first meeting with the addition of Vice Chair Stanley Fischer, Governor Lael Brainard, and Cleveland Fed President Loretta Mester. "New voters add some extra uncertainty to this meeting, but we expect the central message of a patient policy stance and a gradual tightening cycle to be unchanged," said Bank of America Merrill Lynch's Michael Hanson.
- Initial Jobless Claims (Thurs): Economists estimate claims slipped to 313,000 from 317,000 last week. "Initial jobless claims continue to linger below 320k," said Nomura economists. "This suggests that layoffs have bottomed out and that more hiring will be needed to spur job growth."
- Philadelphia Fed Business Outlook (Thurs): Economists estimate this regional activity index fell to 14.0 in June from 15.4 in May. "Last month the new orders and shipment indices both posted meaningful declines, suggesting that the underlying trend is a bit weaker than the solid headline print would suggest," said Barclays economists. "That being said, all of the major components remain firmly in expansionary territory and are consistent with an improving manufacturing sector."
Market Commentary
The VIX, or the CBOE volatility index, is the center of lots of debate and confusion. Even with the recent turmoil in Iraq, the VIX remains at depressed levels, which some interpret to be a sign of investor complacency.
Deutsche Bank's David Bianco believes that market watchers should consider the VIX relative to valuation ratios like price-earnings (PE).
From Bianco: "We define 5 categories of market emotion gauged by PE/VIX: 1) Crash - very high VIX and low PE, 2) Skeptical/Denial - VIX elevated and PE still low, 3) Realistic/Disciplined - Both PE and VIX within normal ranges, 4) Complacency - low VIX or high PE or both, 5) Mania - very high PE and low VIX. PE/VIX is 1.3 and suggests market complacency. It has entered the 2004-2007 range. On Jun 10, PE/VIX reaches 1.6 with trailing PE of 17.5 and a very low VIX of 11."
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