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With one of the most important and watched events about to unfold in Jackson Hole, Wyoming tomorrow, no one knows for sure what Mr. Bernanke might or might not say. Many Fed watchers have their opinion; they have gone back into history and reviewed previous speeches by Mr. Bernanke. They have reviewed the FOMC minutes, read and reread letters recently written by Mr. Bernanke, and they have all drawn conclusion.
I have also, and my conclusion is that Mr. Bernanke himself is not sure what he is going to say. Each day lately, we have seen better and more improved economic indicators, jobs, housing, manufacturing and confidence all seem to be improving, but this is a short term picture. If these reports would have stayed negative, for sure anyone could have predicted Mr. Bernanke's moves, but in this complicated, complex economic cycle, there are way too many factors to be considered.
Today, we will see a new set of weekly unemployment numbers, markets are expecting them to come in close to forecast, but will these have any weight on the decision or the speech that Mr. Bernanke is preparing. There are some important Fed factors due today also, personal spending, consumption, and the PCE deflator will be released on August 30. The latter will be fairly important in our view as the PCE deflator is the Fed’s preferred inflation measure — and the Fed is obviously on everyone’s mind this week. The PCE deflator has been trending quite low throughout the year and is undershooting the Fed’s 2% inflation target substantially. With CPI for July having come in at 0% m/m, we’re anticipating a slightly softer print on PCE inflation. The larger story for the Fed should be that baked-in base effects imply that the PCE deflator should trend quite low through the year. We also think that the U.S. savings rate should deteriorate this month.
Retail sales grew by 0.8% m/m during July leading us to expect personal spending to post a fairly similar surge of 0.7%. Unfortunately, wages were only up by 0.1% according to the BLS. The implication is that the personal savings rate — which ticked up to 4.4% in June from 3.4% at the end of 2011 — should start to fall again.
Yesterday's data was all positive, beginning with revised GDP. Those expecting big changes to the U.S. economic outlook on the basis of revisions to Q2 GDP were… probably looking to get their kicks in the wrong place. Revisions showed that GDP grew at 1.7% q/q SAAR in Q2 as opposed to 1.5% in the initial print. There are pros and cons to the revisions: inventories were lower than previously thought, so GDP ex-inventories is actually better than it looked at first; on the other hand, weaker imports were responsible for a major part of the upgrade to GDP, so it’s not as though the domestic consumer economy was humming. We see the revisions as offering a marginal upgrade that none-the-less leaves the economy running at a disappointing sub-2% rate during Q2 – barely faster than stall speed.
Pending home sales came in at 2.4% m/m, a solid gain that represents a new high on the pending home sales index for 2012. Leading indicators in the housing market are sending mixed signals: pending home sales are up solidly, the NAHB housing market index is showing that activity should be picking up, but the index of Mortgage Purchase applications is running somewhat lower than it was earlier this year.
A fairly positive beige book also gave the impression of a slow positive recovery.
Do you know what Mr. Bernanke is going to say or do tomorrow, express your opinion?