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Look forward to July 22, 2019 week: Fed policymakers go quiet, so the data will do the talking

The July 22 week will not have talk from Fed policymakers during the communications blackout period around the July 30-31 FOMC meeting. The blackout begins at midnight on Saturday, July 20 and runs through midnight on Thursday, August 1. At this point markets are expecting a rate cut at the end of the meeting. There is speculation as to whether that will be 25 or 50 basis points. The week’s data along with one or two reports in the following week – notably the PCE deflator and Employment Cost Index – will shape the FOMC’s deliberations. The FOMC is by no means unanimous that a rate cut is necessary, although the consensus seems to tip that way. Outright opponents of a rate cut are in the minority, but there are also some who will need convincing and the data will have to make the final case.

There are two main themes running through next week’s economic release calendar: housing and regional surveys for manufacturing and services. However, the highlight of the week could be the advance estimate of second quarter GDP at 8:30 ET on Friday. Earlier expectations for softer GDP growth after the 3.1% in the first quarter have moderated. Consumer spending may prove to be more supportive than first anticipated and residential construction has been solid. There are also indications that inventories will be on the rise, although not as much as in the first quarter. Net exports could weigh on growth along with business investment. If growth in the second quarter looks like it aligns with the FOMC’s forecasts for GDP to rise 2.1% in 2019, Fed policymakers will have less reason to impose a larger rate cut at the upcoming meeting. If it surprises to the upside, it could put even a 25 basis point cut in question.

Data on the housing market will feel the influence of lower mortgage interest rates in May and June.

The FHFA House Price Index for May at 9:00 ET on Tuesday should show that sellers continued to get steadily rising prices for units as buyers competed for limited stocks of existing homes and refinancers had higher valuations for properties already purchased. Although price increases are below the peaks of 2018, there are hints that the slowdown bottomed in February and March and has started to regain upward momentum.

Sales of existing homes in June at 10:00 ET on Tuesday could manage to increase from the 5.34 million units (SAAR) of May. Pending home sales pointed to another increase for June and homebuyers will be anxious to complete contracts while lower mortgage rates can be locked in. Sales of new single-family homes in June at 10:00 ET on Wednesday could continue to benefit from the limited supplies of existing units. Builders are increasing construction of smaller homes to meet demand from first-time buyers.

Regional surveys of services and manufacturing are for July and an important piece of data before the FOMC meeting. Chair Powell noted in his semiannual monetary policy testimony that these surveys were showing signs in June that uncertainty in trade policy was having a visible negative impact on activity. If July points to a revival, it makes the case for a preemptive rate cut less compelling.

On July 16 the New York Fed’s Business Leaders Survey pointed to improved conditions in July with its index at 9.7 after 5.8 in June. The release of the Philadelphia Fed’s Non-Manufacturing Index at 8:30 ET on Tuesday and the Richmond Fed’s Service Sector Survey at 10:00 ET on Tuesday should provide more information as to whether there is a broader upward move for the service sector.

Conditions in manufacturing were looking more positive in the general business conditions index of the July New York Fed Empire State Survey (4.3 in July after -8.6 in June) and Philadelphia Manufacturing Business Outlook Survey (21.8 after 0.3). The Richmond Fed Manufacturing Index at 10:00 ET on Tuesday is one of the better predictors of the ISM Manufacturing Index which encompasses a national picture. The Richmond measure has been signaling only mild expansion for the past three months (3 in June after 5 in May after 3 in April). If it picks up in July, it will add to the evidence that the factory sector hasn’t lost its footing, only some speed. The same is true of the Kansas City Fed’s Manufacturing Index at 11:00 ET on Thursday. The index dipped to neutral in June (0 in June after 4 in May after 5 in April). An increase in activity would be another indication that while conditions are slower, they are not in immediate danger of contraction.

New orders for durable goods in June at 8:30 ET on Thursday could be another disappointment. Weakness in transportation – specifically aircraft orders – has held back overall orders for several months. Boeing reported an increase in orders for June, but it was relatively meager for a month in which a major air show was held (Paris, June 17-23). If some deals in the works at the air show come to fruition, it could help total orders for July.

Initial jobless claims for the week ended July 20 at 8:30 ET on Thursday will be moving past the time of year when the seasonal adjustment factors anticipate a brief climb in layoffs that quickly unwinds. The data could be a bit noisy for another week.

 

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