Financial Markets Summary For The Week of November 17-21 2008
Fed Talk
The week in Fed talk will see heavy week of discussion on the
economic outlook. Fed Vice-Governor Kohn and Richmond Fed President will
speak at a conference on the subprime crisis Wednesday. The following day
Treasury Secretary Paulson and St. Louis Fed Bullard will speak on the US economy. The week will close with Richmond Fed's Lacker and Chicago Fed President
Evans addressing the economic outlook, with Philadelphia Fed President
Plosser speak on financial conditions and the overall outlook for the economy.
Empire Manufacturing (November) Monday 08:30 AM
The market gets its first opportunity to observe data from the
real economy in November via the New York Fed's survey of regional
manufacturing conditions. With the economy decelerating at a rapid clip and
orders for basic inputs and finished goods from the external sector
moderating we do expect that there is major risk to the downside for the
month. The fall in the general business headline to -30.0 implied by our
forecast assumes that the new orders from the domestic and external sectors
should continue to decline during the month in an orderly fashion. Should new
orders fall off a cliff, as is often the case in a recession, the market
could observe a much sharper decline in the headline.
Industrial Production/Capacity Utilization (October) Monday
09:15 AM
Given the rather large moves to the downside in the ISM, Empire
and Philadelphia Fed surveys of the manufacturing sector we do expect to see
third straight contraction within the Federal Reserve's estimate of
industrial production. Our forecast of a -0.2% decline accounts for the fact
that production at Boeing did not start until after the sampling period ended
and industrial activity remained weak in the aftermath of the twin hurricanes
to hit the Gulf region in September. Moreover, with production of autos
curtailed and demand for utilities not yet poised for a late autumn increase,
we do think that the risk for the trading day is to the downside. Going
forward, indicators of near term production suggested that the industrial
sector is likely to remain soft over the next several months. For most major
industry groups capacity utilization will remain well below their long-term
averages.
Producer Price Index (October) Tuesday 08:30 AM
The decline in commodity prices in October represented the
single worst month in sector in 52 years. They nature and scope of the change
in cost of production should be reflected in the decline in prices just about
across the board during the month. Inside the data the cost of crude goods
should see its third straight month over month decline. Total crude goods
were down -7.9% in September after an -11.9% drop in August. Ex food and
energy, crude goods were down -9.4% in September. To provide a bit of
perspective on the fall of basic inputs for production, the cost of natural
gas is down -16.5%, crude petroleum -9.0%, iron and scrap metal -22.4% and
nonferrous metal ores -6.9% during the previous reporting period. The
developments in crude goods should begin to translate into relief in the
pipeline and further downward pressure in the headline over time. We
anticipate that headline costs will decline -2.8% m/m and the year over year
measure ease to a 5.4% increase, down from 8.7% posted previously. The core
ex-food and energy measure should see a 0.2% m/m increase and a 3.9% advance
for the month.
Consumer Price Index (October) Wednesday 08:30 AM
The decline in energy and commodity prices in the headline and
the fall in the shelter component inside the core, which comprises 42.4% of
the overall index, should again be the primary catalyst for the long needed
relief for consumers after a long period of inflation. The disinflation now
moving through the system should accelerate as firms now facing bloated
inventories in the aftermath of the -3.1% contraction in real personal income
should price goods to move as the economy enters what is shaping up to be the
most difficult three month period in the economy since the first quarter of
1982 where the economy contracted at a -6.4% rate. Going forward, it is quite
clear that the quantitative easing policy of that has become the primary
focus behind the Fed's efforts at stimulating aggregate demand will expand in
the context of the disinflation that we are observing and be shaped to
support the expansionary fiscal policy in the pipeline on the part of the
Federal government. Until, these policies gain traction the pricing
environment will have a decidedly negative tilt.
Housing Starts/Building Permits (October) Wednesday 08:30 AM
With the median price of a home in most parts of the country
still experiencing declines, beyond the replacement of existing stock, there
is little incentive to apply for a permit to build a new home. Although,
inventory levels have come down in recent months, this has to do with sales
of foreclosed homes. There is little evidence that the current pace of sales
can be maintained given the disruption in the domestic system of credit. With
the strong probability that the pace of foreclosures will pick up as the rate
of unemployment increases, there is little in the way of a rational argument
that would encourage the development community to continue to build homes
except under a very narrow range of circumstances. With the existing stock of
homes in both the new and used category still far to high for what current
demand can absorb, we expect that starts in October will fall to 750K and
permits should decline to 730K.
FOMC Minutes (October) Wednesday 15:00 PM
The FOMC minutes from the October meeting should be quite the
potent release. We anticipate that the minutes will provide further
information on the sharp deceleration in economic activity in the areas of
real personal consumption, business investment and discuss the deteriorating
situation in the labor market. The committee should be expected to have
discussed stresses in the financial markets that were in part one of the
primary catalysts behind the reduction of the federal funds rate by 50bps. Given
that the federal funds rate has moved towards the zero bound, the efficacy of
reducing the target rate to stimulate aggregate demand will be constrained
going forward. Thus, the expansion of the Fed balance sheet has taken on a
far more significance with respect to overall economic activity. We do expect
that going forward the minutes should and will begin to discuss these efforts
in an attempt to add an element of transparency and communications in the
committees efforts to stabilize the financial system and get ahead of the
curve to ward off the disinflation currently moving through the system.
Jobless Claims (Week Ending November 8) Thursday 08:30 AM
The week ending November 15 should see jobless claims continue
to surge. Our forecast implies an increase to 520K for the week and the
continuing claim data for the week ending November 1 will advance to
3.945mln. The constrained environment for credit and slump in consumption by
individuals has provided a strong incentive for firms to begin shedding jobs.
Philadelphia Fed (November)
Thursday 10:00 AM
Although, the cost environment for basic inputs has increased
decisively over the past few months, there is little doubt that the
combination of reduced demand from the external sector and the collapse in
aggregate demand on a domestic basis, particularly in the auto industry,
should combine to drive the headline general business activity index to
-40.0, with risk to the downside. Unlike other purchasing managers surveys,
the Philadelphia Fed survey headline is not a composite score but a
stand-alone question that often is best viewed as a barometer of confidence
in the region. Thus, with the disruption in the credit market and the very
real probability that GM will not make through the end of the year and Ford
through the middle of 2009, there is a risk of the headline seeing a
precipitous decline well beyond our very bearish forecast.
Joseph Brusuelas
Chief Economist
VP Global Strategy
Merk Investments LLC
Merk Investments LLC is the manager
of Merk Mutual Funds, including the Merk Asian Currency Fund and the Merk
Hard Currency Fund. The Merk Asian Currency Fund invests in a basket of Asian
currencies. Asian currencies the Fund may invest in include, but are not limited
to, the currencies of China, Hong Kong, Japan, India, Indonesia, Malaysia,
the Philippines, Singapore, South Korea, Taiwan and Thailand.
The Merk Hard Currency Fund invests
in a basket of hard currencies. Hard currencies are currencies backed by sound
monetary policy; sound monetary policy focuses on price stability.
The Funds may be appropriate for you
if you are pursuing a long-term goal with a hard or Asian currency component
to your portfolio; are willing to tolerate the risks associated with investments
in foreign currencies; or are looking for a way to potentially mitigate
downside risk in or profit from a secular bear market. For more information
on the Funds and to download a prospectus, please visit www.merkfund.com.
Investors should consider the
investment objectives, risks and charges and expenses of the Merk Funds
carefully before investing. This and other information is in the prospectus,
a copy of which may be obtained by visiting the Funds' website at www.merkfund.com or calling 866-MERK
FUND. Please read the prospectus carefully before you invest.
The Funds primarily invest in
foreign currencies and as such, changes in currency exchange rates will
affect the value of what the Funds own and the price of the Funds' shares.
Investing in foreign instruments bears a greater risk than investing in
domestic instruments for reasons such as volatility of currency exchange
rates and, in some cases, limited geographic focus, political and economic
instability, and relatively illiquid markets. The Funds are subject to
interest rate risk which is the risk that debt securities in the Funds'
portfolio will decline in value because of increases in market interest
rates. The Funds may also invest in derivative securities which can be
volatile and involve various types and degrees of risk. As a non-diversified
fund, the Merk Hard Currency Fund will be subject to more investment risk and
potential for volatility than a diversified fund because its portfolio may,
at times, focus on a limited number of issuers. For a more complete
discussion of these and other Fund risks please refer to the Funds'
prospectuses.
This report was prepared by Merk
Investments LLC, and reflects the current opinion of the authors. It is based
upon sources and data believed to be accurate and reliable. Opinions and
forward-looking statements expressed are subject to change without notice.
This information does not constitute investment advise nor a solicitation or
an offer to buy or sell any products or services. Foreside Fund Services,
LLC, distributor.
|