Equity markets were spooked at the end of the preceding week by a sharp drop in early-July consumer confidence, and rising concerns about the profitability of the banking sector, as the mammoth financial reform bill was finally passed by Congress.
Recent bank results exceeded expectations, but investment banking and trading revenues declined. On a positive note, the amount of reserves taken against loan losses declined as credit quality appears to be improving. But the complicated financial reform bill—which has over 1000 sections—is raising angst among investors, particularly the early estimates of costs related to compliance and the associated restructuring of bank operations.
Indicators next week will be concentrated on the housing market, and the reports are not expected to be inspiring. June housing starts and existing home sales are expected to fall sharply, reflecting payback after the expiry of the homebuyers' tax credit, but we are expecting a modest increase in permits for June, as the permits adjustment should have largely passed through the system.
In other developments, Fed chairman Ben Bernanke is expected to provide semi-annual "Humphrey-Hawkins" testimony to the Senate Banking Committee on Wednesday July 21. The recent minutes from the June 22–23 FOMC meeting already provide a window on what will be contained in the chairman's prepared testimony. The Fed is maintaining its very accommodative position on policy in view of weak near-term growth prospects, huge resource slack, and the virtual absence of any inflationary pressures. However, the question and answer will likely zero in on what more the Fed could do at this juncture, given the downside risks to the outlook that were flagged in the minutes—downside risks that have become more salient since the FOMC met at the end of June. This part of the testimony will definitely be worth tuning in to.
The Fed chairman likely will also be quizzed on his views on how to resolve the fiscal deficit problem, but Bernanke in the past has skillfully avoided recommending any spending or tax options. Instead, he has generally indicated that the fiscal trajectory is unsustainable in terms of the rising public debt load that it implies, and kicks the ball back to Congress in terms of taking specific action to deal with it.
KEY U.S. DATA RELEASES THIS WEEK
Tuesday, July 20 – Housing Starts and Building Permits (Jun.)
Housing Starts
- IHS Global Insight: 0.550 Mil.
- Consensus: 0.577 Mil.
- Last Actual: 0.593 Mil. (May)
Building Permits
- IHS Global Insight: 0.588 Mil.
- Consensus: 0.575 Mil.
- Last Actual: 0.574 Mil. (May)
What to Look For
- We expect another drop in housing starts in June, falling 7% to 550,000 units.
Implications
The housing sector is undergoing a payback after the expiry of the homebuyers' tax credit. This would be the lowest level for starts since October. Although single-family starts dropped 17% in May, the 10% drop in single-family permits indicates that starts will take another hit this month. Multi-unit starts should also drop, since they were surprisingly high in May when compared with multi-family permits. The payback period for permits is probably over, and we are expecting a modest increase in permits for June.
Thursday, July 22 – Existing Home Sales (Jun.)
- IHS Global Insight: 5.09 Mil.
- Consensus: 5.10 Mil.
- Last Actual: 5.66 Mil. (May)
What to Look For
- Existing home sales dropped by 10% in June, to a 5.09-million-unit rate.
Implications
The 30% plunge in the Pending Home Sales Index during May and the recent slide in the Mortgage Bankers Association's Purchases Index to a 13-year low indicate that existing home sales will plunge by July. We are expecting a 10% drop in existing home sales in June, and a similar, perhaps even worse, hit in July.
