Sunday, June 25, 2006

Weekly Market Preview

The financial news should be relatively calm until Thursday when we start getting a string of economic numbers that will get people stirred up about inflation.

Inflation is turning into an odd thing. The inflation indexes are contained but if you look into the data you see that the results depend on the sector involved. During the last 12 months the consumer price index records significant increases in medical care, transportation, and energy costs. At the same time apparel, food, and recreation have been rising at lower rates that the index.

The twist here is that if the Federal Reserve increases rates and slows down the economy it will hit that second category hard even though they haven’t had inflation in those sectors. Alternately, the Fed can’t just ignore the inflation in health care, energy, and transportation.

This is one of those situations where the actions of the Federal Reserve results in effectively choosing who will win and who will lose in the economy. The market is aware of that and you will probably see a fair amount of sector movement on Thursday and Friday as the FOMC minutes, GDP, Deflator, and Indexes come out.

In the 1980s a similar sector divergence occurred and the Federal Reserve tried to stay out in order to avoid choosing sides. The result was serious inflation, so now I think the Fed is going to lean hard on inflation. I would try to go light on apparel, food, and recreation stocks for a while.

Monday, June 26th

  • New Home Sales reports for May at 10am EST. The previous report was 1.2 million units, and I would expect 1.1 – 1.2 million this time. Last weeks housing numbers were stronger than expected, though, so the warm weather seems to be giving a boost to construction and sales.
  • Earnings reports: WAG, LEN, SCS, HWAY, CKR
Tuesday, June 27th

  • Consumer Confidence for June reports at 10am EST. Prior number was 103 and most forecasts expect it to remain in the same range. If this number drops far it may wallop the market.
  • Existing Home Sales for May reports at 10am EST. This is the counterpart number to complete the picture started by the previous day’s new home sales. This number has been decreasing a bit and may be down to 6.6million from last months 6.8million.
  • Earnings reports: SRR, UNF, APOG, NKE, FUL, EXFO, LWSN
Wednesday, June 28th

  • Weekly Crude inventories reports at 10:30am EST. The numbers have been jumping around dramatically for weeks but averaging almost no long term change.
  • Earnings reports: PKE, MU, MERX, RHAT, COMS, ESIO
Thursday, June 29th

  • Initial jobless claims reports at 8:30am EST. Expectations are for a stable number near 310,000. If this number is higher or lower it will interact with the numbers below to impact the market.
  • Final Chain Deflator and Final GDP for the first quarter both report at 8:30am EST. The GDP is expected to be at a 5.3% rate, although I wouldn’t be surprised to see 5.6%. The chain deflator is a number that tracks the change in price of all manufactured goods and is equal to the nominal GDP divided by real GDP. The projections are for this number to be about 3.3% here which would lower a reported GDP of 5.6% to a real growth of 2.2%. (Think of the chain deflator as a way to remove inflation from the GDP increase).
  • Help Wanted Index reports at 10am EST for May. Last reported was 35, expect 35 or 36. This number measures the hiring activity in the economy.
  • FOMC policy statement released at 2:15pm EST. Suggestions of continued inflation should hurt housing and consumer staples. Suggestions of easing inflation will hurt oil and basic commodities.
  • Earnings reports: ATYT, PALM, RIMM
Friday, June 30th

  • Expect Light Trading as people leave for the long weekend.
  • Personal Income and Spending reports for May come out at 8:30am EST. Last month incomes were up 0.5% and spending was up 0.6%. Going into an inflationary environment it’s actually normal so observe higher spending than income numbers (see: the 1970s) so I would expect Income rise to be 0.2%-0.3% and Spending to be up 0.1 to 0.2% MORE than the Income numbers.
  • Revised Michigan Sentiment Index for June reports at 9:50m EST. Previous numbers were 82.4, I don’t expect it to change by more than 0.1 – an insignificant amount.
  • Chicago PMI (Purchasing Management Index) releases at 10am EST for June. Previous numbers were 61.5 but I expect a slight decrease. If it rises more people will worry about inflation and it could hurt stocks.

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