Key US Data Releases and Events

It was a case of "bad news is good news" last week. If markets become convinced that the news is so bad that central banks might have to act in a major way, seemingly bad news can be magically transformed into good news for equities, which as of early Friday afternoon were set for a modest gain for the week in the United States. The Bank of England announced a new package of measures to try to kick-start bank lending, while European Central Bank (ECB) and Federal Reserve officials assured markets that they will pump in liquidity as needed if markets begin to freeze up after the Greek elections on Sunday.

There was bad news from Europe, as the boost from the weekend announcement of a bailout for Spain's banks evaporated rapidly. The funds will be channeled through the Spanish government and will therefore add to its debt. They do not break the “death-spiral embrace” between Spain's banks and its government. Spanish bond yields rose, and the contagion spread to Italy, pulling its yields up too.

There was also bad news domestically, as incoming data were downbeat. There were declines in May retail sales and industrial production, while unemployment insurance claims ticked higher. The silver lining came from falling producer and consumer prices as lower gasoline and food costs came through, bolstering consumer purchasing power and holding down business costs.

Meanwhile, the future of the Eurozone hangs in the balance as Sunday's Greek election approaches—a poll being presented as an unofficial referendum on Greece’s euro membership. We doubt that Greece has a long-term future in the Eurozone, but if pro-bailout parties were to form a government, concerns about an early exit would ease considerably. If there's no clear majority, the uncertainty would drag on. If an anti-bailout coalition is elected, a Greek exit would likely follow in short order, unless the rest of the Eurozone caves in with improbable concessions. Markets would quickly ask "who's next" and the pressures on the Eurozone periphery would intensify. Emergency central bank support would likely kick in, but that's hardly a scenario that one should classify as "good news."

Even if no emergency action is needed, the Federal Reserve has a regularly scheduled meeting and press conference set for Wednesday, at which Fed participants will have to scale back their expectations for US growth. In response, we expect the Fed to extend the expiring "Operation Twist" into the second half of the year. More substantial action—such as expanding its balance sheet (QE III) or extending its "low rate" guidance into 2015—seems unlikely this time, but should the Greek elections turn out unfavorably for markets, the Fed might opt for a stronger policy response.

Domestic data this coming week (June 18–22) are limited, and will take a backseat to the Greek elections, as well as the subsequent market and central bank reactions. We expect both housing starts and existing home sales to ease back in May, although we expect housing permits to improve, signaling that there is still an underlying pickup in housing activity under way.

Tuesday, June 19 – Housing Starts (May)

Housing Starts

• IHS Global Insight: 0.710 Mil.
• Consensus: 0.720 Mil.
• Last Actual: 0.717 Mil. (Apr.)

Building Permits

• IHS Global Insight: 0.736 Mil.
• Consensus: 0.730 Mil.
• Last Actual: 0.715 Mil (Apr.)

What to Look For

• Fewer housing starts and more building permits in May

Implications

Housing starts likely declined 1% in May, to a 710,000-unit annual rate. Lower employment in residential construction suggests an easing in starts. But we expect housing permits to improve further, signaling that there is still an underlying pickup in housing activity.

Wednesday, June 20 – FOMC Press Release and Press Conference

Effective Federal Funds Rate

• IHS Global Insight: 0.00–0.25%
• Consensus: 0.00–0.25%
• Last Actual: 0.00–0.25%

What to Look For

• Scaled-back growth forecasts and an extension of "Operation Twist"

Implications

The Fed will show its concern that the economy continues to underperform its expectations in terms of growth and employment. But it probably is not yet ready to implement another major easing beyond extending its maturity-extension program, Operation Twist, aimed at pressing down on long-term yields. That could change if the financial markets are in shock after the Greek elections.

Thursday, June 21 – Existing Home Sales (May)

• IHS Global Insight: 4.60 Mil.
• Consensus: 4.57 Mil.
• Last Actual: 4.62 Mil. (Apr.)

What to Look For

• A minor decrease in closings for existing homes

Implications

Despite an increase in mortgage applications during March and April, existing home sales likely fell a token amount in May, since the Pending Home Sales Index (a leading indicator for closings) moved down in April.

by Nigel Gault and Paul Edelstein