Events to Watch: FOMC the Highlight of the Week

The Fed will meet on June 23-24 to discuss about its monetary policy. Although economic outlook has improved as suggested by recent indicators, policymakers will likely keep interest rates unchanged at 0-0.25% for the rest the year. In light of recent speculations of earlier rate hike, we believe the Fed will reinforce its stance that interest rates will remain low at an extremely long period of time. Moreover, we forecast the Fed will keep the asset buying program as what it is but compositions of asset types should be given more flexibility.

Important economic data to be released this week include:

1. US: FOMC meeting, durable goods orders, PCE index, personal income and spending, existing home sales, FHFA home price indexes, weekly initial jobless claims, finalized 1Q09 GDP
2. Eurozone: Eurozone and German PMI, German Ifo and Gfk consumer confidence
3. UK: Nationwide house price index, Rightmove house price index, CBI survey of distributive trades
4. Japan: MoF business outlook survey, index of tertiary sector activity, CPI
5. Canada: Employment
6. New Zealand: Balance of payments, real GDP

Some of the more important events are discussed below.

Jun 22

German Ifo - June: Heading business climate reading is expected to have improved further to 85.2 in June from 84.2 and 83.7 in May and April, respectively. The major driver for the rise came from business expectations component which probably improved to 88 during the month. Last week, the ZEW survey showed that economic sentiment in Germany improved to 44.8 in June, higher than consensus of 35 and 31.1 in the previous month. This was the highest reading since May 2006.

June 23

Eurozone PMI - June: PMI should have risen to 45.9 in June from 44 in May. Although below-50 reading indicated contraction remained underway, continued improvement indicated economy in the Eurozone has stabilized. Manufacturing PMI probably improved to 42 from 40.7 in April as the employment component which rose last month should have continued to improve from extremely low levels. Services PMI is anticipated to have increased to 45.6 in May from 44.8 a month ago with the business expectation component rising close to the 50 level. However, the employment component likely remained weak although it has fallen in the previous 2 months.

June 24

FOMC meeting -June: The FOMC meeting will be held next Tuesday and Wednesday and we advise investors to pay attention to several important messages.

1. Interest rate outlook: While it's widely anticipated that the Fed will announce to keep its policy rate unchanged at 0-0.25%, we also believe the Fed will address speculations on rate hike in late 2009 as the Fed fund futures has pricing in a significant probably on it. Policymakers will emphasize that while there have been signs that recession is coming to an end, the Fed would like make sure recovery is strong enough to eliminate the output gaps and the risk of deflation before any tightening. The Fed will reiterate that the policy rates will be kept at low level for an extended period of time.
2. Economic outlook: A less dovish tone on economic prospect is likely as recent data suggested recession is ending. Initial jobless claims, which have historically peaked at or near the end of recessions, in June have been running significantly lower than the level in March and new orders component of ISM manufacturing has risen above 50, signaling recession is coming to an end soon. In April, the Fed stated ‘the pace of contraction appears to be somewhat slower'. Policymakers may this time reveal expectation for growth over coming months.
3. Asset purchase program: It's unlikely for the Fed to expand its asset purchase program. However, more flexibility may be allowed in terms of compositions of assets. For instance, the Fed may move to buy more Treasury securities instead of mortgage-backed assets.

US Durable Goods - May: Headline durable goods orders is expected to have dropped -0.8% in May following a +1.7% gain in the prior month, as decline in vehicles good orders should have offset rise in capital goods orders. Excluding transportation, the gauges probably rose +0.2%.

The durable goods sector has shown slowdown in contraction recently after sharp falls at the beginning of the year. We anticipate more consistent, while modest, growth readings will be seen in 2H09. In fact, manufacturing surveys in May showed notable improvements as manufacturers are increasing their capital investment plans. We believe these should then pass through to better capital goods orders.

Shipments, probably fell -1.5% in May after -0.4% in April, have more to fall though the pace should moderate in coming months. The inventories component has becoming more important recently as the economy is entering a stage of blowing out large inventories.

June 26

US Personal Spending - May: Personal income is anticipated to have risen +0.3% in May after rising +0.5% in April as driven by government stimulus such as tax cut and Social Security payment of $250. The latter should have increased real disposable income by around 2%. However, as the payment was one-off, there's a risk for the rate of change in income to turn negative in June.

Personal spending should have increased +0.4% during the month, signaled by strong auto sales (9.9M units) as well as stable retail sales excluding auto and building materials (+0.4% in May). There is also possibility that April's reading may be upwardly revised.