With the debt ceiling debate and the S&P ratings downgrade in the rear view mirror, economic data will be in the spotlight in the coming week as bond investors try to figure out the likely US economic outlook. Data revealing a stronger economic pulse than expected could encourage investors to buy riskier assets, a strategy likely to cause prices of safe-haven US debt to fall and their yields to rise.
Conversely, evidence of a moribund economy would discourage riskier investment choices and put a premium on US safe-haven debt, causing yields to move lower again. Stronger economic data might also make expanded monetary accommodation by the Federal Reserve a little less likely, while weak data would heighten expectations that the Fed would consider new forms of monetary accommodation or extensions of easing paths it has already employed.
Fed Chairman Ben Bernanke will speak at the Kansas City Fed's conference in Jackson Hole, Wyoming on August 26 where he is expected to offer further enlightenment on the subject of a potential third phase of so-called quantitative easing. To put it crudely, investors are really trying to figure out whether 2011 equals 2008 and the answer is no, said Cary Leahey, senior economist at Decision Economics.
"In 2007-2009, we experienced a once-in-75-year credit and economic contraction following 25 years of leverage, financial innovation (credit derivatives), and greed, so stocks went down hard and markets froze," he said. What is occurring now is a more "typical" equity correction, with little seizing up in the markets, he said.
Not all the economic numbers have been bad, however, accounting for some of the extreme volatility in equities that, in turn, has whipsawed the US bond market. That pattern could persist in the coming week as investors decipher one economic report at a time and react accordingly.
Leahey said reports on economic activity will likely look subdued while core inflation will look moderate. Data in the coming week may provide "a small measure of clarity on the near-term trajectory of the economy" and the market's focus could shift "from monetary policy and market volatility to manufacturing, housing and inflation," said Deutsche Bank Securities chief US economist Joseph LaVorgna.
The timely August New York Empire survey is expected to be flat, according to a Reuters poll. Another August index on manufacturing activity, the Philadelphia Fed index, due on Thursday, is expected to read 4.0, according to Reuters' poll, little changed from 3.2 in July. Output data as measured in the Fed's July industrial production could show activity revved up 0.4 percent last month after a more anemic 0.2 percent rise in June.
Housing starts data due on Tuesday could have little impact on bond prices since depressed housing starts, by now, is an oft-told tale. Sales of existing homes are expected to rise modestly to an annualised rate of 4.9 million in July from an annualised 4.77 million in June, according to a Reuters poll, still well below the 5.7 million average over the last decade.
The Fed said on Tuesday that it believed prices would settle down in coming quarters to levels "at or below those consistent with the committee's dual mandate." The headline producer price index due on Wednesday could reflect that, said Lavorgna. Economists polled by Reuters look for a flat headline PPI reading and a 0.2 percent rise in the index excluding food and energy items.
But pipeline pressures remain elevated, a trend that has translated into rising consumer prices. That should be evident in the July Consumer Price Index, expected to be up 0.2 percent after a 0.2 percent drop in June, according to Reuters' poll. The market, however, gives more weight to the core CPI, the index without its food and energy components. That index is expected to be up 0.2 percent after a 0.3 percent rise in June.
The bond market will pay close attention to the weekly US Labour Department count of the newly jobless. New jobless claims have trended down in recent weeks and slipped to 395,000 in the week ended August 6. For the week ending August 13, economists polled by Reuters estimated new jobless claims would rise to 400,000.
"We cannot stress enough the importance of (jobless claims), particularly because the data correspond to the survey week for nonfarm payrolls," LaVorgna said. Another item of interest will be the July index of leading economic indicators, expected to be up 0.2 percent, according to the Reuters poll, after a 0.3 percent rise in June.