The Week Ahead in US: Fomc meeting and Q4 GDP on the spotlight

This is an excerpt from the "Top Down Outlook" we will publish over the week end.

Existing home sales (Monday 25), New home sales (Wednesday 27) – While the worst of the crisis appears to be behind the real estate sector, a return to a healthy growth rate is not on the horizon. With the labor market failing to reverse the two-year negative trend and foreclosures expected to rise in the months to come, we do not expect a rebound in the real estate sector over the short term. The drop in the NAHB housing market index signaled that real estate’s recovery may remain soft in the coming months due to competition from foreclosed homes on the market. After falling to 355k in November, we expect new home sales to increase to 366k, while existing home sales may rise from 6,54m to 6,69m, as the steady two-year decline in housing prices may continue attracting bargain hunters.

Consumer confidence index (Tuesday 26) – Having increased to 52.9 in December from 50.6 in November, we expect the Conference Board’s consumer confidence index to slightly edge down in January to 52.4. Notwithstanding the strong equity markets and the stabilization of the housing markets, we believe that only a strong turnaround in the labor market may push consumer confidence further upward. The index will indicate a moderate increase in consumer spending in the next few months.

FOMC meeting – interest rate decision (Wednesday 27) – No major pieces of news are expected from next week’s FOMC’s monetary policy meeting. Indeed, the FOMC is widely expected to maintain the target range for the Federal Fund rate at 0 to 0.25%. The Federal Reserve may continue its somewhat optimistic position on the economic outlook, particularly with regards to the business investment outlook, but may also continue to indicate that economic activity is apt to remain weak for the time being. The FOMC is also likely to elaborate on the removal of QE measures. We expect the Fed to maintain its view that “economic conditions, including low rates of resource utilization, subdued inflation trends and stable inflation expectations are likely to warrant exceptionally low federal fund rate levels for an extended period of time”. With capacity utilization well below historical average, unemployment at 10%, and core CPI expected to remain below 2% for a long period of time, we believe that the Fed will not raise rates before the end of H1 ’10, and that the subsequent tightened monetary policy will be very gradual (we pencil in the Fed fund rate at 1% by the year’s end).

Durable goods orders (Thursday 28) – Durable goods orders rose by 0.2% m/m in November, albeit the sharp decline in the transportation component (-5.5%). Orders ex-transportation rose by a solid 2% m/m, underlining the positive trend in durable goods orders in recent months. We project the positive trend to continue in December, in line with indications from the ISM new-orders sub-index, which rose to 65.5 in December – the highest since December ’04. We forecast durable goods orders to increase by 1% m/m. However, when compared with December ’08, orders would decline by 2.4%. December durable goods orders are likely to strengthen the view that US economic recovery will continue into early 2010. However, should our estimate prove correct, total durable goods orders would remain 27% below the September ’06 peak, indicating that US economy is still running well below its potential.

Gross Domestic Product (Friday 29) – Having grown by 2.2% in Q3, US real GDP is expected to increase by 4.2% in Q4. This economic rebound is likely to be driven by total investments, which we project to grow by 1.7% q/q. Real personal spending is likely to rise by 0.4% q/q, having so far risen by 0.4% in October and by 0.2% m/m in November. Inventories are likely to contribute positively to total growth, while the contribution from net trade is likely to be slightly negative. In 2009, the GDP may have dipped by 2.5%

Chicago PMI (Friday 29) – In December, the Chicago PMI index rose to its highest mark since May 2007, indicating a strong recovery in industrial production. While we expect the industrial production recovery of recent months' to continue into early 2010, we project the Chicago PMI to slow down to 58.3 in January. The Chicago PMI would anticipate an increase of January’s ISM index, due for publication the following week.