The Superbowl of Monetary Policy

Key economic indicators and market events for August by Joe Terranova, Chief Market Strategist
Going into August, the data for July continues to be mixed, some good, some bad. Price performance of the markets has continued to move sideways, and we seem to be running out of time if 2012 is going to experience any refreshment in the current pause. Economic indicators continue to conrm that economic growth is slowing in the U.S., China, and Europe. Markets appear xated on global central banks to further monetary policy initiatives and, in essence, place puts underneath the market. Everything the Fed does either supports or lls in the blanks of what other central banks are not doing. On August 31, the Feds annual symposium in Jackson Hole will serve as the Superbowl of monetary policy, providing as it did in 2010, a grand stage for Bernanke to telegraph the level of satisfaction he may or may not have with the policy efforts of the European Central Bank (ECB) and Peoples Bank of China (PBOC). It will also allow him to indicate his intentions for the upcoming September 13 FOMC meeting, which will be the Feds last call to enact further easing prior to the presidential election. Based on whatever actions global central banks may or may not take, the Jackson Hole Superbowl will provide the framework by which investors can model or anchor their portfolios. I expect the meetings outcome will be that its too late and not enough or just enough to be a market catalyst.

August 2012
Sunday Monday Tuesday
July 31 9:00 PM: 8:15 AM: ADP

Wednesday
1

Thursday
2

Friday
3 8:30 AM:

Saturday
4

China Mfg. PMI

Employment Report 10:00 AM: ISM Mfg. Index 2:15 PM: FOMC Meeting Announcement
7 8 9:30 PM:

BOE and ECB Rate Decisions

U.S. Unemployment and Private Sector Jobs

6 6:00 AM:

9 2:00 AM: 8:30 AM:

10

11

German Factory Orders

China CPI
2:00 AM:

German Trade Report

12 13 8:30 AM: 14 8:30 AM: 15

China Industrial Production, Retail Sales, and Fixed Assets Investment

USDA WASDE Report China Trade Report

16 10:00 AM:

17

18

U.S. Retail Sales

Empire State Mfg. Survey

Philly Fed Mfg. Survey

19

20

21 10:00 AM: 2:00 PM:

22

23 8:30 AM:

24

25

U.S. Existing Home Sales FOMC Minutes

U.S. Durable Goods Orders

26

27

28 10:00 AM: 8:30 AM:

29

30

GOP National Convention Begins (Tampa Bay)

Richmond Fed Mfg. Index

U.S. GDP
2:00 PM:

31 9:45 AM: Chicago PMI 9:00 PM:

Beige Book

China Mfg. PMI Kansas City Fed Jackson Hole Symposium

Times shown are Eastern Time.

August indicators / events of note:

China Manufacturing PMI China Manufacturing PMI (purchasing managers index) is released on the last day of the month. This monthly gauge of Chinas manufacturing sector, combined with the monthly U.S. ISM Manufacturing Index value released the next day, gives a clear picture of global manufacturing health. An index value above 50 indicates growth, below 50 contraction.

You should be watching:

Theres been a seasonal trend to China PMI in each of the last three years, where we saw a modest uptick sequentially in July, August, and September. I expect the same pattern to develop in 2012. Historical China PMI readings: > 2009: July 53.3, August 54.0, September 54.3. > 2010: July 51.2, August 51.7, September 53.8. > 2011: July 50.7, August 50.9, September 51.2. > November 2011-June 2012: 49.0, 50.3, 50.5, 51.5, 53.1, 53.3, 50.4, 50.2. Its important to add the ADP employment report to the calendar this month because if theres a signicant deviation from the norm, I think the Federal Reserve will pay attention to it. Chairman Bernanke and fellow FOMC members are trying to gather as much info on the labor market as they can; the U.S. economic picture has not yet crystallized. I think well see a little improvement in the July ISM. We slipped just under 50 in June with a reading of 49.7. I think July could pull in a 50-51 and surprise to the upside.

ADP Employment Report This report is based on U.S. private payroll data (excluding government) compiled by Automatic Data Processing (ADP). The report is released monthly, two days ahead of the U.S. Labor Departments Employment Situation report, and is used for the advance read it gives on the labor market. ISM Manufacturing Index Issued by the Institute of Supply Management, this report provides an inuential monthly measure of the health of U.S. manufacturing based on an in-depth survey of 300 manufacturing rms. An index value of 50 is the dividing line between an expanding or slowing economy. Data released is for the previous month. FOMC Meeting Announcement The Federal Open Market Committee (FOMC) releases its interest rate decision following its monetary policy meeting.

There will be no Bernanke press conference after the FOMC meeting, just a straight statement release. U.S. Treasury yields have touched historic lows in the last couple of weeks, with the 10-year note trading as low as 1.379%. I think the impact of further easing measures is suspect, yet there are still some things the Fed can do. Adding language about extending the duration of the low interest rate environment into 2015 is one possibility. It is inconclusive to say that Wednesday, August 1 will be the day the Fed announces further expansion to the balance sheet. However, I will say that they are clearly leaning in that direction and will eventually do so, most likely with longer term Treasuries and mortgagebacked securities. The BOE acted upon further easing measures at last months meeting, increasing its asset purchase target from $325 billion to $375 billion. I think we can expect both the BOE and ECB to do whatever they can to support growth-absent European environments.
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Bank of England and European Central Bank Rate Decisions On August 2, the Bank of England (BOE) and European Central Bank (ECB) announce their respective interest rate decisions.

August indicators / events of note:

U.S. Unemployment and Private Sector Jobs Private payroll data is part of the Labor Departments monthly U.S. Employment Situation report. This data gives the true employment story, is the best gauge of the economys direction, and has the power to move markets. German Factory Orders Germany issues its monthly release of manufacturing orders (domestic and foreign).

You should be watching:

We look to the unemployment rate to remain unchanged at 8.2%. We saw modest improvement in the headline number last month, at +80,000 jobs. Were looking for 110,000 to 125,000 jobs to be added this month. Last month, 84,000 private sector jobs were added; this month were looking for 115,000 to 130,000 new jobs. German factory orders were up 0.6% last month, month on month. My reason for watching this data is to make sure that German-produced capital and consumer goods do not initiate a contraction trend. I suspect that the decline of the euro over the last couple of months will have a longer term favorable outcome for German economic conditions. What a difference a year makes. Last month, China CPI was 2.2%, compared to a reading of 6.5% in July 2011. Another low CPI gure would continue to clear all roadblocks for further monetary easing measures from the PBOC. I suspect that the weakening in the euro is favorable for German exports. Last month, exports were up 4.2% month over month, which was the biggest month over month rise that weve seen in over 12 months. Ive watched Chinas economic indicators closely for months, but this is the rst time Ive put the xed assets investment report on the calendar because Im putting more emphasis on this indicator. Chinas investment in its xed assets is really where you can see if Chinas monetary policy is working or not through its investments in petroleum, telecommunications, power, and machinery industries. Last month, China xed assets investment was up 20.4% month on month.

China CPI The consumer price index (CPI) measures the price of consumer goods and services. As such, CPI data are signicant indicators of ination. German Trade Report Germanys import and export data is provided in its monthly trade report, released by the Federal Statistical Ofce in Wiesbaden. China Industrial Production, Retail Sales, and Fixed Assets Investment > Industrial production measures changes in output for the industrial sector of Chinas economy, including manufacturing, mining, and utilities. > Retail sales is a measure of total receipts at stores that sell durable and nondurable goods. > Fixed assets investment discloses how much China is investing in the countrys infrastructure projects, like roads and bridges. USDA WASDE Report The World Agricultural Supply and Demand Estimates (WASDE) report provides the USDAs comprehensive forecasts of supply and demand for major U.S. and global crops and U.S. livestock. The report gathers information from a number of statistical reports published by the USDA and other government agencies, and provides a framework for additional USDA reports.

The WASDE report will give us a picture of whats going on with the drought in the Midwest and the challenges to cotton, soybean, wheat, and corn gures. This report has a signicant economic impact and will let us see what the supply and demand picture for these commodities looks like.

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August indicators / events of note:

China Trade Report Chinas monthly trade report provides important import, export, and interest rate data on the Chinese economy. U.S. Retail Sales Retail sales data is released monthly by the U.S. Department of Commerce. Retail sales measure total receipts for sales of durable and nondurable goods. Consumer spending accounts for two-thirds of GDP and is therefore a key element in economic growth. Each report is based on the previous months data. Regional Manufacturing Indicators > Empire State Manufacturing Survey The Federal Reserve Bank of New York conducts this monthly survey of manufacturers in New York state across a variety of industries. Report data is for the month in which it is released. > Philly Fed Manufacturing Survey This monthly survey provides useful intelligence on manufacturing conditions within the Philadelphia Federal Reserve district and is an indicator of broad manufacturing sector trends. > Richmond Fed Manufacturing Index The Federal Reserve Bank of Richmond release a monthly report of manufacturing activity in the mid-Atlantic and Southeast, which includes Virginia, Maryland, the Carolinas, the District of Columbia, and parts of West Virginia. > Chicago PMI This monthly index, compiled by the Institute of Supply Management Chicago, provides insight into business conditions at manufacturing and non-manufacturing rms in the Chicago area, and is considered a proxy for the overall U.S. economy. A reading above 50 indicates an expanding business sector, below 50 contraction. Data released is for the previous month. U.S. Existing Home Sales This monthly report from the National Association of Realtors provides sales-closing data on previously constructed homes, condos, and co-ops. Existing homes account for a larger share of the market than new homes and indicate housing market trends. Each report is based on the previous months data.

You should be watching:

Chinas imports and exports data are worth watching, but I dont expect to see much movement either way this month.

Recent retail sales data suggests softening. Last months retail sales were down 0.5%, month on month. We should be keeping an eye on this number.

Were seen contraction in regional manufacturing over the last few months, so this month were going to pay attention to the Empire State, Philly Fed, Richmond Fed, and Chicago PMI manufacturing reports to see if regional manufacturing has clearly slowed. Over the rst quarter of 2012, the Empire State Manufacturing Survey readings were 13.48 (January), 19.53 (February), and 20.21 (March). Last month we saw it slip to 7.39. The most important of these manufacturing reports is the Philly Fed, which contracted in each of the last few months: -12.9 (July), -16.6 (June), and -5.8 (May). There is an incredibly high correlation between U.S. GDP and this report, and even the market itself. In fact, I suggest that a positive Philly Fed reading in August should be conrmation for investors that potential appreciation in the markets is about to unfold. Manufacturing activity has ground to an absolute halt in the mid-Atlantic and Southeast region. Last month, the Richmond Fed Manufacturing Index signicantly contracted at 17.31. Chicago PMI readings from February through June 2012: 60.2, 64.0, 62.2, 56.2, 52.7, and 52.9.

There has been a lot of improvement in existing home sales, and I believe we are coming off the bottom that was put in place two years ago, in July of 2010, when sales were at $3.39 million. Last months sales of $4.37 million were mildly disappointing coming off the prior months reading of $4.62 million. I wouldnt call it an acceleration, but we have probably marked the bottom. Putting this indicator back on the calendar says a lot; we havent included it in a long time.
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August indicators / events of note:

FOMC Minutes The Federal Open Market Committee (FOMC) releases minutes from its July 31August 1 meeting. U.S. Durable Goods Orders This monthly release from the U.S. Commerce Department reects new orders placed with U.S. manufacturers for immediate and future delivery of factory hard goods, and is an indicator of how busy factories will be to ll those orders. Data reported is for the previous month.

You should be watching:

I was tempted to take this indicator off the calendar this month, but I decided to leave it on and see what insights the minutes may reveal.

Durable goods orders increased 1.6% in June, well ahead of analyst estimates of +0.3%; however, the internals of the report highlighted continued soft business investment and demand conditions. Overall, it was a mixed report that did not provide any evidence that Q2 GDP estimates should be raised. Investors should be looking to the August report for any impact to Q2 GDP, which will be released on August 29. Is there anything in this report to suggest a potential change to GDP one way or the other? Advance Q2 GDP was 1.5%.

U.S. GDP The quarterly GDP report, released by the U.S. Commerce Department, tracks the purchases of all U.S. goods and services in all sectors and is the broadest measure of the economy. Preliminary GDP for Q2 2012 will be released this month.

Beige Book FOMC commentary on current conditions in each of the Federal Reserves 12 districts is released two weeks prior to the next FOMC meeting. This months Beige Book is for the September 12-13 meeting. Kansas City Fed Annual Jackson Hole Symposium The Kansas City Federal Reserves annual symposium in Jackson Hole, Wyoming features a keynote address by Fed Chairman Ben Bernanke.

Ill be looking at the Feds Beige Book for any insight or useful nuggets into what the FOMC could be looking at ahead of its September meeting. I would imagine that Bernanke will aggressively read through this report ahead of his Jackson Hole symposium speech. Following the FOMCs August 1 meeting, only three meetings remain for the year. The September 13 meeting will be the last call for Chairman Bernanke to introduce further monetary easing prior to the election. The Jackson Hole meeting will be attended by the IMFs Christine Lagarde and Adam Posen, a member of the Bank of Englands monetary policy committee. It will give Bernanke the opportunity to telegraph his views of other central banks policy measures, and his intentions for the September 13 FOMC meeting. I expect that a lot of what the Fed may do is provide support for whatever the ECB or PBOC may not do. The most impactful monetary measures for the markets would be the PBOCs efforts. Additionally, Europe has been picking up slack and is also important to the FOMC.
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JOSEPH M. TERRANOVA, Chief Market Strategist, Virtus Investment Partners Joe Terranova is chief market strategist for Virtus Investment Partners. He was elevated to that position in June 2009, having started with the company in the role of chief alternatives strategist. In his current role, Mr. Terranova works with Virtus regional sales teams and the nancial advisors who sell the companys investment products, providing insight into the domestic and global investing landscape and has represented Virtus as a keynote speaker for several nancial institutions. He is a member of the Virtus Investment Oversight Committee. Prior to joining Virtus in 2008, Mr. Terranova spent 18 years at MBF Clearing Corp., rising to the position of director of trading for the company and its subsidiaries. In this capacity, he managed more than 300 traders and support staff for MBF, one of the New York Mercantile Exchanges largest rms. His work was highlighted as the feature story in the June 2004 issue of Futures magazine. Mr. Terranova is perhaps best known for his risk management skills, honed while overseeing MBFs proprietary trading operations during some of the most calamitous times for the U.S. markets, including the rst Gulf War, the 1998 Asian Crisis, 9/11, and the collapse of Amaranth Advisors. In 2003, he was one of the rst Wall Street professionals to make an early call for higher energy, natural resources, and commodity prices. In June 2008, he cautioned investors to move to the sidelines in commodities and, in March 2009, he encouraged investors to ignore the global embracement of pessimism and overweight equities. Before joining MBF, Terranova held positions at both Swiss Banking Corp. and JP Morgan Securities. Mr. Terranova is a regular panelist on CNBCs highly rated program Fast Money and a frequent panelist on CNBCs Fast Money Halftime Report. He is the author of Buy High, Sell Higher (Business Plus, 2012), a book about the new rules of investing based on his years as a professional trader. In 2007, Mr. Terranova and Hockey Hall of Fame player Mike Bossy established Bossys Bunch, a program that rewards excellence in the classroom for elementary school students. Mr. Terranova earned a bachelors degree in nance from the Peter J. Tobin College of Business at St. Johns University in New York.

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