UNITED STATES
The main event this week is political, the battle in the Senate to defeat the Affordable Care Act, before the recess of July 4th. Failure of the Republican majority to deliver the vote would compromise the likelihood of swift passage of a tax reform bill—and this could, in turn, affect business sentiment, with impact on the expected, by yet unseen, boom in capital spending.
On the data front, we will watch closely four events.
- Monday, June 26: May Core Durable Goods Orders (DGO) – Capital goods and Shipments. Expected: +0.3%momsa. Since March, on a y-o-y basis, capital goods shipments nondefense ex-aircrafts are on positive territory, reversing a negative trend that began in 2015, although the latest reading is still below the levels in 2012-2015. Headline DGO most likely will be negative (-0.6%momsa). But the number for core shipments is the one to watch.
- Wednesday, June 28: May Pending Home Sales. Expected 0.8%momsa, a likely rebound in the month, following two consecutive months of declines. With mortgage rates at historically low levels, and higher incomes, housing remains affordable, despite rising prices. Measures of sentiment (U. Michigan) for buyers and sellers are high and, as more people sell their houses, the total number of potential buyers increases.
- Friday, June 30: June Michigan Consumer Sentiment.Expected: no change at 94.5 down from 98+ earlier in the year. Sentiment remains high, especially among respondents who declare to be Republicans, although the index receded to the Nov/2016 level. For them, lack of progress on health-care reform, regulations, corporate or personal tax cuts, or trade adjustments may be wearing sentiment down.
- Friday, June 30: May Personal Income, Spending and PCE deflator. Expect 0.3%momsa and 0.1%, respectively on income and spending; 0.1%momsa (1.4%yoy) for core PCE. These are the most important data points of the week. First, to help gauge the post-Q1 recovery after weak retail sales in May. Second, to keep score on the FMOC’s inflation expectations. Weak PCE inflation is expected. However, if inflation dips into negative territory, there would be a change in the probability distribution of future rate hikes, and it could call into question the FMOC’s
In addition, Fed speakers will be on the tape nearly every day. Yellen speaks in London on Tuesday.
BRAZIL
The Temer saga continues, with the PGR (Procuradoria-Geral da República) expected to formally accuse him, next week, of obstruction of justice and passive corruption. The first to examine the accusation is the Supreme Court. It may take about 20 days to complete its deliberation, essentially a procedural delay. After this, the accusation proceeds to a vote in the Lower House, where a super-majority must decide whether to allow the trial to begin. It is unlikely to allow it. However, in the event it does, the President would leave office for the duration of the trial, and the leader of the Lower House would assume the Presidency, pro-tempore. Even if this dramatic outcome is avoided, and Temer remains in office until the end of his mandate, as I expect he will, his obstinacy in clinging to power, ineffectually, is dragging down confidence, nullifying the incipient recovery seen in Q1. Expect a year of zero growth, possibly another year of recession.
On the data front, the most relevant news will be:
- Wednesday, June 28: May data on the credit market. The deleveraging of households and firms is by now well advanced, and May data should show a continuing trend. Expect another y-o-y decline in outstanding loans with a sharper drop in loans to the corporate sector. Meanwhile, the default rate that stands at 5.9% may decrease somewhat. Deleveraging is taking a toll on economic activity, and is one of the causes for the deep recession since end-2014. The expectation was that, with a return to confidence, and the end of the deleveraging cycle, the upturn would gain speed and deliver robust growth in 2018. Presently, with the political crisis, this hope is dashed, with growth next year in the range of 1-1.5%.
- Thursday, June 29: May Central Government Primary Budget Balance. Expect a deficit of R$20bn. In April, despite a monthly surplus of R$12.6bn, the 12-months accumulated result pointed to a deficit of 2.4% of GDP. In addition, the interest bill summed to 7.4% of GDP for a nominal deficit of 9.2% of GDP, after a surplus of 0.4% of GDP from the subnational governments. Unfortunately, this picture is not likely to improve. The administration is not able to contain expenditure, and revenues will continue to disappoint. The only gain may come from lower interest rates. However, given the political uncertainty, the government is likely to spend more—so that a near 10% of GDP nominal deficit for 2017 is still likely.
- Friday, June 30: May unemployment. Expect 13.6%, stable. Unemployment is a lagging indicator of the depth of the recession. It is likely to increase through well into 2018, deepening the abysmal drop in welfare—and threatening the elections at end-2018. As elsewhere, and for better reasons, the Brazilian electorate has lost confidence in established politicians and politics. The outcome could be a surprising swing to fascist-populist outside candidates like Jair Bolsonaro.
IMPORTANT NOTICES:
This report is a general discussion of certain economic and geopolitical trends and forecasts. It does not constitute investment advice of any kind or constitute a recommendation to buy or sell any security or other financial instrument. Investors may not rely upon any of the conclusions or other statements contained herein.
Certain of the factual information contained herein was obtained from third party sources which the author considers reliable, but the accuracy of such information cannot be guaranteed.
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