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Data Preview: Reduced Northeast Cases Lift Factory Data

After a busy week, the upcoming data schedule is a bit lighter.

After being hit hard by COVID early in the spring, the Northeast region has seen a sharp improvement that will translate into further strengthening in manufacturing conditions for August.

The New York Fed’s Empire State reading, to be released on Monday, is expected to rise further after finally moving above the breakeven point in July.

At the same time, the Philadelphia Fed region posted a small decline in July, but remained well into positive territory. A rebound is likely in August.

Things are less certain for the regions currently being impacted. Data for those areas will be released the last two weeks of the month.

The national Markit flash reading, to be released on Friday, will be the first indication of how the readings for regions like Richmond and Dallas could fare in the coming weeks.

Mortgage rates remain low, supporting new construction

The weekly MBA data continued to indicate strong gains in mortgage applications in July as bank rates remained near record lows each week. Even with the COVID resurgence, there doesn’t seem to a slowdown to this trend.

As a result, Tuesday’s release of July government home building data should follow up June’s strong report, though a smaller gain is expected. Last month, housing starts rose by 17.3% in June after an 8.2% rise in May, while building permits rose by 2.1% to set up another starts gain in July.

The NAHB housing market index surged in July to a reading of 72 from 58 in June, returning the headline reading to the pre-COVID level of 72 seen in March. Based on the MBA data, the index should increase further in August when it is released on Monday.

Jobless claims still elevated, but appear to be pulling back

Initial jobless claims fell to their smallest level since the beginning of the shutdown last week while continuing claims declined to their lowest point since early-April, both welcome signs. However, the levels remain significantly elevated and will need a major shift in the economy to improve drastically.

The expiration of enhanced benefits on July 31 appears to have depressed initial filings over the last two weeks. Some displaced workers may have opted to wait for the outcome of negotiations in Washington and a possible renewal of the program before filing for benefits. They may be waiting awhile.

The claims declines have come at an advantageous time of the month, with next Thursday’s data reflecting levels in the employment report survey week. Lower survey week claims usually correlate with stronger payrolls growth, but in this case the claims declines reflect a lack of filings rather than a return to work.

Leading indicators lifted by claims, hours, stocks

In a repeat of the movements in June, the leading index in July should benefit from falling jobless claims, a longer factory workweek, and an uptick in stock prices.

In addition, the ISM new orders reading jumped in the month and the pace of building permits is expected to post another increase when they are released on Tuesday.

FOMC minutes likely to add little to unchanged environment

When the FOMC met on July 28-29, there were concerns about a resurgence of COVID-19 cases and the fact that the enhanced unemployment benefits program was about to expire on July 31.

Since then, well, nothing has really changed. COVID cases continue to rise and the two political parties may be further away from a deal on the unemployment program than they were three weeks ago.

As a result, the FOMC minutes to be released on Wednesday may have more current relevance than they normally do. There were no economic forecasts released with the July meeting and the committee already committed to keeping rates low for the medium term.

However, the July statement was a bit more upbeat than the previous one, so the discussion likely centred around whether that improvement was temporary or longer lasting considering the increase in COVID cases.

The data released since the meeting have shown further increases in payrolls and consumption and declines in initial claims filings and the unemployment rate, but the magnitude of those improvements was more modest than in previous months.

The only real surprise has been a sharp upturn in monthly inflation growth, even outside of energy prices, a discussion point for the next meeting September 15-16. However, even those gains kept the year/year rates low, in some cases negative, so there is no concern that the extreme amount of stimulus in the system is causing inflation to overheat.

In the outlook for the upcoming week’s US stocks, it may be difficult to break above February’s pre-crisis highs without some agreement on the next phase of virus relief legislation.

Kevin Kastner

Julie Ros

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