Global Business Confidence

Global business sentiment has downshifted this summer. Confidence is now consistent with a global economy that is expanding at the low end of its potential. Hiring intentions have suffered the most significant pullback in recent weeks, and consistent with that, office space demand has meaningfully weakened as well. Sentiment has weakened most in the U.S., Japan, and most recently, even in South America. It is encouraging that most of the decline in sentiment is due to a lower percentage of positive responses to the survey questions, and not to a significant increase in negative responses; it's not that conditions are eroding; more that they are not getting better.

Treasury International Capital Flows: $23.6 bil
Net long-term capital flows to the U.S. was positive at $23.6 billion in May compared with $30.6 billion in April. Risk aversion played a role in private foreign investors and foreign official institutions significantly upping their holdings of U.S. Treasury bonds and notes. Private foreign investors cut back their holdings of government agency bonds, including those issued by Fannie Mae and Freddie Mac, but they increased their net holdings of corporate bonds and U.S. equities.

Risk of Recession: +3%
The economy's struggles are well documented, and the probability that the U.S. will be in recession in six months is edging higher, rising from May's 23% to 26% for June. A tightening in financial markets, a deteriorating labor market, and a drop in consumer confidence pushed the probability of recession higher in June. The economy appears to be off to a slow start this quarter, but the recovery is expected to remain intact. Few indicators are flashing recession, and the probability of recession should begin to edge lower in the second half as we expect growth to reaccelerate

Bloomberg Consumer Comfort Index: +0.6
Consumer confidence edged higher, extending the prior week's gain. According to the Bloomberg consumer comfort index, sentiment gained 0.6 point, to -43.3 for the week ended July 17. The improvement was driven by better perceptions of personal finances; the state of the economy and the buying climate components lost ground.

Conference Board Leading Indicators: 0.3%
The Conference Board index of leading indicators rose 0.3% in June. This increase was in line with expectations. The coincident index was 0.1% higher. The modest increase in the leading index is consistent with our expectations for a continued recovery in the second half of 2011.
 

Consumer Price Index: -0.2%
For the first time in a year, consumer prices declined, falling 0.2% in June. The larger than expected decline was driven by a 4.4% decline in energy, its second consecutive monthly drop. Food prices rose 0.2% in June, half the pace in each of the previous two months. Excluding food and energy, the core CPI was surprisingly strong, rising 0.3% for the second consecutive month. This isn't alarming, but it suggests that the impact of the Japanese supply chain disruptions is not fading as quickly as we anticipated. Relief is near, as sluggish growth in the first half will catch up with consumer prices, and June's report doesn't change the Fed's wait-and-see approach.

Industrial Production: +0.2%
Industrial production for June increased only 0.2%, and that result was made possible by good gains in utility and mining output. The more important manufacturing gauge was flat, and May's gain was revised down to 0.1%. Manufacturing was held back by a 2% drop in auto production, though output in the nonauto sector rose only 0.2%. Factory capacity utilization was unchanged at 76.7%. Overall, it was a weak finish to an ugly quarter, the worst since the recovery began.
 

Jobless Claims: +10,000
Initial claims increased by 10,000, to 418,000 for the week ending July 16; the prior week's data were revised from 405,000. This was in line with expectations, as the previous week's drop was not considered sustainable in the current environment. This is consistent with a labor market that has weakened since earlier in the year.

Existing-Home Sales: -0.8%
Sales of existing homes disappointed in June, falling by 0.8% to an annualized 4.77 million units. This drop is the third consecutive monthly decline and brings sales to their slowest pace since last fall. Year over year, sales dropped by 8.8%. A rise in canceled contracts is weighing on sales. The distress sales share has fallen slightly from May and June 2010, and this drop is at least partially behind the 0.8% y/y increase in the median existing-house price. Months of inventory increased to 9.5 from 9.1.

MBA Mortgage Applications Survey: +15.5%
For the week ending July 15, 2011, the composite index surged 15.5% from the previous week, driven by a sharp rise in the refinance index. The refinance index jumped 23.1% from the previous week as homeowners rushed to take advantage of still-low mortgage rates. However, the purchase index declined by 0.1% from the previous week, indicative of a struggling economic recovery.

NAHB Housing Market Index: +2
The NAHB housing market index increased by 2 points in July, slightly higher than expected, thanks to improved expectations of future sales. Though prospective buyer traffic remained unchanged and present sales increased only slightly, the index for single-family sales expected within six months increased by 7 points. Regionally, the South and West showed significant improvements in their indices, more than offsetting a slight decline for the Northeast.

FHFA Purchase-Only House Price Index: -6.3%
The FHFA monthly purchase-only index increased 0.4% from April to May-good news that was tempered by a downward revision to April's increase from 0.8% to 0.2%. The index is now down 6.3% from its level in May 2010, slightly lower than expectations. The regional indices were mixed, with good gains in the Mountain and East South Central census divisions, offsetting declines in the West South Central and Middle Atlantic divisions. Overall, the index points to a housing market that has almost reached bottom.

New Residential Construction (C20): +14.6%
Homebuilding took a great leap forward in June, with housing starts rising to a pace of 629,000 annualized units, a 14.6% gain from May. Census revised May numbers downward, however. June's month-over-month gain is the strongest since the beginning of this year. Both single-family and multifamily starts rose strongly. Permit issuance advanced 2.5% in June compared with May. Completions declined 1.7% m/m.

Chain Store Sales Snapshot: +0.4%
The ICSC chain store sales index still shows no sign that consumer spending is following confidence lower. Sales posted their fourth consecutive weekly gain, up 0.4% in the latest week. While sales posted a larger gain in the comparable week last year, year-over-year growth remained strong by post-recession standards at 4.5%. The ICSC reported that weather was not a significant factor in the week while high and rising gasoline prices remain a drag..

Natural Gas Storage Report: +60 bcf
Working gas in underground storage rose by 60 billion cubic feet during the week ending July 15, exactly matching the consensus estimate. This report should support the recent rise in natural gas prices.

Oil and Gas Inventories: -3.7 mil barrels
Crude oil inventories fell by 3.7 million barrels during the week ending July 15, exceeding the expected decline of 2 million barrels. Gasoline inventories rose by 800,000 barrels, contrasting with expectations for a 250,000 barrel decrease. Distillate inventories rose by 3.4 million barrels, exceeding the expected increase of 1.5 million barrels. Oil inventories at Cushing OK fell to 36.7 million barrels from 37.6 million barrels. Refinery capacity utilization unexpectedly surged from 88% to 90.3%. Petroleum demand rose. This report will boost oil prices.