Morgan Stanley Sees Decreased September Sales

by: SA Editors

The following is excerpted from Morgan Stanley's Global Economic Forum:

Treasuries posted big long end-led losses in the past week after two weeks of gains to low yields since May when the market violently reversed course late in the week following a somewhat softer, but certainly not terrible, 30-year auction that wrapped up the latest flood of supply. After having gotten progressively longer and more and more into flatteners for a while recently into the 30-year auction, the less-than-stellar results ended up driving a fair amount of lightening up of both outright and curve positions ahead of the long weekend. Fundamentally the week's backdrop certainly also supported a correction, but as long as the auctions, the week's main market focus, were coming in so strongly, this was being ignored. The economic data calendar was light but quite positive in what was released, helping to ease some of the concerns raised by the prior week's run of more negative numbers. A back-and-forth pattern in the tone of the incoming data like the past couple weeks could become the norm for a while if, as we expect, the economy has moved into a sustainable but modest and bumpy recovery.


* We forecast a 2.4% plunge in overall retail sales in September but a further 0.2% gain ex autos. A very sharp - but largely anticipated - fall-off in unit sales of motor vehicles in the aftermath of the cash-for-clunkers program points to a sizeable drop in headline retail sales for September. However, the chain store reports contained a number of upside surprises which suggest some follow-through gains in discretionary spending on the heels of a solid advance in August. In particular, we look for another sharp jump in the general merchandise category, which is expected to contribute to a 0.3% rise in the key retail control gauge that feeds directly into the consumption component of GDP. Finally, gasoline prices were little changed after accounting for normal seasonal variation, so we look for a flat reading in the service station category.

* We look for a 1.3% plunge in August business inventories. The figures that have already been reported for the manufacturing and wholesale sectors - together with an anticipated plunge in stockpiles of motor vehicles - point to another very sharp drop in overall business inventories. The I/S ratio is likely to move down to 1.33 - well above where it should be but down from the recent peak of 1.46 posted at the start of the year.

* We expect both the headline and core CPI readings to round down to +0.1% in September, as gasoline prices flattened out on the heels of a very sharp advance in August and quotes for food items continue to show little change. One of the keys in this month's report will be the motor vehicle category. Cash for clunkers contributed to a 1.7% decline in new car and truck prices in August - the sharpest drop in more than 35 years. However, we were actually looking for an even larger decline and suspect that there may be some spillover to this month's report. Moreover, new motor vehicles are expected to register only a partial rebound in September since the mid-month sampling methodology should delay a full reversal of the cash-for-clunkers effect for another month. Meanwhile, the used car category has been posting some hefty increases in recent months, but survey data suggest that the pace of increase is beginning to moderate somewhat this month. Otherwise, softness in the shelter category is expected to continue to act as a restraint on consumer price inflation. Finally, our September estimate implies that the core CPI should tick back up to +1.5% on a year-on-year basis.

* We look for a 0.1% rise in September industrial production. The employment report pointed to significant underlying weakness in manufacturing activity during September. In particular, we should see sharp production declines in the metals, machinery and furniture sectors. However, another surge in motor vehicle assemblies - a response to the extremely low inventory levels experienced in the wake of the cash-for-clunkers success - should provide considerable support. Moreover, we look for another weather-related jump in utility output this month. So headline IP is likely to eke out a fractional rise even though the key core category (manufacturing ex-motor vehicles) is expected to be down 0.4%.