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October 10, 2008

Merk Economic Calendar: Week Ahead in U.S. Financial Markets (October 13-17 2008)
by Joseph Brusuelas

Financial Markets Summary For The Week of October 13-17 2008

The week of October 13-17 will see perhaps the most important week of macroeconomic data and Fed talk of the year. The weekend of Oct 10-12 will see the G-7 meeting in Washington where finance ministers will attempt to formulate a common policy to stem the damage to global financial markets. We expect them to consider guaranteeing all term lending at the meeting. The statements of Fed Chair Bernanke and ECB President Trichet can be expected to support whatever important decisions are arrived at the G-7 meeting. The economic data for the week will see several first tier data, which will include advance retail sales (Wed) and inflation data for producers (Wed) and consumers (Thurs), all for September. Tuesday will see the publication of the US Budget Statement for September, while Wednesday will see the release of Fed beige book. On Thursday the weekly jobless claims and the Philadelphia Fed survey of regional manufacturing activity will be released. The week will close with the publication of the University of Michigan's preliminary estimate of consumer confidence for October.

G-7 Meeting: October 10-12

Global finance ministers will meet in Washington to discuss the intensifying global credit crisis. We expect that steps will be taken to further coordinate a global policy response that may tend towards a blanket guarantee of all term lending and perhaps a move by the US along the lines of what the Bank of England has done to directly inject capital into the banking system. Our interpretation of the Paulson plan recently approved by the US Congress is that the US Treasury is not explicitly prohibited from injecting capital into select banks. We do anticipate that some common policy approach to be arrived at during the meeting that will allow individual countries to proceed along a similar policy path, but permit enough variation to suit local needs and accommodate domestic political realities.

Fed Talk

The market will have an enormous amount of talk from global central bankers in the week ahead. On Tuesday, European Central Bank President Trichet will speak in New York. That same day, St. Louis Fed President Bullard and San Francisco Fed President Yellen will address the economic outlook. On Wednesday Fed Chair Bernanke, Boston Fed President Rosengren and Minneapolis Fed President Stern will address the economic outlook. Thursday will see St. Louis Fed's Bullard address the US growth potential and Boston Fed's Rosengren speak on foreclosure issues. The week will conclude with Atlanta Fed President Lockhart speaking on the US economic outlook.

US Budget Statement (September) Tuesday 2:00 PM

Typically the month of September observes a surge in tax revenues due to end of the quarter payments. We expect that the September will see a far smaller than normal increase in tax payments, which is behind our forecast of $46bln surplus for the final month of Q3'08. In past weeks we have made the case that the we expect the deficit for fiscal year 2008 should arrive at -$440bln in contrast with the -$162bln recorded in 2007. Looking forward we would not be surprised to see an increase in the deficit move from 3% of GDP in 2008 to nearly 6% of GDP in fiscal year 2009, with substantial risk of a strong move well past a one trillion dollar deficit.

Producer Price Index (September) Wednesday 08:30 AM

The estimate of producer price index for September should provide a second straight negative posting on the back of easing costs of energy and commodities. We expect the headline to decline -0.4% m/m and 8.7% y/y. The core ex food and energy should increase 0.2% and 3.6%. Although, the cost of total intermediate goods is up 16.7% on an annualized basis, we do expect that the monthly indicator will see a second straight negative print. The steep increase in pipeline costs over the past year that has been passed through to the core will continue to linger for some time, but our dynamic year ahead model of core PPI does indicate that the market should begin to observe an easing in core inflation in a manner that will provide more than a good measure of comfort for the Fed.

Advance Retail Sales (September) Wednesday 08:30 AM

We anticipate that a stressed consumer will be on display in September when the market gets its first real look at demand for retail goods, post fiscal stimulus. With auto sales remaining weak the headline data should see a strong move to the downside. Given the -3.7% contraction in demand for consumer credit for the month of August and the disappointing retail chain store sales for the month of September, the risk for the month is to the downside of our bearish forecast of a -0.6% decline in the headline and a -0.2% decline in the core ex-auto data. Outside of discounting chains and food and gasoline sales, retailers took a solid hit for the month as sales at Dillard's fell -12.0%, Nordstrom's -9.6%, and Saks -11.1%.

Empire Fed Regional Manufacturing Survey (October) Wednesday 08:30 AM

Even amidst an improvement in the cost environment for producers over the past three months, there is very little relief on the horizon for industrial firms. Weak domestic demand and a resurgent dollar should combine to provide a second straight negative print in the headline-manufacturing index. Our forecast implies a decline to -9.1 on the back of a sharp decline in new orders.

Fed Beige Book (September) Wednesday 2:00 PM

Recent statements by Fed Chair Bernanke and the very blunt assessment of the economic outlook in the joint statement issued by global central banks have superseded the coming beige book report. We expect to observe a deceleration in economic activity accompanied by an increase in unemployment across the twelve Federal Reserve districts. The impact of financial turmoil across the districts will be of more than a bit of interest to the market and the assessment of issues surrounding the availability of credit should be of interest. Given the recent decline in the cost of commodities and energy the pricing environment should see some improvement.

Consumer Price Index (September) Thursday 08:30 AM

Due to the surge in headline prices throughout the second quarter of the year, we expect to see another month of data that will remain well above the comfort zone of the Fed. Our forecast implies a 0.1% m/m and 5.1% y/y posting in the headline and a 0.2% and 2.6% print in the core over those same time frame. However, given the recent reduction in the cost of energy and commodities, headline inflation will begin to moderate at a sharper rate in the fourth quarter of 2008 and continue to see further declines into Q1'09. It is important to remember that inflation is a slow moving process. The impact of pass through effects caused by the sharp increase in the headline costs, the core rate should continue to remain elevated throughout the end of the year and perhaps into early 2009, before the market observes some material improvement in the data.

Jobless Claims (Week Ending October 11) Thursday 08:30 AM

The impact of the twin hurricanes to hit the Gulf Coast this year on the claims series has begun to unwind and initial claims looks to be temporarily settling into a range between 475-500K. The continuing claims series continues to rise which is consistent with the pickup in intensity of longer-term unemployment that has been observed in the establishment portion of the non-farm payrolls series. We expect that the headline for the week will advance slightly to 483K and the continuing claims series will increase to 3.7mln.

Industrial Production/Capacity Utilization (September) Thursday 09:15 AM

The conditions are ripe for a second straight outsized decline in industrial production. Total hours worked and overtime demanded in the manufacturing and mining sector has declined for three straight months. Sales of light autos and trucks which remain critical to overall manufacturing activity has been quite weak over the past few months and there is little in the macro data to suggest that overall production will see a return to growth during the final month of Q3'08. With the dollar rebounding and demand for the external sector looking to decline in coming months, going forward we expect to see continued contraction in the manufacturing sector. Our forecast implies a -1.4% decline in output and a 78.0 posting in capacity utilization.

Philadelphia Fed Manufacturing Survey (October) Thursday 10:00 AM

After a mid summer rebound, linked to the restarting of production lines due to the end of the strike at American Axel, a key critical supplier of parts to the auto industry. With demand from the domestic sector very weak and the dollar on the rebound, we think that industrial readings across the board in October will see negative postings. Our forecast implies an -8.7 reading in the headline of the Philadelphia Fed survey of regional manufacturing conditions.

Housing Starts/Building Permits (September) Friday 08:30 AM

We expect to observe a decline to 868k in starts and 822 in permits. Should our forecast in starts be anywhere close to the actual data, it would represent the lowest print in the data since February of 1982. The combination of weak sales activity, the impact from the intensification of the credit crunch, an increasing unemployment rate and uncertainty over the economic outlook should depress starts activity going forward.

University of Michigan Consumer Confidence Survey (October-Preliminary) Friday 10:00 AM

We expect the intensification of the credit crisis to wreak havoc on consumer psychology in October. Our forecast is based on the estimate that the sharp decline in equity markets and the size and scope of unprecedented action taken by the Fed, Treasury and the US Congress will cause a sharp retrenchment in the recent improvement of consumer confidence despite of the improving cost of domestic gasoline. We anticipate that the headline will decline to 63 for the month.

Joseph Brusuelas
Chief Economist
VP Global Strategy
Merk Investments LLC

Bridging academic rigor and communications, Joe Brusuelas provides the Merk team with significant experience in advanced research and analysis of macro-economic factors, as well as in identifying how economic trends impact investors. As Chief Economist and Global Strategist, he is responsible for heading Merk research and analysis and communicating the Merk Perspective to the markets.

Mr. Brusuelas holds an M.A and a B.A. in Political Science from San Diego State and is a PhD candidate at the University of Southern California, Los Angeles.

Before joining Merk, Mr. Brusuelas was the chief US Economist at IDEAglobal in New York. Before that he spent 8 years in academia as a researcher and lecturer covering themes spanning macro- and microeconomics, money, banking and financial markets. In addition, he has worked at Citibank/Salomon Smith Barney, First Fidelity Bank and Great Western Investment Management.

Mr. Brusuelas lives in Connecticut with his wife and St. Bernard.

Merk Investments LLC is the manager of Merk Mutual Funds, including the Merk Asian Currency Fund and the Merk Hard Currency Fund. The Merk Asian Currency Fund invests in a basket of Asian currencies. Asian currencies the Fund may invest in include, but are not limited to, the currencies of China, Hong Kong, Japan, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.

The Merk Hard Currency Fund invests in a basket of hard currencies. Hard currencies are currencies backed by sound monetary policy; sound monetary policy focuses on price stability.

The Funds may be appropriate for you if you are pursuing a long-term goal with a hard or Asian currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market. For more information on the Funds and to download a prospectus, please visit www.merkfund.com.

Investors should consider the investment objectives, risks and charges and expenses of the Merk Funds carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Funds' website at www.merkfund.com or calling 866-MERK FUND. Please read the prospectus carefully before you invest.

The Funds primarily invest in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Funds own and the price of the Funds' shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. The Funds are subject to interest rate risk which is the risk that debt securities in the Funds' portfolio will decline in value because of increases in market interest rates. The Funds may also invest in derivative securities which can be volatile and involve various types and degrees of risk. As a non-diversified fund, the Merk Hard Currency Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. For a more complete discussion of these and other Fund risks please refer to the Funds' prospectuses.

This report was prepared by Merk Investments LLC, and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute investment advise nor a solicitation or an offer to buy or sell any products or services. Foreside Fund Services, LLC, distributor.

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