Since June 10 the S&P 500 has dropped more than 7%, including a 1.9% fall on Friday, which pushed the index below its 200-day average. This week a surge of positive data could cause markets to switch direction, but if news disappoints markets could extend their recent declines.

As of Sunday evening, Dow and S&P 500 futures were pointing north, and WTI crude was up slightly to $59.91 per barrel.

The week begins slowly with no news Monday morning and only the monthly budget in the afternoon, but the week’s highlight, Retail Sales, is posted an hour before the opening bell on Tuesday. Other highlights include PPI and CPI, Industrial Production, and minutes from the latest FOMC statement.

In Real Estate, the major news will be Friday’s Housing Starts report, but don’t get too excited: analysts are expecting construction projects to remain at low levels.



Key Releases this Week:

Monday:

2pm ― Even with three months left in the fiscal year, the Budget Statement for June will push the annual deficit past the $1 trillion mark. Analysts expect the monthly deficit to be $97 billion, a major contrast to the $33 billion surplus in June 2008. In the previous report for May, the deficit created a record for the month with a $189.7 billion deficit, pushing the annual deficit to $991.9 billion.

The report isn’t known to shake markets, but reminders that the annual deficit will be $1.8 trillion can’t have much of a positive effect.

Tuesday:

8:30 ― Retail Sales for June are expected to repeat May’s performance with another 0.5% increase. With auto sales excluded, analysts look for a 0.6% advance.

Analysts at IHS Global Insight say the rise is mostly a reflection of rising gas prices. “June retail sales will jump 0.5%, but virtually all of this gain will be due to surging gasoline prices, as chain store and auto sales declined,” they said in a client note.

Comments from Deutsche Bank analysts are similar. “Recall that the previous report was boosted substantially by surging gasoline sales —ex gas retail sales rose just +0.2% m/m, and most discretionary categories posted declines,” they wrote. “If consumer sentiment is faltering—probably as a result of ongoing labor market losses—then retail activity could fall in response.”

Ellen Zentner, senior economist at BTMU, expects only a 0.3% advance in the month (+0.4% ex-autos), and looking ahead she reminded others that consumption won’t return to its pre-recession levels.

“When sales growth does break back into the black, it will be at a new level that matches the higher savings rate and little use of credit,” she said in a client note. “Saving and paying down debt have become the new mantra for households and it will be reflected in their spending habits for years to come.” 

8:30 ― The Producer Price Index has been volatile in recent months so it’s no surprise that expectations are all over the map this month. The median forecast looks for a 0.8% increase in June prices, with expectations ranging from +0.1% to +1.2%. Last month the PPI saw a 0.2% gain, building on a 0.3% gain in April.

The median forecast for core PPI (minus food & energy) is +0.1%, with forecasts ranging from -0.2% to +0.7%. In May the core PPI fell 0.1%.

Forecasters from IHS Global Insight note that the index is released early this month, “so the June report should capture nearly all of oil's recent run-up but none of the subsequent decline.” The look for the all-items index to advance 1.1% in the month due to a 20% surge in gasoline prices. 

“Although commodity costs have risen, finished goods producers cannot push through price increases with demand so weak,” they added.

10:00 ― All analysts agree that Business Inventories will see their 9th consecutive monthly drop in May. Following a 1.1% dip in April. the consensus looks for a 0.8% decline in May, with forecasts ranging from -0.7% to -1.2%.

Cuts to overhang mean businesses aren’t expecting a rebound in consumption any time soon, but it also helps the economy set up for a V-shaped rebound.

The research department at BBVA adds: “This strong reduction in inventories could actually have a positive effect on the economy because once inventories reach a certain threshold, we could see an uptick in industrial production as companies need to maintain a particular level in order to do business.” 

Wednesday:

8:30 ― After a benign 0.1% increase in the Consumer Price Index for May, analysts look for a 0.7% gain in June, owing to a leap in energy prices. When energy and food prices are excluded in the CPI core, the gain should just be 0.1%.  

With demand still weak around the globe and unemployment high at home, the threat of inflation remains feeble. Yet the Federal Reserve and Treasury haven’t signaled a clear exit strategy, so concerns for future inflation remain.

8:30 ― The Empire State Manufacturing survey is the first regional look released each month. The consensus looks for some improvement from -9.4 to -4.5 in July, indicating overall contraction for the 15th straight month.

9:15 ― Industrial Production shrank 1.1% in May and should fall another 0.7% in June, according to the consensus forecast. Though IP accounts for less than one-fifth of the economy, markets watch this report closely as a leading indicator of where the economy is heading.

“We expect production to drop about 0.5%, with manufacturing down 0.4% and relatively cool weather depressing utility output,” said Ian Shepherdson, chief US economist at HFE, in a client note. “Capacity use should fall to yet another new low of just 68.0%.”

2pm ― The FOMC meeting three weeks ago maintained the status quo so the minutes could be more of the same, but analysts will look for any comments on a potential exit strategy following massive government intervention into financial markets and the economy ― comments that were omitted in the policy statement, disappointing those investors concerned with deflation or hyper-inflation.

Thursday:

8:30 ― Last week’s Jobless Claims saw initial filings break a 22-week trend above the 600k level. Unfortunately, this week’s report may not confirm whether that was merely a blip due to the four-day holiday week, as July is known to be a volatile period for the labor market, and auto shutdowns earlier this year are skewing the data.

10:00 ― On the heels of the Empire State survey, the Philadelphia Fed Survey is also expected to report only slight deterioration in the month. The median forecast looks for -5.0 reading in July, but some analysts look for growth in the month.

Friday:

8:30 ― It’s a truism that the economy won’t recovery until the housing market recovers. Unfortunately, the Housing Starts report is expected to report that construction remains weak ― no surprise given that inventory overhang is already dragging prices down. The annual pace of construction is set to fall moderately to 530k, following a 17.2% rebound in May.

“Even though the decline in new home sales has stabilized, the market has not experienced the same renewed demand as that of existing homes because the price of a new home is not as flexible as that of an existing one,” note analysts at BBVA. “Once prices for existing homes stabilize and the excess inventory is depleted, the market for new homes could pick up again and we will see an increase in housing starts.”  

 

In the media:

Swiss Resisting Calls from US to Give Financial Information

UBS AG and the governments of the U.S. and Switzerland are deep in talks to settle a major tax-evasion case that could require the Swiss bank to reveal some -- but not all -- of the 52,000 or so account-holder names the U.S. has sought, according to people familiar with the matter. ― WSJ

Analysts Believe Goldman Earned $2bn in Q2:

Up and down Wall Street, analysts and traders are buzzing that Goldman, which only recently paid back its government bailout money, will report blowout profits from trading on Tuesday. . . Goldman Sachs is betting on the markets, but the markets are also betting on Goldman: Its share price has soared 68 percent this year, closing at $141.87 on Friday. . . . The stock is still well off its record high of $250.70, reached in 2007. In the first quarter, it posted profits of $1.66 billion. Now, the second quarter looks even better. ― NYT

JP Morgan will announce earnings on Thursday while Bank of America and Citi will announce on Friday.

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