Financial Markets Summary For The Week of August 11-15

The publication of the advance retail sales report for the month of July on Wednesday and the consumer price index for the same month the following day should be the primary market moving macro events of the week. Outside of the US macro data, corporate earnings reports on Thursday for Wal-Mart, Nordstrom's and Berkshire-Hathaway all will be closely observed by the market. For the week earnings at Flour on Monday, Indy-Mac on Tuesday and Macy's on Wednesday will also impact the week in trading. The week will kick off with the release of the June trade balance and US budget statement for July on Tuesday. Wednesday will see the July import price report and June business inventories statement. Thursday will see the release of the weekly jobless claims data and the week will conclude the publication of the industrial production/ capacity utilization report for July, the TICS data for June and the preliminary estimate of consumer confidence by the University of Michigan for August.

Fed Talk

The week ahead will see a light schedule of Fed speakers. On Wednesday FRB Minneapolis President Stern will speak on "Repercussions from the Financial Shock" at 2:30 EDT. The following day Chicago Fed President Evans will speak on the US economic outlook at 12:30 EDT.

Trade Balance (June) Tuesday 08:30 AM

The trade balance should see a bit of deterioration in June due to the run-up in oil prices during the sampling period. The price of West Texas Intermediate moved from $128.00 per barrel to a high of 140.58 to close the month. This should partially offset the continued strong demand for US goods and services on the back of a diminished US dollar and relatively strong external demand. We expect that the deficit will increase to $-61.5bln for the month.

US Budget Statement (July) Tuesday 2:00 PM

We expect that going forward that the US budget deficit will grow materially worse. Our forecast of a -$83.7bln deficit is a sign of things to come. Our expectation of a growing problem in the deficit is a function of increased outlays and shortfalls in tax receipts. Revenues from individual taxes paid have begun to deteriorate along with corporate tax payments. Overall total receipts are down -6.0% year over year. We expect that the 2008 deficit will arrive in line with administration forecasts, but the fiscal year 2009 could approach -$600.0 billion should the Congress attempt to pass a second stimulus package and take other measures to shore up the finances at the FDIC.

Import Prices (July) Wednesday 08:30 AM

Import prices in July should advance 1.8% month over month and 21.1% on an annual basis. However, the fall in the cost of imported petroleum should provide a bit of drag on the overall increase in the cost of imports, which is the first positive news that market has observed in some time. Ex-petroleum costs for industrial supplies, foods and beverages and consumer goods will all continue to see solid increases. While the easing of the cost of imported oil will provide some measure of relief to the market in coming months, the inflation imported via the trade channel from China will remain on ongoing concern going forward as the focus inside the Middle Kingdom shifts from combating inflation to supporting growth.

Advance Retail Sales (July) Tuesday 08:30 AM

The month of July should capture the final surge in spending related to the well-timed stimulus package. The data based on the Redbook weekly and chain store sales both support this assessment and looked to receive further support due to back to school sales activity. While outstanding problems in demand for autos continues to weigh heavily on the headline, ex-autos sales are holding up relatively well all things considered. The outstanding question hovering over the retail sales picture going forward is how will consumers respond to the modest relief seen at the pump during the sampling period. We think that the cost of gasoline will have to move back towards $3.50 per gallon in the short term and below $3.00 per gallon later this year for the retail sales environment to see a solid response by the consumer. We expect that the headline will see a 0.20% increase m/m and a 0.6% advance ex-autos.

Consumer Price Index (July) Thursday 08:30 AM

The move in the headline to 5.0% in June provided a material measure of discomfort to the market. The publication of the July CPI should facilitate a sense of déjà-vu if our forecast of a 5.2% y/y and 0.5% m/m arrives on target. While, some will dismiss the headline and focus on the core, we do not take much comfort in our expectation of a 0.2% m/m and 2.4% y/y increase in core inflation. Our one-year ahead forecasts suggest further deterioration in the core. While, the market of late has taken solace in the Fed forecast that inflation should moderate in the coming months, we are careful to note that they have been making this claim since August 2006. Moreover, it is our assertion that once the liquidity that the Fed has pumped into the system over the past year begins to provide support to the economy that firms who have seen their profit margins shrink will look to regain more than a share of pricing power. Should this occur, core pricing will continue to bedevil a Fed that is counting on headline pressures easing somewhat over the next several months.

Initial Jobless Claims (Week ending Aug 9) Thursday 08:30 AM

Initial claims over the past two weeks has surged well above the critical threshold of 400K and the less volatile four week moving average has increase to 419K. The strong move to the upside may partially be a function of legislative changes that have enabled continuing files to be identified and initial filers. This implies that the market should see the headline moderate over the coming weeks towards the four-week moving average. Thus we expect a 442K print for the upcoming week.

Empire Manufacturing (August) Friday 08:30 AM

The modest decline in pricing pressures should provide a measure of relief to purchasing managers in August. We expect that with production picking back up in the manufacturing sector and new orders moving back into positive territory the contraction in the manufacturing sector should ease somewhat in August. Moreover, the midyear inventory correction, as illustrated by the -14.74 reading in the July inventory component inside the release, should have run its course and provide a bit of positive support for the month. We anticipate that the general business conditions headline will arrive at -1.0 for the month, with a risk to the upside.

Industrial Production (July) Friday 09:15 AM

Industrial production should continue to limp along on the back of demand for utilities. Our forecast of a 0.10% increase for the month is a function of the traditional summer increase in demand for energy than a solid and sustainable increase in the overall manufacturing sector. We remain quite bearish on the manufacturing sector outside of demand from the external sector and with the dollar firming, over the coming months that support should begin to weaken somewhat.

University of Michigan Consumer Sentiment (August-Preliminary) Friday 10:00 AM

After a long period of steady increases in the cost of gasoline, consumers have begun to see the most modest amount of relief at the pump. Over the past four weeks the cost of gasoline fell .23 cents to $3.88 per gallon nationally. While not enough to provide support for an observable increase in personal consumption, it should be sufficient to drive overall consumer sentiment upward to 62 during the preliminary estimate of consumer confidence. While, this is a positive development, consumer sentiment still remains at decade long lows and for lack of a better term still stinks.