On Tuesday, the U.S. Census Bureau will release its May retail sales data. The markets aren’t expecting much new information since most major retailers already announced May sales results on June 2. Sales generally climbed, but growth was weaker than expected. And much of the growth was driven by the discount retailers as consumers tightened their purse strings. We already know that consumer confidence dipped in May. Deteriorating labor market conditions certainly didn’t give consumers reason to shop. Nevertheless, any additional color on the consumer’s health is helpful considering personal consumption expenditures accounts for 70% of GDP. Also on Tuesday, Best Buy will announce the financial results of its quarter ending May 2011. Analysts are expecting earnings to decline 3 cents per share year-over-year to 33 cents per share.
May producer price index and consumer price index data will be released on Tuesday and Wednesday, respectively. It will also be watched by the Federal Reserve, whose dual mandate includes price stability. While gas prices are still a substantially higher than a year ago, The Fed continues to employ a dovish monetary policy arguing that inflation concerns could prove to be transitory. Indeed, speculation is rising that President Obama will open the floodgates of the Strategic Petroleum Reserves in an effort to combat high energy prices. Reports also indicate that Saudi Arabia intends to ramp up oil production in the wake of what it considered to be a disappointing OPEC meeting. Corn prices recently reached record highs. Smithfield Foods, the world’s largest pork processor, relies heavily on corn for feed. On Thursday, Smithfield will announce its quarterly financial results and share important insights on the outlook for food prices.
The Federal Reserve will release May industrial production and capacity utilization data on Tuesday. The previous report from the Fed said industrial production was disappointingly flat in April, while capacity utilization dipped. Earlier this month, the Institute of Supply Management told us that manufacturing activity growth decelerated to its slowest pace since September of 2009.
On Thursday, the Commerce Department will release its May housing starts number. Last month’s report showed construction started for only 523,000 homes in April, which was sharply lower than the 570,000 that was expected. Everyone is looking for signs of hope in the housing market. But the outlook isn’t good. According to a recent measure of the S&P/Case-Shiller Home Price Indices, home prices in its 20-city index fell to a two-year low. One S&P analyst wrote that another 15% decline in prices could lead to $80 billion in losses for U.S. banks. Economist Robert Shiller, the Yale professor who helped develop the Case-Shiller indices, expressed a notably bearish sentiment. Shiller, who famously predicted both the 2000 dot-com bubble and the recent housing bubble, said he wouldn’t be surprised if home prices fell by another 25%.
On Monday morning, the Treasury plans to auction off $27 billion in 13-week bills and $24 billion in 26-week bills. Economists and policymakers will continue to keep an eye on Treasury auctions in order to gauge the investment community’s taste for government securities. The auctions are likely to go without a hitch. Last week’s $21 billion 10-year note auction went smoothly, with securities selling at a yield just below 3%. However, uncertainty continues to loom as the Federal Reserve’s program to purchase $600 billion in Treasury securities—aka QE2—is scheduled to end this month. Bill Gross, the manager of the $243 billion PIMCO Total Return Fund, is the most prominent of the Treasury security bears. For months, he has argued that if the Federal Reserve, one of the Treasury’s largest customers, exits the Treasury market, then the prices of those securities will fall. But given the deceleration in U.S. economic activity, some experts counter by saying that the Federal Reserve will use new means to prop up the economy and keep interest rates low, perhaps in the form of a “QE3.” More recently, Gross appears to be backtracking a little in his bearish thesis; according to PIMCO’s website, the Total Return Fund’s exposure to U.S. debt ticked up slightly.