::Forecast for the Week::August 10,2009

The Retail Sales Report comes out this Thursday, giving us our first picture of consumer spending for the month of July. Last month's report came in better than expectations at 0.6%, but that number was slightly skewed by the high gasoline station sales. This month's reading is expected to come in at 0.4%. With this report, we will see, among other things, how much impact the government's Cash for Clunkers program has had on the retail picture.

Another big mover this week could be the Consumer Price Index, which is due out on Friday. Last month's report showed that the cost of living in the US rose more than forecast, due largely to a jump in energy costs. Overall, core inflation remained in the Fed's comfort zone, but that didn't stop inflation concerns from becoming a hot topic. And for good reason - when lenders see changes in inflation or even anticipate a rise, they may increase their interest rates to make up for the losses they expect. With concerns already out there, lenders and investors will be watching this report closely.

In addition to these reports, the Treasury's record auction of $75 Billion worth of 3-year and 10-year Notes could shake things up. The markets will definitely be paying attention to how the auction is received. Why? Let's look at it this way, the flood of auctions lately has been like an all-you-can-eat buffet of Treasury securities - as fast as the offerings can be bought, the Treasury keeps refilling the bowls with a seemingly endless amount of supply. In the end, investor appetites may slow down as more and more supply just keeps on coming. Should that happen, higher rates may be needed to induce further buying. I will keep an eye on this situation this week and keep you posted.

Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result. As you can see in the chart below, Mortgage Bonds traded sharply lower due to strong Pending Home Sales, the announcement of another Treasury auction, and better-than-expected employment news.