Next Week's Busy Economic Calendar

Due to a vacation overseas, there will be no new articles posted until the week of September 20th.

The moderate back up in Treasury yields caused by the more resilient-than-expected labor market report last Friday has essentially put the market in an "on hold" mode, awaiting further cues as to which way to go next. The particularly light economic calendar this week also left Treasuries more sensitive to supply, with the maneuvering around the 3-, 10-, and 30-year auctions representing the main drive of price action so far. A somewhat underwhelming Beige Book on Wednesday and a 27,000 decline in initial jobless claims were not potent enough information to provide prices with any momentum in either direction

This state of relative inertia has the potential to change next week, as the economic calendar is packed with major releases, usually known for their market-moving potential. At the same time, the absence of any new coupon supply almost guarantees that the economic data will be in the driver's seat of next week's price action, with a reasonable prospect that will help the market break out of this week's stalemate.

At the top of the list of such key reports next week are August's retail sales on Tuesday, the September Empire Fed and Philly Fed manufacturing surveys on Wednesday and Thursday respectively, and CPI (August) along with the University of Michigan Consumer Sentiment (September) index on Friday.

Following some inconsistent performance in the last few months, retail sales should show a moderate gain of about 0.5%, with only a slightly smaller gain in the ex-autos component. The overall number should benefit from better-than-expected "back-to-school" sales for the month and will probably underscore the fact that, contrary to concerns expressed recently, the consumer is not quite as moribund as feared. We view personal spending as still on track to post a gain in the 2-2 1/4% range (annualized) in Q3.

The two manufacturing surveys could be pivotal in setting market tone next week, not only because of the usually considerable degree of attention they command but also due to their dramatic drop in the last three months- which is particularly true for the Philly Fed (-7.7 in August compared to 21.4 in May). Both indexes should show a rebound by about 10 points or so, providing reassurance that their sharp weakening earlier in the summer was mostly caused by auto-related and other unspecified distortions and were not the precursor of an ominous, broad-based slowing in manufacturing.

A gain of 0.1% in the core CPI for August (+0.2% overall) would leave that closely watched measure of inflation at +0.9% on a year-on-year basis for the fifth consecutive month. This, although not ground-breaking material as such, should be viewed as mildly reassuring that the disinflationary dynamic is not picking up steam and that core inflation may stand a good chance of stabilizing at a fairly safe distance from the dreaded zero mark in the context of an ongoing economic recovery.

Although, on balance, the overall tone of next week's economic reports should feel consistent with a recovery that continues to plow ahead at an admittedly unimpressive pace but is showing no signs of fizzling dangerously. However, the behavior of the Treasury market, as has often been attested to in the last year or so, is not always a linear function of the specific economic reports, as other parameters often can interfere with that relationship. For example, headlines associated with the sovereign debt situation in Europe that seem to be making their way back up to the spotlight in the last few weeks, can, depending on the degree of surprises that the data hold, have a significant role to play. So, all things considered, it is safer to argue that next week has the potential to offer more exciting (see, noisy) price action in the Treasury market but offers no promises of a decisive directional move.

Anthony Karydakis