Investors this week will be given key data on second-quarter industrial production, retail sales, inflation, the housing market, consumer sentiment, and manufacturing.

Loan pricing looks to deteriorate as the week gets underway.  "Rate sheet influential" MBS prices are 5/32 lower with the Fannie Mae 4.0 coupon bid at 100-20.  This will result in 10-15bp rebate reductions.

There's a feeling in the air that Treasury prices can't rise much higher and that investors are more willing to stuff cash into equities again after six straight weeks of losses. The Financial Times is even leading with a story on how bigger banks are "preparing to cut their use of US Treasuries in August as a precaution against any turbulence that could follow if warring Republicans and Democrats fail to increase soon the US debt ceiling." READ MORE

The stock lever is already negatively impacting bond prices. S&P futures are up 5.75 points (0.45%) at 1275 and the benchmark 10-year Treasury note is -8/32 at 101-02 yielding 3.000%, 3bps higher from Friday's close versus an average yield of 3.07% over the past 12 months and 4.09% over the past decade. Its low last week was just under the 2.92% mark.The S&P has shed nearly 7% since late-April, including 2.2% last week, but the losses were more like "a slow bleed than uncontrolled hemorrhage," said economist Robert Kavcic at BMO Capital Markets. 

Key Events This Week:

Monday:

9:30 - Federal Reserve Bank of Richmond President Jeffrey Lacker speaks on "Manufacturing in the New Southern Economy" before the Southern Growth "Our History, Our Future: Manufacturing in the South" conference.  Audience and media Q&As expected.

7:00pm - Federal Reserve Bank of Dallas President Richard Fisher speaks on "Federal Reserve Functions and Economic Update" before the Certified Financial Analysts Society of Dallas-Fort Worth. Audience Q&A expected. Media Q&A TBD.

Tuesday:

8:30 - The Producer Price Index is finally expected to cool after several months of energy-led cost jumps. Economists expect headline prices to tick up just 0.1% in May, following hefty gains of 0.8% and 0.7% in the prior two months (one economist estimated that 40% of the jump in April came from higher gasoline prices). The core index, which excludes volatile food and energy prices, is expected to rise a tame 0.2%, following a 0.3% rise in April and a 0.2% cut in March.

"After rising 23% over the past nine months, energy prices at the producer level are set to decline," said economists at Citigroup. "The turn in crude prices in May has prompted a drop in gasoline and fuel oil prices at a time when seasonal factors anticipate large increases. The expected decline in energy prices is likely to keep May overall producer prices unchanged." 

8:30 - Ben Bernanke's description of the economic recovery as "frustratingly slow" and "uneven" should be borne out in May Retail Sales. Following a monthly gain of 0.5% in April, sales are expected to be trimmed by 0.3%. One culprit is auto sales, as motor vehicle unit sales declined 11% last month; economists at Citi noted that was the worst month for auto sales since "cash for clunkers" program concluded in 2009.

"Potential [car] buyers have likely delayed purchasing until more models are available - a prime example of how supply disruptions stemming from Japan's 11 March disaster have fed through from production to final demand," said economists at Nomura Global Economics.

The negative reading would break a 10-month trend of gains.

Excluding autos, sales jumped 0.6% in April but are now anticipated to rise only 0.3% as 

Aside from weak vehicle sales and a drop in gasoline station receipts due to lower oil prices, Citi expects to see "modest but healthy" gains.

"It looks like consumer spending is on a path toward a 1.25% gain," Citi said. "While this would be the lowest reading since 2009, keep in mind that there will be a powerful rebound in vehicle sales later in the year once production normalizes."

10:00 - Business Inventories are expected to rise 1% in April, in line with the 1.1% and 0.7% increases of the prior two months. But estimates are pretty wide, ranging from 0.5% to 1.1%, as some forecasters believe retail inventories could drop sharply. 

Economists at Nomura note that manufacturing and wholesale inventories jumped 1.3% and 0.8% in April, but that retail shelves likely grew at a slower pace "amid slowing sales and falling deliveries of auto sales."

"Business sales likely came under pressure in April following the 11 March Japan earthquake and uncomfortably high input costs," they added.

2:30 - Federal Reserve Chairman Ben Bernanke speaks on "Fiscal Sustainability" before a Committee for a Responsible Budget conference, "The Debt Ceiling, Fiscal Plans, and Market Jitters: Where Do We Go From Here?" No Q&A.

Wednesday:

8:30 - After five months of 0.4% and 0.5% increases, Citigroup says the Consumer Price Index should be flat in May. Expectations range from flat to +0.3%, with the consensus at flat. As with the producer price index, costs should remain subdued due to a sharp decline in energy prices.

"Energy prices finally broke the string of big jumps and seasonal adjustment factors accentuated the reversal into a meaningful decline," Citi economists said, echoing others. "Apart from food and energy, we look for a continuation of the recent trend of modest increases."

Citi noted that recent price gains have been centered in transportation as gas prices soared and airlines passed on higher fuel costs to consumers. 

"Importantly, there was little leakage to other goods and services, and inflation expectations remained anchored throughout the run-up in energy prices," they said.

The core index, which excludes volatile food and energy prices, is set to rise 0.2% for a second consecutive month.

8:30 - The first regional manufacturing report for June is anticipated to show faster growth than in May. The Empire State Manufacturing Survey dropped nearly 10 points last month to a score of 11.9 - well above the zero-mark suggesting growth, but a big enough drop to initiate worries of a turnaround in the sector. Uncertainty for the report is reflected in the variety of forecasts, which range from 3.8 to 18.1

"The anecdotal accounts from the Fed's Beige Book suggest there is more weakness to come in the regional manufacturing surveys," said economists at Nomura. "Reinforcing our forecast of a relatively weak reading of the Empire State index (3.8 versus) the Labor Department in the latest report on jobless claims cited increased manufacturing layoffs in New York."

9:00- The Federal Reserve Consumer Advisory Council meets to discuss national mortgage servicing standards, real estate owned issues; proposed rules regarding ability to pay for mortgage loans, risk retention proposal and "qualified residential mortgages" and the proposed rules regarding remittance transfers

9:15 - Industrial Production is expected to grow 0.3% in May, following a flat reading in April and a 0.7% jump in March. Forecasts range from a 0.3% decline to a 0.4% boost; the uncertain factor is impact from the March 11 earthquake in Japan.

"The auto segment probably stabilized after a big drop in April, but production remains weak because of the earthquake disruptions," said economists at IHS Global Insight. "The rest of manufacturing is firming, but not very fast. Total hours worked rose just slightly in May, but allowing for rising productivity that should be enough to raise manufacturing output 0.3%. Although not in retreat, the industrial side of the economy is no longer at cruising speed."

Added economists at Citi: "Based on industry data, assemblies were little changed in May from the low April levels. So there was no new deterioration in vehicle production. We expect vehicle production to remain low for several more months, but automakers claim that operations will be on a path toward normalization by late in the third quarter."

The capacity utilization rate should inch up to 77.1% from 76.9%, according to the median forecast.

10:00 - After last month's Housing Market Index, NAHB Chairman Bob Nielsen said homebuilder confidence had "hardly budged over the past six months as persistent concerns regarding competition from distressed property sales, lack of production credit, inaccurate appraisals, and proposals to reduce government support of housing have continued to cloud the outlook."

Data has only gotten worse since with home prices continuing to fall. Economists thus expect the survey to remain at 16 - far, far below the 50 level indicating optimism. 
"Builders are depressed and with good reason," said economists at Nomura Global Economics. "Housing completions are at all-time lows as builders cut activity significantly under flagging demand for new homes. In six months the housing market index has been unable to bounce off the level of 16 and we do not expect it to do so in June either."

Thursday:

8:30 - After a near-11% drop in Housing Starts in April, economists think it's time for some pickup. The April report left the construction sector "stuck near the bottom nationally, regionally, and in nearly every state," according to IHS Global Insight. The consensus call looks for the annual pace of starts to climb to 540k from 523k (+3.3%), a relatively modest gain - and not a hopeful sign as credit remains tight - but at least it's in the right direction.

"We look for a small rebound of 3.6% in housing starts in May to an annual rate of 542k, which would still be lower than the six-month average of 557k," said economists at Nomura. "Based on tough seasonal comparisons and a slow start to the building season, we expect building permits to fall again, by another 1.1% in May to an annual rate of 557k. There is some upside risk to building permit activity in May if builders applied to start replacing the housing stock in tornado-stricken areas."

8:30 - Initial Jobless Claims have been stuck in the 425k to 430k range for the past three weeks, adding further disappointment to a spate of weak data. Weekly claims have also been above the 400k in the past nine readings. The only encouraging sign was that continuing claims - a tally of people still receiving benefits - fell to 3.68 million from 3.75 million.

Economists at Citigroup expect weekly filing to rise and the four-week average to hit a three-week high.

"Unadjusted claims are expected to spike following the Memorial Day holiday week, posing the risk of a higher print," they wrote. "Separately, the number of beneficiaries probably rebounded after the prior week's tumble, pushing the insured rate back up to 3.0%."

10:00 - At 3.9 in May, the Philadelphia Fed Manufacturing Survey was precariously close to a negative read. Economists are predicting some upswing in June though, with the consensus forecast at 9; forecasts range from flat to 19.8. But don't call it a comeback - in March this index was soaring at 43.4. Why the massive slowdown? Rising inflation pressures, slow recovery, and perhaps some impact from the Japanese earthquake.

"Manufacturers are still smarting from supply disruptions and high input costs that are expected to linger through the summer," said economists at Nomura. They predict "a slight rebound" to 7. 

 1:10 -Richard Fisher, president of the Dallas Fed, speaks at the Dallas Fed conference on Hispanic Economic Experience in Dallas.

Friday:

9:55 - It's hard to imagine Consumer Sentiment moving upwards with unemployment rising and the stock market tumbling for six consecutive weeks, yet that's what economists are forecasting. Well, somewhat. The consensus forecast is 74.5, up one-tenth from 74.3 in May. 

Economists at Nomura say falling gas prices should produce "slightly better attitudes" despite national per-gallon prices being at $3.90 in May, about $1/gallon higher than a year before. They predict a 75.1 score.

Analysts at IHS Global Insight predict a fall to 70.3.

"May's payroll numbers were disappointing, household net worth is taking a beating from falling home prices and volatile stock markets, and gasoline and food prices are still relatively high," they said. "The good news is that gasoline prices are off their peak, providing relief to already strained household budgets."  

10:00 - A week of data helpfully concludes with the Leading Economic Indicators index, a composite measure aimed to forecast turning points in the economy. The index fell 0.2% in April - breaking a nine-month trend of gains. This month the index is anticipated to rise 0.2%, which economists at Nomura call "a tepid rebound."