Equities are likely to see their fifth straight weekly gain, but the day is a busy one and surprises in the data could cause markets to jump either way. The main events today are Consumer Prices an hour before the bell, Industrial Production at 9:15, and a fresh look at Consumer Confidence at 10:00. Ahead of all those releases, markets are looking to open moderately lower, following a 0.7% gain in the benchmark S&P yesterday.

On the fixed income front, BMO’s Sal Guatieri writes: “Treasuries remain firm following yesterday’s big 12-point rally, which was spurred by a steady rhythm of bad news (retail sales down, jobless claims up, bankruptcies up, foreclosures at record highs, guitar great Les Paul dies). The weak data helped the market claw back more than half of last week’s 37-basis points drubbing (the worst since 2003).”

Aside from US data, a major headline this morning is that Hong Kong’s GDP expanded 3.3% in the second quarter, following a 4.3% decline in Q1. Textbooks will be citing that to explain what V-shaped recovery means.

Key Releases Today: 

8:30 ― The Consumer Price Index is expected to be tame in July, especially when compared to the 0.7% advance seen in June, which was led by energy costs. With oil costs moderating in July, the CPI is expected at just +0.1%. Core prices, which exclude volatile energy and food components, is expected to come in at +0.2%, just as in June.

Analysts at IHS Global Insight believe the report will be quiet in July, mostly owing to declining energy costs. 

“Pricing pressures continue to be contained as only tentative signs of a turnaround emerge,” said a weekly client note. “Energy prices should not repeat their volatility of recent months, with gasoline likely posting only a small seasonally adjusted decline of just over 1%. Excluding food and energy, core consumer prices are likely to remain resilient, recording another 0.2% gain, further dimming the threat of deflation.”

Taking a different stride, economists at BMO Capital Markets said the “Cash for Clunkers” program will have a huge impact on the core CPI.

“An average $4,000 rebate on an average $28,000 vehicle price represents a more than 14% price reduction,” they wrote in a client note. “This alone should lop 0.2 percentage points off the core CPI, resulting in a flat figure, risking the first negative monthly change in 27 years and leaving the core inflation rate running at 1.4% y/y (well below the Fed’s 1.7% to 2.0% long-term projection).”

If the CPI does lose 0.1 percentage points, the annual rate would be -2.2%, the worst symptom of deflation since 1949. The good news is that deflation should give more support to the fiscal stimulus package. Chairman Ben Bernanke, nicknamed ‘Helicopter Ben’ several years ago for saying that in the event of deflation, the Fed could just throw money from helicopters flying over cities, might also see it as a green light to inject more money into the system, or at least slow down the central bank’s exit strategy.

9:15 ― The first Industrial Production report of the third quarter is expected to give signs of stabilization in July. The median forecast is +0.6%, with forecasts in a wide range from -0.3% to +1.5%. This follows a 0.4% fall in June and a 1.2% nosedive in May.

“Although levels are expected to remain well below those of last year, the pace of decline could begin to stabilize,” said forecasters at BBVA. “In addition, inventory levels are low, so it is anticipated that businesses will need to restock in the near future, which will prompt a resumption in production.”

Ian Shepherdson from HFE also expects to see a monthly increase, but his analysis was less optimistic. “Given the troubles of the consumer . . . we are inclined to see this as little more than a rebound from the unsustainably steep fall in output after Lehman,” he wrote. “We are happy to see it, and the success of the auto clunkers program will likely boost August and September too, but we are far from convinced that any real momentum is building.”

10:00 ― The last report of the week will give some indication of how consumers are feeling in the first two weeks of August. The Reuters/U of M Consumer Sentiment report is expected to rebound to 68.5 after dipping almost 5 points to 66.0 last month. Once again it’s the “Cash for Clunkers” program that’s stealing some credit here, while rising stock prices provide optimism that the worst of the crisis ended months ago. 

Weighing on the report is, of course, the 9.4% unemployment rate. But at least the slide in payrolls last month was the smallest in 11 months. That may not help the index of current conditions, but projections for six months hence could see a boost.