RTTNews - Notwithstanding the optimistic light shed by Federal Reserve Chairman Ben Bernanke on the second quarter marking the bottom of the current downcycle, there are lurking fears that are keeping sentiment subdued in the markets. The commercial real estate sector has more skeletons in the closet and poses serious downside risk to growth. However, the economic readings released last week were bordering on the positive.

The wary private sector has reduced spending significantly, leading to an increase in excess capacity. Therefore, commercial real estate values and the unemployment rate will continue to surge through the first half of next year. There has been a shift in spending and borrowing from the private sector to the government. Sherry Cooper from BMO Capital Markets suggests that private sector prudence will endure as regulations are tightened and consumer and business debt piles remain. Cooper believes that the fiscal stimulus has succeeded in only partially offsetting the reduction in the private sector.

While testifying before the House Financial Services Committee in the past week, Bernanke said the near zero interest rate environment is here to stay. Bernanke's prepared also speech included a discussion of the ways and means to mop up excess liquidity from the system, which is otherwise termed as the 'exit strategy.'

The Fed Chairman is of the view that policy measures will unwind automatically as the economy recovers. He also said should there be a need, the Fed has tools available to hasten the process. Bernanke also expressed his opposition to opening up monetary policy deliberations and operations to General Accountability Office reviews. Additionally, Bernanke said Congress needs to prepare its own exit strategy from unsustainable budget deficits.

The Conference Board said last week that its leading indicators index rose 0.7% in June, faster than the 0.5% increase expected by economists. With the increase, the index has now risen for three straight months. The May reading was upwardly revised to show 1.3% growth. The interest rate spread continued to contribute to growth, while suggesting some stability in the housing market, building permits began to positively contribute to growth.

Meanwhile, initial jobless claims for the week ended July 18th came in at 554,000, while the previous week's numbers were revised up by 2,000. Continuing claims declined by 88,000, although the decline was more due to the unusual seasonal adjustments this year due to the differing timings of auto plant shutdowns.

A report released by the National Association of Realtors showed that existing home sales rose 3.6% to a seasonally adjusted annual rate of 4.89 million units in June. Economists had estimated sales of 4.84 million for the month. May sales were revised down by 50,000 to 4.72 million units. Sales have been increasing for each of the past three months and existing home sales are now at their highest level since October 2008. The months-supply of new homes fell to 9.4 in June from 9.8 in May and is now at the lowest level since December 2008. Distressed sales accounted for 31% of the overall sales. The median price of an existing home rose to $181,800, although it is down 15.4% from the year-ago period.

The Reuters/University of Michigan's survey showed an improvement in consumer sentiment from the mid-month reading for July to 66, although it was down 4.8 points from June. The upward revision was mostly due to an improvement in expectations.

The Commerce Department's new home sales report for June, the Conference Board's consumer confidence index for July, the Commerce Department's durable goods orders report for June and the advance second quarter GDP report are among the key reports the markets are likely to closely watch in the unfolding week. Apart from these reports, the S&P Case-Shiller's home price index for May, the results of the ISM-Chicago's manufacturing sector survey and the Federal Reserve's Beige Book are also likely to take the spotlight.

Traders may also stay tuned to the Fed speeches scheduled to be delivered during the week and the results of the Treasury's 20-year TIPS auction, 2-year note auction, 5-year note auction and 7-year note auction.

Durable goods orders are likely to show a modest increase in June following strong gains in April and May. That said, annualized durable goods order growth has been negative since March 2008. Conditions in the manufacturing sector haven't taken a turn for the better. The May national manufacturing survey of the ISM showed that the headline manufacturing index suggested a slower pace of contraction, while the indexes of new orders and backlog of inventories fell further into contraction zone. Unless, the manufacturing sector shows resurgence, the chances of a sustainable rebound in durable goods orders look remote.

Second quarter GDP is set to show a decline both on a quarterly basis and on an annual basis, marking the fourth straight quarter of negative GDP growth. Second quarter may most likely to show flat consumer spending despite the tax rebates and stimulus checks doled out by the government. Residential and business fixed investments are likely to have fallen yet again, albeit at a slower pace than in the first quarter.

The Beige Book may reveal an economy that is still weak, but is contracting at a more moderate pace. Tight credit standards are weighing down on lending activity. At the same time, traders may closely watch labor market conditions as portrayed by the report to assess the health of the labor market.

Monday

The Commerce Department is due to release its new home sales report for June at 10 AM ET on Monday. The consensus estimate calls for an increase in new homes sales to 352,000.

New home sales declined 0.6% in May from the previous month to a seasonally adjusted annual rate of 342,000. Sales rose in the Northeast, Midwest and West, but declined in the South. The months supply of new homes declined to 10.2 in May from 10.4 in April, with the decline coming about due to a decline in inventories to 292,000 in May. The median sales price of new homes declined 3.4% year-over-year to $221,600.

Tuesday

The S&P/Case-Shiller home price index, which tracks monthly changes in the value of residential real estate in 20 metropolitan regions across the U.S., is scheduled to be released at 9 AM on Tuesday. Economists expect a 17.80% year-over-year decline in the 20-city composite house price index for May.

The Conference Board is scheduled to release its consumer confidence report for July at about 10 am ET on the same day. The report, which is based on a survey of 5,000 U.S. households, is expected to show that the consumer confidence index slipped to 48.7 in July.

The index unexpectedly fell to 49.3 in June compared to 54.8 in May. While the present situation index fell 5 points to 24.8, marking the lowest level since March, the expectations index declined by 6 points to 65.5. The data suggests that difficult labor market conditions and high debt levels are continuing to weigh on consumers.

San Francisco Federal Reserve Bank President Janet Yellen is scheduled to speech to the Idaho/Oregon Bankers Association on the economic outlook in Couer d'Alene, Idaho at 10 am ET.

Wednesday

The Commerce Department is set to release its durable goods orders report, which gives the value of orders placed for goods designed to last for more than 3 years, at 8:30 AM ET on Wednesday. Economists look forward to a 0.5% decline in durable goods orders for June.

New orders for manufactured durable goods rose 1.8% to $163.4 billion in May, with orders showing an increase in three of the last four months. In April, orders had risen 1.4%. The increase in May was fueled by a 3.8% jump in transportation equipment orders. On the other hand, shipments declined 2.5%, unfilled orders edged down 0.2% and inventories fell 1%.

New York Federal Reserve Bank President William Dudley is due to speak on the factors driving U.S. growth and inflation before the Association for a Better New York, in New York at 8:30 am ET.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET on the same day.

The oil inventory report for the week ended July 17th showed that crude oil stockpiles fell by 1.8 million barrels, although inventories remaining above the upper boundary of the average range for this time of the year.

On the other hand, gasoline stockpiles rose by 0.8 million barrels and were near the upper limit of the average range. Distillate inventories increased by 1.2 million barrels and remained above the upper boundary of the average range. Refinery capacity utilization averaged 86.9% over the four weeks ended July 17th compared to 87.2% in the previous week.

The Federal Reserve is due to release its Beige Book, which is a compilation of anecdotal evidence on economic conditions from each of the 12 Federal Reserve districts, at 2 PM ET. The report is normally released about two weeks before the monetary policy meeting is held.

Thursday

The Labor Department is due to release its customary weekly jobless claims report for the week ended July 25th at 8:30 AM ET on Thursday.

First-time claims for unemployment benefits showed a moderate increase in the week ended July 18th, with the increase coming roughly in line with economist estimates.

The report showed that jobless claims rose to 554,000 from the previous week's revised figure of 524,000. Economists had expected jobless claims to increase to 557,000 from the 522,000 originally reported for the previous week.

Friday

The Bureau of Economic Analysis is due to release its advance second quarter GDP report at 8:30 AM ET on Friday. The report is likely to show that the U.S. economy contracted at a 1.5% rate in the quarter.

In the first quarter, U.S. GDP shrank at a 5.5% rate compared to a 6.3% GDP decline in the previous quarter. The contraction was smaller than the 5.7% decline estimated initially. On a year-over-year basis, the first quarter GDP declined by 2.5% compared to 0.8% decline in the fourth quarter.

The decline in fourth quarter GDP compared to the previous quarter reflected negative contributions from exports, private inventory investment, equipment and software, non-residential structures and residential fixed investment. The weakness was offset to some extent by positive contributions from personal consumption expenditures. Imports, which are a deduction from GDP calculations, declined.

The Labor Department is scheduled to release its report on the employment cost index for the second quarter at 8:30 AM ET on the same day. The report sheds light on wages and salaries as well as benefits. The consensus estimates call for 0.3% increase in the employment cost index for the quarter.

In the first quarter, the employment cost index rose a seasonally adjusted 0.3% compared to the expected increase of 0.5%. Wages and salaries increased 0.3%, slower than the 0.5% rate in the previous quarter and benefits climbed by 0.5%.

The results of the Institute of Supply Management-Chicago's business survey for July are scheduled to be released at 9:45 AM ET. Economists expect the business barometer index based on the survey to come in at 42.

In June, the business barometer index rose to 39.9 from 34.9 in May. Economists had expected a reading of 39. The new orders index climbed 4.3 points to 41.6 and the order backlog index rose more than 11 points to 37.6. Despite a 4-point increase, the employment index remained at depressed levels at 28.9. The rise in the inventories index for the second straight month seems to support the fact that inventory depletion that characterized much of the fourth quarter of 2008 and the first quarter of 2009 may be coming to an end. Reflecting the recent increase in commodity prices, the prices paid index increased by about 7 points.

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