RTTNews - Equity markets are showing broad consolidation moves despite warnings that the recent gains may have been overdone. Corporate earnings outlook still remains weak and economic reports do not support claims that the economy has in fact begun a turnaround. The minor correction the markets underwent last week is attributable to the headwinds of rising oil prices and bond yields, which could make it difficult for the recovery to continue into next year when all the stimuli fade and the inventory correction is over.

The one thing that can be said with certainty is that the downward momentum has slowed. However, internationally, we are seeing more fleshly green shoots. Conditions in Japan seem to be improving. The Bank of Japan and Japan's Cabinet Office have recently raised their respective assessments of domestic economic conditions more than once. Earlier in the day, a report released from Japan showed that sentiment among large manufacturers rose to -13.2 in the second quarter compared to a reading of -66 in the previous quarter, marking the biggest gain on record. Services activity is also improving, with the Ministry of Trade, Industry and Economy reporting an increase in the tertiary industry index for April.

Last week, the World Bank revised up its growth forecast for China, while an IMF official suggested that the institution is now more optimistic about growth prospects and is all set to upwardly revise its growth projections for fiscal year 2010.

In the U.S., the outlook is still hazy. Even if a recovery is in the cards, it is likely to be a long drawn out and painful progress. Last week, the National Association of Homebuilders' said its housing market index fell by 1 point to 15 in June, reflecting the caution of homebuilders due to their concerns over a fragile state of the housing market. The index of current home sales and the index gauging traffic of prospective buyers remained unchanged at 14 and 13, respectively, while the index gauging expectations for the next six months fell 1 point to 26.

However, the housing starts report pointed towards a semblance of stabilization. Housing starts rose 17.2% to a seasonally adjusted annual rate of 532,000 units in May and building permits rose 4% to 518,000. The increase in housing starts reflected a 62% jump in multi-family starts and an 8% increase in single family starts.

In-line with the recent trend of a few positive and a few negative readings, results of the manufacturing surveys released last week were mixed. The New York Fed's survey showed that the general business conditions index, indicating conditions in the manufacturing sector in the New York region, fell to -9.41 in June after improving to -4.55 in May. The new orders index improved fractionally to -8.15, while the shipments index fell to -4.84 in June from 1.29 in May. The prices paid and prices received indexes improved by about 6 points and 15 points, respectively to -5.75 and -12.64. However, on a positive note, the outlook index improved to 47.8 in June from 43.8 in May, marking the highest since July 2007.

On the other hand, the pace of contraction in manufacturing activity in the mid-Atlantic region slowed significantly, with the index of business activity coming in at -2.2 in June compared to -22.6 in May and the economists estimate of -17. The prices paid and prices received indexes improved, rising to -13 and -16.6, respectively. The new orders index also saw a significant improvement, with the index moving up about 21 points to -4.8, while the shipments index climbed 21 points to 2.1. On the employment front, there was improvement as well, albeit on a moderate degree. On a more upbeat note, the 6-month outlook index rose to 60.1 from 47.5 in the previous month, reaching the highest level since September 2003.

The job market continued to show some improvement, although it may remain in a state of flux even after the recession ends. Initial claims for unemployment benefits rose to 608,000 in the week ended June 13th, up from the previous week's upwardly revised reading of 605,000. Continuing claims came in at 6.687 million, marking the first weekly drop since January. Also, the Conference Board said its leading indicators index rose 1.2% in May, more than the 1% increase estimated by economists. However, the coincident as well as the lagging indicators indexes fell by 0.2% each.

The Federal Reserve's industrial production report released last week came as a dampener, with the May industrial output dropping 1.1% in May month-over-month, almost in-line with the expected decrease of 1%. Auto output showed one of the steepest declines, falling 7.9%. The April reading was revised down by 0.2 percentage points. Capacity utilization was at 68.3%, marking another record low reading. The output of mines fell by 2.1%.

Pricing seems to be no longer a concern. Producer prices rose at a slower-than-anticipated monthly pace of 0.2% in May. On a year-over-year basis, producer prices were down 5%. The core produce prices index dipped 0.1%, as prescription drug prices fell 0.3% in May following a 1.3% increase in the previous month. Pipeline inflation is picking up, as reflected by a 0.3% increase in headline intermediate goods prices. At the same time, consumer prices rose merely 0.1% on an overall basis as well as excluding food and energy prices. Barring gasoline prices, prices of most other categories remained tame.

The hesitant recovery many are anticipating is keeping traders glued to the economic numbers that could validate expectations. The FOMC meeting is likely to headline the economic events of the unfolding week, although there are a few economic reports that could help gain more clarity on the state of the economy.

The existing and new home sales reports for May, the Commerce Department's durable goods orders report for May, the weekly jobless claims report, the Bureau of Economic Analysis' personal income and outlays report for May and the final reading of the University of Michigan's consumer sentiment for June are likely to be in the radar in the week. Some degree of attention may also be bestowed on the final reading of first quarter GDP and the weekly oil inventory reports. Traders may also keep an eye on the treasury bond auctions, including those of 2-year, 5-year and 7-year notes, scheduled for the week.

The Fed will be left in a dilemma on the course of interest rates, as the central bank is forced to do a balancing act. One section of the FOMC members fears that inflationary pressures may overshoot if the central bank does not state that it is ready with exit strategies. The FOMC statement may show a slightly increased optimism on economic growth, while at the same time suggesting that interest rates may remain on hold for a long time due to expectations that inflationary environment be benign.

Market expectations for a 75 basis point increase in Fed rates before the end of next year are seen as being too aggressive by economists. Even if the economy improves, the unemployment rate will continue to grow, resulting in high idle capacity. So, at least until the second half of next year, we may not see a change in interest rates from the current depressed levels.

Additionally, the Fed is not expected to alter the size of its purchase of mortgage and government bonds, although it could choose to extend the period of the current program. The central bank could also alter the composition of purchases.

Existing home sales is expected to hold within the narrow range they have been in since late last year. Wachovia Securities expects buyers to have remained on the sidelines except in the distressed markets. Additional job losses and the recent rise in mortgage rates should exert downward pressure on sales in the near term.

The durable goods orders for May are expected to see a drop in May, as regional purchasing managers' surveys showed that conditions in the manufacturing sector hasn't improved considerably. Capacity utilization remains at a historical low. However, IHS Global Insight forecasts a rebound in orders in May, with the firm expecting the reversal of a spike in defense orders masking a positive performance by some key sectors.

Monday

There are no important economic reports due out on Monday.

Tuesday

The Federal Reserve Open Market Committee is scheduled to meet on Tuesday and Wednesday to discuss the near-term direction of monetary policy, and the monetary policy-setting arm of the Fed will make an announcement at 2:15 PM ET on Wednesday. The Federal Open Market Committee consists of seven Governors of the Federal Reserve Board and five Federal Reserve Bank Presidents.

At its April meeting, the Fed maintained its key fed funds target rate unchanged at a range of 0%-0.25%. The FOMC noted that the economy continued to contract, with the pace of contraction slowing somewhat. Despite the stabilization in consumer spending, the committee noted that spending continued to be constrained by job losses, lower housing wealth and tight credit.

Overall, the central bank is of the view that economic activity is likely to remain weak for a time. That said, the committee expects sustained economic growth will resume gradually due to policy actions, fiscal and monetary stimulus and market forces. Additionally, the fed suggested that inflation may remain below rates that are consistent with economic growth and price stability.

The National Association of Realtors is scheduled to release its report on existing home sales for May at 10 AM ET on Tuesday. Economists estimate existing home sales of 4.83 million for the month.

Existing home sales rose 2.9% to a seasonally adjusted annual rate of 4.68 million units in April compared to a revised reading of 4.55 million in March. The median price of existing homes rose to $170,200, up from $169,900 in March, but down 15.4% from a year-ago. Inventories measured in months' supply rose to 10.2 months from 9.6 months in the previous month. According to data from the association, about 45% of the sales were of distressed properties. The Mortgage Bankers Association said earlier in the day that mortgage applications fell 14.2% year-over-year in the recent reporting week.

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 0.9% decline in durable goods orders for May.

In April, orders for manufactured durable goods rose 1.7% month-over-month following a 2.2% decline in March. Transportation equipment orders showed the largest increase, rising 5.8%. Shipments fell 0.4% and unfilled orders declined by 1.2%. Inventories at the end of the month were down 0.9%.

The Commerce Department is due to release its new home sales report for May at 10 AM ET on the same day. The consensus estimate calls for an increase in new homes sales to 360,000.

New home sales rose 0.3% month-over-month in March to 352,000. However, annually new home sales were down 34%. The median price of a new home was $209,700, up from $202,000 last month, but was down $246,400 in the year-ago period. The months-supply of new homes was 10.1 months compared to 10.6 months in March and 10.4 months in April last year.

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

Crude oil stockpiles declined 3.9 million barrels to 357.7 million barrels in the week ended June 12th. Despite the declines, crude oil inventories remained above the upper limit of the average range.

Gasoline inventories increased by 3.4 million barrels, but stockpiles were still below the lower limit of the average range. Distillate inventories rose by 0.8 million barrels and were above the upper limit of the average range. Refinery capacity utilization averaged 85.8% over the four weeks ended June 12th compared to 84.8% in the previous week.

Thursday

The Bureau of Economic Analysis is due to release its final first quarter GDP report at 8:30 AM ET on Thursday. The report is likely to show that the U.S. economy contracted at a 5.7% rate in the quarter.

The preliminary estimate showed that the U.S. GDP shrank at a 5.7% rate in the first quarter compared to a 6.3% GDP decline in the previous quarter. The contraction was worse than the 5.5% decline expected by economists, but not as worse as the advance estimate of a 6.1% decline. 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. Personal consumption rose 1.5%, revised down from the 2.2% growth estimated earlier. However, the sore spot was inventories, which deducted 2.8% off growth.

The Labor Department is due to release its customary weekly jobless claims report for the week ended June 20th at 8:30 AM ET on the same day.

Initial jobless claims rose 3,000 to 608,000 in the week ended June 13th from an upwardly revised figure of 605,000 for the previous week. Economists expect a small increase in claims to 602,000 from the initially estimated figure 601,000 for the previous week.

The 4-week moving average for initial claims, a statistic that flattens out week-to-week fluctuations in the data, dipped 7,000 to 615,750. Continuing claims, which measures people receiving ongoing unemployment help, declined 148,000 in the week ended June 6th to 6.687 million.

Friday

The Bureau of Economic Analysis is due to release its personal income & outlays report for May on Friday. Economists estimate the report, which is due out at 8:30 AM ET, to show that personal income rose 0.2% and the personal spending increased 0.4% in the month.

Personal income rose 0.5% month-over-month in April following a downwardly revised 0.2% decline in March. Economists had expected a 0.2% increase in income for the month. Personal spending fell 0.1% compared to expectations for a 0.2% increase.

Spending on durable goods fell 0.6% in April after declining 0.3% in March, while spending on non-durable goods dropped 0.6%. Spending on services rose 0.3% in May after rising 0.1% in the previous month. The core price consumption expenditure index rose at a 1.9% year-over-year rate, the same rate in February.

The Reuters/University of Michigan's final report on the consumer sentiment index for June is scheduled to be released at 10 AM ET on Friday. Consumer confidence is expected to rise in the month, with economists forecasting an increase in the index to 69 from the previous month's reading of 68.7.

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