RTTNews - Traders are weighing two possibilities, even as they carefully craft strategies for their next portfolio moves. Is the economy poised to remain in an extended period of shallow recession-a period many believe would be characterized by very low interest rates or whether the economy will move with a spring in its step towards a rapid and steady recovery? If the latter condition turns out to be the case, then we will be stepping into another painful period, when the inflation environment worsens and interest rates climb higher- a combination that could pour cold water on expectations of a sustainable recovery.

While suggesting that the recession may be ending this summer, Wachovia Securities commented that the strength and durability of the recovery remain very much in question. The firm conceded that the economy would have a tough time gaining momentum.

The primary reason behind the muted expectations is that consumers are still cautious, unwilling to spend freely as they are still dithery over their job and income prospects. The economy is also left to fend off threats arising from an increase in interest rates and a weaker dollar. Last week's auction of 10-year treasury notes received only a lukewarm response, clearly showing the paucity of supply for longer dates securities. A rise in interest rates has cyclical effect of nudging up mortgage rates, putting at risk the housing market recovery. That leaves the Fed in a quandary? Should it step up its purchase of treasuries and mortgage-backed securities in order to keep long-term rates down? Last week, reports suggested that the Fed is unlikely to buy big, although they did not rule out the possibility of the Fed changing the mix of its purchases or stretching the purchases over a longer period.

The Fed's Beige Book released last week showed that the twelve Federal District Banks said economic conditions remained weak or deteriorated further from the period from mid-April through May. That said, five of the districts noted moderation in the downward trend. The report also highlighted the improvement in expectations, although there is little hope that economic activity will improve significantly through the end of the year.

Manufacturing activity was reported as declining or remaining at low levels in most districts, although the outlook has improved. The Beige Book also noted that retail spending remained soft and new car purchases remained at depressed levels. That said, home sales were reported to have improved, while home constructions appears to be stabilizing. The labor market conditions also remained weak, with wages generally flat or falling.

Retail sales for May rose 0.5% month-over-month in May, in line with expectations, and rising after two months of declines. Excluding autos, retail sales were also up 0.5%, better than the expected increase of 0.2%. However, sales after auto and gasoline were stripped rose an anemic 0.1%. These number reinforce the view that consumers are still on guard, given the intensity of the economic damage we have been seeing in the current downcycle, with the gains reflecting spending on gasoline and autos, which received a shot in the arm from the magnanimous discounts thrown out by a battered industry.

Consumer confidence is still shaky, as reflected by the results of the Reuters/University of Michigan's consumer sentiment survey, which showed that the consumer sentiment index for June rose to 69 in March, below expectations for an increase to 69.5.

Meanwhile, the jobless claims report for the recent reporting week presented a mixed picture. First time claims fell to 601,000 from the upwardly revised reading of 625,000 for the previous week. On the flip side, continuing claims surged up to another fresh record after the previous week's pause. That said, initial jobless claims are more of a leading indicator and the fact that they have been declining in recent weeks should bring some cheer to the markets.

A Commerce Department report released last week showed a widening of the trade deficit, as expected. The trade deficit widened to $29.2 billion in April, with both imports and exports declining. The decline in exports was broad based, but in small magnitudes. On an inflation adjusted basis, the trade deficit was $40.5 billion, which is better than the year-ago's deficit of $57.5 billion. With the inflation-adjusted trade deficit being smaller than the average for the first quarter, trade may add about 1 percentage point to GDP in the second quarter.

Separately, the Commerce Department said business inventories dipped 1.1% month-over-month in March compared to the expected decline of 1%, with the drop spearheaded by a depletion of auto inventories. The March reading was revised down to a decline of 1.3%. Business sales fell by a lesser magnitude, dropping 0.3% month-over-month. Accordingly, the business inventories to sales ratio declined to 1.43.

Reflecting the recent uptick in oil prices, import prices rose 1.3% month-over-month in May. When fuel prices were stripped off, import prices were up a mete 0.2%. However, the underlying downward trend in import prices is likely to reverse due to the recent weakness of the dollar and the recent strength in commodity prices.

Prospects of a fragile recovery continue to brighten with the release of each economic data and traders are likely to look forward to the unfolding week's economic calendar for confirmation of expectations that the economy will slowly and steadily limp its way towards a recovery. The Commerce Department's housing starts report for May, the National Homebuilders Association's housing market index for June, the Federal Reserve's industrial production report for May, the jobless claims report for the week ended June 13th and the results of the June manufacturing surveys of the New York Fed and the Philadelphia Fed are among the key reports that are likely to take the center stage during the week.

Additionally, some degree of importance may also be attached to the Labor Department's producer price and consumer price inflation reports for May, the Conference Board's leading indicators index for May and the weekly crude oil inventory report. Traders could also stay focused to the Fed speeches scheduled for the week.

Economists expect industrial production to have declined yet again in May, as the number of hours worked in the factory sector fell sharply in May. Manufacturing production is also likely to drop further, as motor vehicle production, which rose in the past two months, may see a reversal. Moreover, metals, machinery and electrical equipment output is also expected to see weakness.

However, industry output could gain support from the inventory cycle due to the fact that businesses have hugely reduced inventories and remain poised to replenish stocks, which in turn could kick start production. Recent ISM manufacturing survey suggested that the inventory index fell to 32.9, suggesting an accelerated pace of stock reduction.

Higher energy prices and the resultant increase in the prices at the pump are expected to support consumer prices to some extent. Wachovia Securities expects core prices to be supported by higher tobacco prices and owners' equivalent rent. That said, the firm is of the view that neither inflation nor deflation will be a problem in 2009.

Housing starts for May would have seen an improvement following two straight months of decline. The rise in single-family starts in April, the improvement seen in builder confidence in the first five months of the year and expectations that the short-run multi-family correction has run its course should bode well for the headline number in May.

Monday

Chicago Federal Reserve Bank President Charles Evans is due to speak on the current crisis before the Executives Club of Chicago Joint Committee in Chicago at 8 AM ET on Monday.

The results of the New York Federal Reserve's empire state manufacturing survey, which elicits response from 200 manufacturing executives in New York state, is slated to be released at 8:30 AM ET on the same day. The headline general business conditions index for June is expected to come in at -5.10.

Manufacturing conditions in New York worsened modestly in May, with the general business conditions index climbing 10 points to -4.6. Economists expected a modest improvement in the index to -12.

The new orders index fell several points and remained below '0', while the shipment index edged up into positive territory. The employment indexes remained negative and deteriorated from the month-ago levels and the inventories index also remained negative. On the other hand, the future indexes improved significantly, with the future general business conditions index rising 11 points to its highest level since September.

The Treasury Department is due to release a report on the flows of financial instruments into and out of the U.S. for April at 9 AM ET on the same day.

The National Association of Homebuilders' is scheduled to release the results of their survey on homebuilders' confidence at 1 PM ET on Monday.

In April, the housing market index rose to 16 in May from 14. The increase was in line with expectations, with the index gauging current sales conditions rising 2 points to 14, while the index gauging sales expectations for the next six months rose 3 points to 27. However, the index gauging traffic of prospective buyers remained unchanged at 13.

Tuesday

A report on housing starts, which refer to the number of privately-owned new homes on which construction has been started over some period, and building permits, which is the number of permits issued for new housing units each month, is slated to be released at 8:30 AM ET on Tuesday. Economists estimate housing starts of 483,000 for May.

Housing starts fell 12.8% month-over-month to 458,000 in April from an upwardly revised reading of 525,000 for March. Economists expected housing starts to have increased to 527,000 from the initially estimated reading of 510,000 for April.

Single-family starts rose 2.8%, while starts of buildings with five units or more were 78,000. Annually, housing starts slumped 54.2%. Building permits declined 3.3% month-over-month to 494,000.

The U.S. Labor Department is scheduled to release a report on the producer price index for May at 8:30 AM ET on the same day. The index measures the average change over time in the prices received by domestic producers of goods and services. Economists expect the headline index to show 0.6% growth and the core index to show 0.1% growth.

In April, producer prices rose 0.3% following a 1.2% decline in March, while the core producer price index rose 0.1%. Economists had expected the headline index to show 0.2% growth and the core index to show 0.1% growth.

Food prices climbed 1.5% compared to a 0.7% decline in the previous month. Energy prices edged down by 0.1% following a 5.5% increase in the previous month. On a year-over-year basis, the producer price index fell an unadjusted 3.7%. Inflation pressures in the pipeline showed mixed trend, as intermediate food prices reversed course, rising 0.3%, while energy prices fell a steeper 0.9%.

The industrial production report of the Federal Reserve is due out at 9:15 AM ET on the same day. Economists estimate that industrial production declined 0.8% in May, while capacity utilization is expected to come in at 68.4%.

The April industrial production report showed a 0.5% month-over-month decline in output following a steeper 1.7% drop in March. Manufacturing production was down 0.3%, with the weakness broad based across industries. Mining output declined 3.2%, while the output of utilities rose 0.4%. Capacity utilization declined to 69.1%, marking a record low.

Wednesday

Federal Reserve Chairman Ben Bernanke and FDIC Chair Sheila Bair are scheduled to speak to the Operation Hope Financial Literacy Summit in Washington on Wednesday.

The consumer price index for May is scheduled to be released at 8:30 AM ET on the same day. The index is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The consensus estimates call for a 0.3% increase in the consumer price index and a 0.1% rise in the core consumer price index that excludes food and energy.

Consumer prices remained unchanged in April compared to the previous month following a 0.1% decline in March. Core consumer prices, excluding food and energy, rose 0.3%, faster than the 0.2% increase in the previous month. The consensus estimates had called for an unchanged reading for the consumer price index and a 0.1% rise in the core consumer price index.

Transportation prices and cost of recreation fell by 0.4% each, while food prices were down 0.2%. On the other hand, medical care costs rose by 0.4%.

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

Crude oil inventories fell by 4.4 million barrels in the week ended June 8th to 361.6 million barrels. Despite the decline, stockpiles were still above the average range.

Distillate inventories edged down 0.3 million barrels and remained above the upper bound of the average range. Gasoline stockpiles declined by 1.6 million barrels and were below the lower limit of the average range. Refinery capacity utilization averaged 84.8% in the four weeks ended June 5th compared to 84.2% in the previous week.

Thursday

The Labor Department is due to release its customary weekly jobless claims report for the week ended June 13th at 8:30 AM ET on Thursday.

Initial jobless claims, a closely-watched gauge of layoffs, came in at 601,000 for the week ended at June 6th. This was down 24,000 from the previous week's revised level of 625,000.

The 4-week moving average for initial claims, a statistic that flattens out week-to-week fluctuations in the data, dipped to 621,750. Continuing claims, which measures people receiving ongoing unemployment help, pushed further higher, setting yet another record by rising 59,000 to 6.816 million.

The results of the Philadelphia Federal Reserve's manufacturing survey are due out at 10 AM ET on the same day. Economists expect the diffusion index of current activity to show a reading of -17 for June.

In May, the index of business activity rose 1.8 points to -22.6. However, the increase was less than what analysts had expected. Nonetheless, May marked the third straight month of an improvement in contraction. The new orders index fell to -25.9 from -24.3 in April, while the backlog of orders index rose slightly to its highest level since September. The shipment index climbed to -19 in May from -35.7 in April, signaling a sharp improvement. Moreover, the future general business activity index rose to 47.5 from 36.2 in the previous month, marking the highest level since November 2004.

The Conference Board is scheduled to release a report on the U.S. leading index for May at 10 AM ET on the same day. The consensus estimate calls for a 0.9% increase in the leading indicators index for the month.

In April, the leading indicators index rose 1% following a 0.2% decline in March, marking the first increase in seven months. Stock prices, the interest rate spread, consumer expectations, initial unemployment claims, the average workweek and supplier deliveries all contributed positively to the index, while real money supply and housing starts acted as drags. Meanwhile, the coincident economic index fell 0.2% compared to a 0.5% drop in the lagging economic index.

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