By Theresa Sheehan

PRINCETON (SMRA) – The week ahead will provide markets a lot to
mull over, from Federal Reserve Chairman Ben Bernanke’s semiannual
monetary policy testimony — which comes on the heels of a unexpectedly
disappointing employment report — to the initial look at some important
economic data on consumer spending and inflation.

The week will also include the first wave of closely watched
earnings reports, starting with Alcoa Monday. The financial sector sees
reports from JPMorgan Chase Thursday and Citigroup Friday.

Bernanke delivers his semiannual monetary policy testimony
Wednesday and Thursday, first before the House Financial Services
Committee and then before the Senate Banking Committee.

In advance of this, the Fed will release the minutes of the June
21-22 Federal Open Market Committee meeting at 14:00 ET Tuesday. The Fed
moved the scheduled release date up one day so as not to conflict with
the Chairman’s appearance on the Hill.

Since this is the meeting that forms the basis of the Fed’s
economic forecasts, the details will be of interest. However, economic
data released in the interim may alter at least some of the economic
assumptions. In particular, the weakness in the June employment numbers
may cause Bernanke’s remarks to focus on the forecast ranges rather than
the central expectation.

Additionally, the Fed will not have the data from the upcoming
reports on retail sales and the inflation data until after the remarks
are prepared. When the retail numbers are released Thursday at 8:30 ET,
it may contain something to cause Bernanke to amend his comments before
he begins speaking at 10:00 ET. The release of the Producer Price Index
Thursday at 8:30 ET should offer further evidence that price pressures
are easing.

Only the Bank of Japan will hold a monetary policy meeting this
week and make a routine announcement. The Policy Board took further
steps to provide liquidity at their last session on June 13-14, but
probably will be on hold this time around as the recent news is for an
economy starting to mend after the March disasters.

The release of a fair number of economic reports during the week
will not long divert market attention away from the two that will speak
most directly to current economic conditions.

First — and quite probably foremost — will be the aforementioned
data on June retail sales Thursday. This will likely close out the
second quarter on a soft note, with weaker sales of automobiles and
lower service station sales as gasoline prices fell. There are hints
that sales at department and apparel stores were active, and that
consumers continued to shop for bargains elsewhere.

Most probably the softness in the auto component be attributed at
least partly to limited availability of the most sought-after
fuel-efficient cars, which offers some prospect of a turnaround as
manufacturers catch up in supplies going forward.

The back-to-back-to-back release of the inflation reports should
confirm the Fed’s expectation that gains in food and energy prices are
transitory, but there will still be some signs of increases at the core.

The June Import Price Index at 8:30 ET Wednesday will reflect the
moderation in petroleum costs and other commodities. The non-petroleum
index should show that imported food costs are rising more slowly, but
that prices for automobiles continue to advance.

The Producer Price Index for June out Thursday should indicate that
price pressures in the pipeline are easing, but that some pass-through
has occurred at the finished goods stage.

The June Consumer Price Index at 8:30 ET Friday will have the most
importance to markets, and is expected to be consistent with moderation
in headline inflation, with pockets of continue price increases for
housing, motor vehicles (both new and used), medical care, and
education.

The data available so far for the factory sector was uneven for May
and June, and much had a decidedly pessimistic tone. However, the next
reports for manufacturing could start to signal better conditions going
forward.

The earliest data for the factory sector in July will be the New
York Fed’s Empire State Survey at 8:30 ET Friday. Last month the index
dropped to -7.79, an unwelcome return to negative territory after six
months of solidly positive readings. However, this will probably start
to turnaround in July. The Richmond Fed index turned higher in June
after a softer trend in the prior month, and it frequently leads the
other District Bank surveys for changes in direction.

Industrial production and capacity utilization for June at 9:15 ET
Friday could get a bit of a boost from higher utilities output during a
warm month and continued demand in motor vehicle production. Mining
output should remain solid in spite of some lower prices for crude oil.

Measures of consumer confidence in early July could indicate that
consumers remain wary in spite of lower gasoline prices. Conditions in
the labor market are still a source of concern, and news for the housing
market is not reassuring either. The IBD/TIPP Economic Optimism Index
will be released at 10:00 ET Tuesday, and the preliminary
Reuters/University of Michigan Consumer Sentiment Index is scheduled for
release at 9:55 ET Friday.

Initial jobless claims for the week ended July 9 and the next
couple of weeks could well be volatile. The seasonal adjustment factors
for the first few weeks of July usually anticipate widespread shutdowns
at auto manufacturers for annual retooling and maintenance. However,
many automakers are going to be ramping up production of fuel-efficient
passenger cars and catching up after supply chain disruptions hit in
April and May. Conversely, there may be new claims related to severe
weather impacts and/or government layoffs and shutdowns that will make
up for the break in pattern in other industries. The four-week moving
average should be a better measure of underlying trends.

International trade data for May at 8:30 ET Tuesday will feed into
expectations for the preliminary GDP report Friday, July 29. Data on
business inventories for May at 10:00 ET Thursday will do so as well.

Data on Job Openings and Labor Turnover (JOLTS) for May will add a
bit to what is known about labor market conditions, but probably will
not do more than hint that underlying conditions are for continued slow
growth.

The U.S. Treasury will auction new 3-year notes and reopenings of
the 10-year notes and 30-year bonds in the next leg of the quarterly
refunding on Tuesday-Thursday, respectively. The next refunding package
will be offered on Wednesday, August 3. How that shapes up will be
determined by if the debt limit is addressed in time.

New 10-year TIPS notes will be offered on Thursday, auctioned on
the following Thursday, and settle on Friday, July 29.

The Treasury is currently using extraordinary measures to keep the
debt from breaching the statutory limit. This may have an impact on the
announced sizes of the offerings of bills and/or coupons in the coming
weeks.

The release of earnings reports for the second quarter 2011 have
begun, however, this is the first week in which some of the industry
bellwethers are slated for release.

Monday kicks off the unofficial start of earnings season with the
report from Alcoa after market close. Tuesday has little of market
significance. On Wednesday, reports from Marriott International and Yum!
Brands later in the day will likely be the most interesting of the
releases.

Thursday, the first of the major financial sector reports is
expected at 7:00 ET from JPMorgan Chase. Friday includes the numbers
from Citigroup at 8:00 ET. Other major reports on Friday are expected
from Mattell and Emerson.

** Stone & McCarthy Research Associates **

[TOPICS: M$$FI$,M$U$$$,MAUDS$]