Trade Balance (July)
Trade Balance for July was -$44.9 billion. The is the (X-M) component of GDP. The Trade deficit was smaller partly because of lower oil prices. Exports were up 4.8%.

Consumer Metrics
The Consumer Metrics Absolute demand Index has been increasing the past 6 days. This is a near real time measurement of online discretionary spending.

Bloomberg Consumer Comfort Index
This survey measurement of consumer confidence fell to -49.3 its second lowest level of this year.

-Yes You Should Worry About Europe (John Carney, CNBC)
-What Europe’s Short-Selling Ban Means. Will It Work? (Heidi Moore)
-Q&A: Fate of Europe’s Economy (Michael Lewis, Vanity Fair)
-Full Piece: Fate of Europe’s Economy (Michael Lewis, Vanity Fair)
-Sometimes Inflation Is Not Evil (Floyd Norris, NYT)
-10 Myths Politicians Want You To Believe (Barry Ritholtz)
-CHARTS: S&P 500 vs. 30yr Bond, Gold, Dollar, Oil (TheArmoTrader)
-CHART: S&P 500 Yield Exceeds 10yr Note Yield (KidDynamite)
-10yr Real Yields = 0.00% (LendingTree Chief Economist)

Rates dropped early last week because: (1) a weak jobs report weighed on markets, (2) bonds liked the 10yr and 30yr Treasury auctions, (3) Bernanke said recovery is “frustratingly slow,” (4) jobless claims rose. Below is a preview of next week’s data and rationale for why rates should be even to slightly down.

It’s a big week for measuring the strength manufacturers and home builders, the mood of consumers, and the level of business and consumer inflation.

Consumer mood: Monday is May retail sales, Thursday is weekly jobless claims, and Friday is June consumer sentiment. Retail sales will likely be flat, and consumer sentiment may improve a bit as gas prices have come down. Net neutral for rates.

Manufacturing activity: May’s manufacturing surveys showed weaker activity and higher prices paid. Wednesday and Thursday are June New York and Philadelphia area manufacturing outlook surveys, and it’s unlikely that both surveys will show markedly increased activity and relief from rising prices. Bonds rise, rates drop.

Homebuilder activity: Wednesday is the June National Association of Homebuilders housing market index and Thursday is May housing starts and building permits. Theses numbers have been disappointing and no new evidence suggests a meaningful improvement. Bonds rise, rates drop.

Inflation: Tuesday and Wednesday are May Producer and Consumer Prices, and while the debate always rages that food and oil prices are an issue, bonds are unlikely to trade that belief next week, especially since oil dropped in May. Neutral to better for rates.

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Income growth is fairly strong but being consumed by higher energy and food costs. In is not that people are buying more stuff but more the case that they are paying more for the stuff they are buying.

The PCE price index is a measure of inflation which looks only at consumer goods.

Consumer Sentiment increased to 74.3. For the past year this number has unduly been affected by gasoline prices making it, in my view, useless.

NAR Pending Home Sales:
Pending home sales fell 11.6% since last month, and fell 26.5% since last year. The housing market is ill. With prices continuing to fall there is little incentive to buy now. Politicians have insinuated themselves into the market trying to make foreclosures tougher. The effect of that will be to drag out the date on which we start to see recovery in the housing market.

Bonds are topped out at the 200-day moving average so, while a further rally (that would bring lower rates) looks unlikely, a steep price drop (that would cause rates to spike) isn’t justified by economic data. Rates are fantastic, and below is a preview of the rate week ahead.

First, a word on last week’s “low” consumer and producer inflation shown in the accompanying table.

Yearly consumer and producer inflation figures appear tame … if you focus on the “Core” figures which exclude food and energy. This is what the Fed does because they say food and energy prices are too volatile short-term to dictate monetary policy.

But it’s not only monetary policy that dictates consumer mortgage rates. Day-to-day, it’s mortgage bonds that dictate mortgage rates.

If bond markets see inflation trends, they tend to sell, pushing rates higher. This happens because bonds pay investors fixed income each year. If inflation sets in, it erodes the buying power of that future bond income. This causes investors to sell, bond prices to drop, and yields (or rates) to rise.

So while rates are low as bonds rally on bad economic news, bond markets are more sensitive to all-inclusive inflation numbers than the Fed. Those figures are called “All” in the table, and you’ll see they’re much higher (than Core) for consumers and especially producers.

Next week, bond investors will get more producer inflation inputs Monday and Thursday from New York and Philadelphia regional manufacturing surveys. These surveys have shown higher inflation in recent months, and rates will rise slightly if the trend continues.

Bond markets will also digest April housing starts Tuesday and April existing home sales Thursday. These numbers may show a continued weak trend which will help rates.

The jobs picture is slightly weaker which also helps bonds and rates. Thursday’s initial unemployment insurance claims figure will be the latest read.

After three weeks of rising jobless claims, last week’s claims (reported May 12 for the week ending May 7) decreased by 44k, and the four-week moving average of new claims rose 4,500 to 436,750.

Stay tuned, and hope you have a great week.

Inflation concerns aren’t just from Europe and China rate hikes this week. Rising commodities are the main issue: oil is at a 30-month high $111, gold is near record of $1474, silver’s at a 31-year high of $40.30. Same story in agriculture. Oil is of particular concern going into this weekend’s election in Nigeria, the fourth largest oil supplier to the U.S. Elections were postponed last week due to violence and fraud.

Stocks still can’t quite break the upside resistance levels of 1333 on the S&P 500, levels it hasn’t closed above since the February 18 high of 1343. And the last time the S&P was that high before February was June 19, 2008. If stocks can rise above it’s current level, we’d likely see a climb higher, which would result in a bond selloff that would also push rates higher.

If the inflation theme continues and stocks can break higher, there’s some meaningful risk of rates spiking. Mortgage bond prices are sitting at a key downside resistance level, and if stocks break higher and bonds break lower, mortgage bond prices could potentially drop another 100-110 basis points, which would translate into rates rising about .375% to .5%.

On top of these factors, there’s $66 billion more Treasury supply coming into bond markets next week: $32b 3yr notes Tuesday, $21b in 10yr notes Wednesday, and $13b in 30yr bonds Thursday. More bond supply can also pose downside price pressure on bonds, and rates rise when bond prices drop.

Check in this weekend for our full WeeklyBasis report previewing next week.

The Fed’s preferred measure of inflation, the Personal Consumption Expenditures Index (PCE), showed inflation was up 0.4% in February and up 1.6% since a year ago. Removing oil and food prices, “Core” inflation was up 0.2% in February and up 0.9% since a year ago. The Fed often argues that food and energy are too volatile to count short-term, but even the Fed’s favored Core PCE inflation is trending up since October. Bonds tend to sell on such trends, which is how bonds opened but have since recovered to flat after the pending home sales data (below).

Personal income was only up 0.3% in February vs. 1.2% jump last month, and February savings is still a bit high at 5.8% vs. 6.1% last month. Consumer spending was up 0.3% in February after being flat last month. Here’s a full summary and table.

And pending home sales rose 2.1% in February. Bonds improved after this report beat expectations of 0.3% and was an improvement over the 2.8% drop last month. But it’s still down 8.9% from a year ago, and is the latest reminder that housing is still the weak spot in the economic recovery.

The tough choices are compounded when Libyan turmoil is actually the reason for rising oil. Libyan rebels are currently winning a war for that country’s key oil ports, and even though Libya only produces 2% of global oil supply, the North Africa & Middle East region (see map) controls 35% of the world’s oil, and popular uprisings are spreading toward the Middle East, which controls 30% of that total. With this as a backdrop, let’s recap last week and preview next week.

Recap Last Week: Feb 28-Mar 4
Last week began with a confirmation that consumer inflation remains flat but as the week pressed on, rates rose on three (1, 2, 3) monthly manufacturing surveys that showed marked improvement along with continued business inflation due to rising oil and commodity prices. Rates also rose in anticipation of big February jobs growth, which was confirmed by Friday’s data showing +222k new private sector jobs vs. +50k in January. But rates dropped again Friday as violence in Libya (and no wage growth in the U.S. jobs report) outweighed surface-level jobs data.

Preview Next Week: Mar 7-11
Next week may end up much like last week, with conflicting data causing massive rate volatility (.375% rate swings up or down), and ultimately ending even.

Two potentially higher-rate factors are: (1) bonds may sell on supply concerns as $66b in new Treasury securities will be auctioned into market as follows: $32b in 3yr notes Tuesday, $21b in 10yr notes Wednesday, and $13b in 30yr notes Thursday, and (2) February’s Retail Sales on Friday are expected to be +1%. Rates were flat on January’s +0.3% retail sales, so if it does jump to 1%, rates would jump too.

But bonds could remain a safe haven as geopolitical instability fears win out over oil-driven inflation fears. Ultimately inflation would cause U.S. rates to rise as U.S. bonds sell, but short-term, the bond bet is that higher oil threatens U.S. economic growth, so bond buying would pull rates down and offset the higher-rate factors above.

CONFORMING RATES ($200,000 to $417,000) 0 POINT
30 Year: 4.875% (4.99% APR)
FHA 30 Year: 4.75% (4.84% APR)
5/1 ARM: 3.5% (3.62% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) 0 POINT
30 Year: 5.125% (5.24% APR)
FHA 30 Year: 4.75% (4.84% APR)
5/1 ARM: 3.875% (3.99% APR)

JUMBO RATES ($729,751 to $2,00,000) 1 POINT
30 Year: 5.375% (5.49% APR)
10/1 ARM: 5% (5.12%)
5/1 ARM: 4.0% (4.12% APR)

Also today we’ve had 3 other data points: (1) Jobless Claims dropped by 22k, from 413,000 down to 391,000. Continuing Claims also dropped. (2) Durable Goods were +2.7% in January, versus a drop of .4% in December. (3) January sales of new single family houses were down 12.6% from previous month and down 18.6% from January 2010, with an average sales price of $260,300. The seasonally adjusted estimate of new houses for sale at the end of January was 188,000. This represents a supply of 7.9 months at the current sales rate.

Best real-time Libya coverage is from Al Jazeera: live blog | live TV