Summer is over on Wall Street and Politicians are back in Washington. Time for markets to get back to work.

Extending on two days of gains before the long weekend, equity futures are looking higher on Tuesday with the benchmark S&P a full 1% up. Globally, equity markets were in the black across the board, including a 2.14% advance in Hong Kong’s Hang Seng and a 1.71% gain in China’s Shanghai index. The gains seem likely to hold for the day as only one macroeconomic release, consumer credit, is on the schedule today.

Plus, multiple factors are responsible for the broad gains. Kraft's proposed $16.7 billion cash-and-stock bid for Cadbury helped boost UK markets, while UK industrial production numbers more than doubled expectations with a 0.5% gain. Germany’s trade surplus was also bigger than anticipated, and Swiss unemployment rose less than expected to 4.0%.

In Asia, the People’s Bank of China Vice Governor Su Ning said that monetary policy would continue to be “appropriately loose.” In addition, Japan’s trade surplus expanded more than forecasters had assumed.

“While the S&P 500 has surged about 50% since March, valuations are not stretched, but rather reflect a re-normalizing of the depression-risk pricing seen at the height of the crisis,” said Robert Kavcic from BMO Capital Markets. He added that  “factors working against stocks are mostly short-term in nature” while “supports appear more fundamental and long lasting.” 

With appetite for equities growing, taste for the safe haven US dollar is softening. The US$ index hit its lowest level since October this morning, while 1% gains were seen in the euro, yen and pound. Meanwhile, China plans to “improve the international status” of the renminbi by offering $879 million of bonds at the end of the month. “China will issue sovereign bonds denominated in its own currency to offshore investors for the first time this month – a crucial step towards making the renminbi a global currency,” according to the Financial Times. 

BMO’s Benjamin Reitzes also notes that rising commodity prices are also boosting equities. “Oil is up 2.3% to $69.50, spot gold is up $10 to $1,005 (its first move above $1,000 since February), base metals are very strong rising 2%-5%, while grain prices mostly higher.”

Treasuries, contrary to trend, continue to rally with the 10-year yield down a few points to 3.42%, ahead of two auctions later this morning.

Key Releases This Week:

Tuesday:

2:00 ― Consumer Credit, which gives a picture of current consumer finance while projecting near-term trends, is expected to contract by $4 billion in July. This marks a major improvement from the $10.3 billion monthly change in June, though much of the improvement is due to the government’s cash-for-clunkers incentive program. Since July 2008, credit will now have contracted for 10 months. 

“We think the consensus forecast underestimates the rate of contraction of consumer credit, as lenders reduce limits and raise interest rates and fees, and people seek to reduce their debt burdens voluntarily,” said Ian Shepherdson from High Frequency Economics. “The monthly numbers are variable, but the underlying trend rate of contraction is about $10B per month. Remember these numbers do not include mortgages or home equity credit; the data are dominated by credit cards and auto loans.”

Shepherdson said the case-for-clunkers program should have a positive credit effect of around $2 billion, so the monthly decrease should be near $8 billion. A bigger impact will be seen in August, but then the trend comes back to the fore. “In September and beyond, though, credit outstanding will surely contract again, and don’t expect it to level off until sometime in 2011.”

Treasury Auctions:
11:30 ― 3-month Bills
11:30 ― 6-month Bills

Wednesday:

2:00 ― The Federal Reserve’s Beige Book is an anecdotal summary of the economy written by each of the 12 Reserve banks. Investors will look at it to get a picture of what central bank officials are thinking just ahead of the September 22 FOMC meeting.

Treasury Auctions:
1:00 ― 4-Week Bills
1:00 ― 10-Year Notes

Thursday:

8:30 ― In June, the US trade balance expanded by $1 billion to -$27 billion, as imports (+2.3%) advanced at a faster rate than exports (2%). In July, exports are expected see another gain, suggesting a sense of stabilization in the global economy. Yet imports are set to advance at a faster pace once again, driving the monthly deficit up another $1 billion to $28 billion.

Analysts at IHS Global Insight believe it could even increase to $30 billion. “Both export and import volumes should increase, signaling a welcome revival in world trade activity,” they said. “But we expect that export growth will be restrained by a decline in aircraft exports, while import growth should be boosted by an influx of autos and parts as domestic vehicle production ramped up. As a result, imports should bounce more than exports, and the deficit should widen.”

8:30 ― Many analysts believe the recession technically ended in May, but with fresh jobless claims coming in each week, it won’t feel like the economy is truly recovering for many more months. The 4-week average of new claims for unemployment benefits was 571,250 in August, 11k higher than the pace in June but still a hefty decline from the 616k pace in June. There’s still a long way to go: the weekly number has to fall to 360k or so to be consistent with growth in the labor market.

“Jobs are still being lost in just about every cyclically sensitive sector of the economy, but the panic induced by the Lehman bust has long since subsided,” said HFE’s Ian Shepherdson. “What remains now . . . is an extended labor market adjustment to the new economic reality, which is that even a modest pace of expansion is dependent on public policy assistance.”

Treasury Auctions:
1:00 ― 30-Year Bonds

Friday:

10:00 ― The first monthly look at Consumer Sentiment is expected to show a small uptick in September, reversing the minor loss seen in August. Forecasters assume the preliminary survey from Reuters and the University of Michigan will inch up from 65.7 to 67.0, with a range of predictions between 65.0 and 69.0. 

“Nevertheless, consumer sentiment remains low and the ongoing weakness in the labor market will limit a strong increase,” said forecasters at BBVA. “As a result, the consumer outlook could provide an additional barrier to the recovery of the consumption component of GDP.”  

2:00 ― According to Bloomberg News, the Treasury’s budget deficit in August over the past 10 years has been $50.8 billion, whereas in 2009 analysts expect stimulus measures to puff up the monthly gap to $140 billion. In the first 9 months of the fiscal year beginning October, the 2009 deficit has ballooned to $1.267 trillion, yet recent revisions have trimmed the annual projection down from $1.8 trillion to $1.6 trillion. With numbers that large, it seems unlikely many were comforted by the new estimates, especially as projections for the 10-year deficit were revised in the other direction.