After rising about 3.5% last week, stock markets are hesitant to continue moving higher as the week begins while interest rates are mostly unchanged.

One hour before Monday’s opening bell, Dow futures are down 21 points to 10,365 and S&P 500 futures are down 2.50 points to 1,098.00. The 2-year Treasury note is UNCH at 100-02, up 0.8bps to 0.596% and the benchmark 10-year Treasury note is +0-03 at 104-10, -0.9bps at 2.992%.

The September Delivery Fannie Mae 4.0 MBS coupon is +0-01 at 101-12 while the September Delivery Fannie Mae 4.5 MBS coupon is +0-00 at 103-18. The secondary market current coupon is 0.4bps lower at 3.764%. Yield spreads are slightly wider to start the week.

Ahead of Friday’s look at second-quarter GDP, economists at BMO Capital Markets noted that earnings results have been mostly positive so far.

“Even if many stocks are struggling to move higher, the underlying results look solid, with little to suggest that companies are seeing a double-dip recession coming down the pipe,” they wrote in a weekly note. “To date, 84% of S&P 500 companies have beaten earnings expectations, on pace for the highest rate so far this cycle. However, a more modest 69% have beaten revenue estimates, which seems to be the real measuring stick this quarter—investors don’t seem interested in rewarding cost cut-driven earnings surprises anymore at this stage of the cycle, but rather want to see signs of firm demand.”

Economists at BBVA said the Friday GDP release is the key report this week.

“Market expectations have taken a negative turn in recent weeks and worse than expected results would add fuel to the fire,” they said. “We expect economic growth to continue in 2H10, but at a slower pace than in the first half. A negative surprise in the GDP figures could indicate that average GDP growth in 2010 could come in below our forecast of 3.0%”

Key Events in the Week Ahead

Monday:

10:00 ― Could New Home Sales sink any lower? That’s the question investors want to know after the index fell a third in May to its lowest level in more than four decades of records. Economists anticipated the annualized pace of sales, currently at 300k, to pick up to 310k in June, and estimates range from 280k to 350k. 

“June new home sales report warrants special attention, because economic forecasters will be watching to see if the ‘hangover’ following the expiration of the homebuyer tax credit is abating,” said economists at DeutscheBank. “We expect to see that sales volumes recovered somewhat last month. In the past week, even though existing home sales fell 5.1% (to 5.37M), this was a relief of sorts since both we and the consensus were projecting a much sharper decline.”

They further noted the potential for the housing market to put the economy into a second tailspin is limited for a simple reason: “it is now only 2.4% of GDP compared to 6.3% at its peak.” 

Tuesday:

9:00 ― The S&P Case-Shiller Home Price Index is the most closely watched indicator of national home prices. This index for May will garner extra attention given the government’s tax incentives expired in April. In the prior index, prices rose 0.4% in the month among the top 20 major metropolitan areas, or 3.8% compared to one year ago. That bounce followed two months of declined and was attributed to the tax-credit. Without such stimulus, prices are likely to deflate in May.

Expectations are mixed. Economists at Nomura Global Economics forecast that prices will be up 4.1% year-over-year, which would reflect the highest rate of growth since 2006. 

“However,” they noted, “the report may signal weakness in the latest monthly trends. The Loan Performance house price index ― actually our preferred measure of house prices ― decelerated slightly in May from April, bucking normal seasonal trends. We believe the after effect of the federal homebuyer tax credit may have played a role in softening price growth.”

10:00 ― After declining nearly 10 points to 52.9 in June, Consumer Confidence is expected to fall roughly two points to 52.0 in July. Expectations are mixed but several important signs aren’t looking good: The S&P 500, a benchmark of stock prices, had shed nearly 10% over the past three months and has been volatile in recent weeks; labor markets are far from suggesting robust growth; and the housing market has been getting worse.

Economists at BTMU predict a hefty 6.6-point drop and list a series of reasons to support it. They note the University of Michigan’s measure fell 9.5 points to its lowest since August, while the IBD/TIPP index shed 1.5 points to its lowest since December 2007.

“Financial market volatility is once again stripping away wealth and investors are running for the hills (i.e. government treasuries) where preserving cash has become key,” they added. “We’ve already seen the damage show up in weak consumer spending late in the second quarter and spending is not expected to be robust in the second half of the year.”

In total contrast, economists at IHS Global Insight look for a slight bounce this month.

“The sharp drop in the previous month was probably an overreaction to weakness in the stock market and the constant litany of bad news on the BP oil spill,” they argued. “That being said, consumer confidence has been dramatically shaken in the past couple of months and it may take some time to recover to more reasonable levels.”

Treasury Auctions:

• 11:30 ― 4-Week Bills
• 11:30 ― 52-Week Bills
• 1:00 ― 2-Year Notes

Wednesday:

7:00 ― The weekly Mortgage Applications Index, a measure of mortgage loan application volume, advanced 7.6% in the week ending July 16. Extremely low interest rates must have played a large role, as the average 30-year fixed-rate mortgage decreased 10 basis points to 4.59% ― the lowest 30-year contract rate ever recorded in the survey.

Economists at Nomura note that weekly purchases remain “extremely low” and that it’s not clear what this means for the home sales outlook. 

“The correlation between this index and actual home sales has been poor in recent years,” they noted. “Nevertheless, we believe the distressed level of applications suggests downside risks to sales.”

8:30 ― New orders for Durable Goods in June could have some impact on predictions for second-quarter GDP, which comes out Friday. Economists are expecting new orders to jump 1% in June, reversing the 0.6% drop in May and adding to the 2.9% leap in April. Transportation orders are expected to be a major boost in the month due to strong aircraft orders.

“Excluding transportation, orders will continue to rise but at slower pace, indicating that business demand remains firm,” predicted economists at BBVA. “This report is volatile on a monthly basis, but the year-over-year rate is expected to remain at historically high levels, highlighting the strength of the recovery. An increase in new orders would indicate that industrial production will continue to strengthen in July.”

Economists at Nomura noted that Boeing booked 49 new orders in June compared to just 5 in May. 

“This should boost headline durable goods orders,” they said, forecasting that core orders ― nondefense capital goods excluding-aircraft ― rose by 1.0% compared to +3.9% in May. 

“Although financial conditions and the outlook for growth have deteriorated, we believe this will likely not affect capital spending for a few more months,” they concluded.

2:00 ― The Federal Reserve’s Beige Book, an anecdotal summary of economic conditions from all 12 regional central banks, may be slightly less watched than usual given that chairman Ben Bernanke testified to Congress last week. Still, the report is always valuable for its close look at each region.

Economists at Nomura Global Economics expect the banks to reiterate that economic activity is growing, albeit at a modest pace. 

“We expect a broadly similar assessment in the current report, with perhaps some reference to the fact that the pace of growth in the manufacturing sector has slowed,” they said. “Commentary about price trends will also be interesting to watch, especially given the recent firming in measures of core inflation.”

Treasury Auctions:

• 1:00 ― 5-Year Notes

Thursday:

8:30 ― Investors will be looking for some clarity in this week’s Initial Jobless Claims index. The survey recorded just 427k claims in the week ending July 10 ― the lowest of the calendar year ― before jumping 37k to 464k in the period ending June 17. The weekly average in July so far is 450k, versus an average 467k in June, 458k in May, and 463k in April. The index remains stubbornly high, but things could be, and have been, worse: in July 2009 the weekly average was 563k.

“Recent jobless claims reports have been obscured by seasonal adjustment problems related to the annual retooling of auto manufacturing plants,” said economists at Nomura. “Looking through this noise, we believe the trend in jobless claims is around 450-460,000.”

Friday:

8:30 ― This week’s key report, Gross Domestic Product, is anticipated to report that the recovery slowed down in the second quarter. Economists look for a 2.5% advance from April to June, compared with a 2.7% gain in the first three months of the year. Expectations are pretty mixed though, ranging from just 1.0% to 3.4%.

Among the “slowdown” crowd is Nomura Global Economics, which said the most recent indicators “have consistently surprised” to the downside.

“In particular, retail sales and the real trade balance have proved weaker than expected,” they noted. “With regard to the composition of growth, we expect positive contributions from consumer spending, equipment and residential investment, government spending (helped in part by the Census program), and inventories. Net trade and business structures investment likely subtracted from growth.”

By contrast, the forecasting team at BBVA said not only were fiscal stimulus and inventories supporting economic growth, “but private demand is taking hold as well.”

Somewhere between the two, economists at IHS Global Insight said the economy “entered the second quarter with plenty of momentum, but exited with very little.”

9:45 ― The Chicago Business Barometer might take a hit in July, economists say. The index, which covers both manufacturing and services, is set to fall to 56.0 from 59.1 in June. While anything over 50 indicates growth, the falling headline could inflate fears of a double-dip recession.

Economists at Nomura are looking for a 54.0 score. “Given that the business barometers in other regions already reported earlier this month showed large declines, the index is likely to fall,” they wrote.

10:00 ― The week’s final data release is the Reuters & U of Michigan Consumer Sentiment report. A preliminary look on the 16th showed the index nose-dive 9.5 points to 66.5, marking the lowest score since August 2009. As with so many other indexes this week, predictions are deeply divided. The median estimate is 67.0, not far from the preliminary numbers, but estimates range from an astonishingly low 57.9 to 68.0. 

“With high volatility in financial markets and an ‘unusually uncertain’ economic outlook, the final number for the July's consumer sentiment index could worsen from the preliminarily report,” said economists at Nomura, quoting Fed chairman Ben Bernanke. “Even if it improves from the preliminary number, it will likely remain at a lower level relative to the previous month.”

Once again, economists at IHS Global Insight look for a rebound from consumers.

“Sentiment is expected to have improved in the second half of July, as the stock market rebounded and the litany of bad news on the BP oil spill abated somewhat,” they predicted.