Key Events This Week:

Monday:

10:00 ― The week begins with a bang. The ISM Manufacturing Index, the leading index on conditions in the sector nationwide, is expected to moderate 2.3 points to 54.1 in July. That follows a 3.5-point drop in June, but any score above 50 indicates growth. 

Forecasts range from 52.5 to 55.8, but predictions were taken before two strong surveys were released Friday, “so the true consensus is likely now a bit higher,” noted Ian Shepherdson from HFE.

He said it’s trickier than usual to predict the ISM because regional surveys “sent very mixed messages. He noted the Philly Fed survey “weakened markedly but both the Chicago and Milwaukee PMIs were rather better than we expected and stronger than in June.” 

“Nevertheless,” said economists at BBVA, “the index will remain at a level consistent with economic growth for the fourteenth consecutive month. Manufacturing comprises approximately 70% of industrial production. As a result, the pace of expansion of industrial production may slow in July as well. This outcome would be consistent with our expectation that the rate of economic expansion will slow in 3Q10.”

10:00 ― Construction Spending is set to fall again in the wake of the home buyer tax credit expiry. The June index is anticipated to fall 0.5%, following a 0.2% dip in May and  a strong 2.3% surge in April (the last month the tax incentive was in effect.) In the May report, private construction slipped 0.5%, public construction gained 0.4%, private nonresidential construction declined 0.6%, and single-family home construction increased 0.8% ― its weakest advance in a year.

“Based on the latest housing starts numbers, we are expecting a drop of more than 3% in single-family construction spending,” said economists at IHS Global Insight. Multi-family housing construction spending fell 6.3% in May, and another sizable drop in June is likely. Private nonresidential construction has leveled since February. This is good news, considering that this has been the economy's worst-performing sector since the recession ended.”

In contrast to dim expectations, Ian Shepherdson from HFE said Friday’s GDP report suggests the index will rise.

“Given that housing construction in GDP was stronger than we expected, we look for a hefty increase in June,” he said. “The same applies to public construction, which has been gathering pace in recent months after falling for the first year after the stimulus bill was passed in February 2009.”

10:15 ― Ben Bernanke, Chairman of the Federal Reserve, speaks on the challenges confronting the national economy and state & local governments.

4:00 ― Treasury Secretary Tim Geithner speaks on the financial reform

Treasury Auctions:

• 11:30 ― 3-Month Bills
• 11:30 ― 6-Month Bills

Tuesday:

8:30 ― Personal Income & Outlays are each expected to rise a modestly in June, as is the core PCE price index, often called the Fed’s preferred measure of inflation. The expected gain in income marks a slowdown from the 0.4% and 0.5% advances in May and June, respectively. The anticipated rise in spending is in line with the 0.2% and flat reading for the prior two months. Lastly, the slight gain in core inflation confirms that pricing policy can remain on the back-burner.

“Personal income is expected to rise for the eleventh consecutive month, but at a slower pace given the decline in June’s non-farm payrolls. As income firms, so will personal spending,” said economists at BBVA. “However, June’s decline in retail sales and sluggish consumer confidence point to slow growth in this arena. The key driver of consumer spending will be employment ―while consumers now feel more secure in the jobs than during the recession, those that are unemployed are still struggling to find work. Given our expectation that the labor market will continue to improve at a slow pace, consumer spending will follow suit.”

10:00 ― The NAR’s Pending Home Sales Index fell by almost one-third in May to the lowest level in its history. The index declined 33.3% in the South, 32.1% in the Midwest, 31.6% in the Northeast, and -20.9% in the West. Whatever the index does in June, it won’t regain earlier levels; economists are looking for a flat ready but forecasts range from -10.0% to +15.0%.

“One effect of the tax credit is that people who may have been planning to buy a home during the summer months accelerated their purchases in order to receive the tax benefit. As a result, post-tax credit demand is low,” said economists at BBVA. “Nevertheless, the environment remains favorable to buyers — the employment situation is improving, home prices are low and mortgage rates are favorable. Given this setting, we expect housing demand to gradually improve throughout the year.”

Treasury Auctions:

• 11:30 ― 4-Week Bills

Wednesday:

7:00 ― The MBA Mortgage Applications Index decreased 4.4% for the period ending July 23, led by refinancings. This survey will give results for the final week of July.

“Mortgage purchase applications appear to be stabilizing, but at an extremely low level,” said economists at Nomura Global Economics. “If they fail to turn higher over the next 3-4 weeks, this would suggest downside risks to the near-term outlook for home sales.”

8:15 ― The ADP Private Employment Report last month forecast an increase of 13,000 private jobs, whereas the “official” figures from the Bureau of Labor Statistics reported that 83,000 such jobs were created. Private jobs have risen by an average of 119,000 each month for the past three months.

Economists at Nomura Global Economics expect trends in July to be broadly similar.

“Based on our forecast for a 85,000 increase in the official BLS count of private nonfarm payroll employment, we expect a gain of 20,000 in ADP private employment,” they said. “This assumes a gap slightly smaller than the average over the last six months.”

10:00 ― Like its cousin manufacturing index, the ISM Non-Manufacturing Index, a nationwide measure of the financial, construction, and services sectors, is expected to continue in growth mode in July but slow down from June. Economists forecast a 53.0 score, 0.8 points below June’s level 2.4 points down from May. As the score approaches the break-even 50 level, talk of a double-dip recession is likely to increase. Last month’s level was the lowest since February.

Breaking it down by sector, economists at IHS Global Insight expect mixed results.

“The employment index picked up slightly, but transportation services and freight volumes appear to have slowed down a notch,” they wrote. “Tourism activity is reported to be solid, despite the Gulf oil spill and weak consumer confidence numbers. Financial markets, in general, saw a better month as euro crisis fears subsided and equities rebounded.”

Meanwhile, economists at Nomura expect the survey to rise to 54.0, “bucking the weakening trend” in other surveys.

“Although the manufacturing sector has begun to cool, the recent Beige Book indicated an ongoing improvement in service-related industries,” they wrote. “The index has also lagged to recovery to date, so may have further room to catch up. Particularly interesting in this report will be the employment component, which dipped back below 50 in June. A further deterioration from these levels would be a worrying sign for the job market outlook.”

Thursday:

8:30 ― A quiet Thursday awaits as only Jobless Claims, a weekly look at the labor markets, is set for release. The report has been volatile in recent weeks due to annual retooling of auto manufacturing plants. The four-week average is currently 453, compared to 467k in June and 458k in May. Last week’s survey showed 457k people filing for unemployment benefits.

Economists at Nomura said the distortion “should now be fading.” They expect to see a gradual drift down to 450,000 ― the threshold that economists often say points to national job growth.

9:00 ―  Treasury Department announces the refunding terms of 3-year, 10-year, and 30 year government debt auctions to be held in the following week.

The July Prepayment report is released are on Thursday afternoon.

Friday:

8:30 ―The Nonfarm Payrolls & Unemployment Report is expected to bring more mixed news to the world. In June the report said payrolls dropped 125,000 in the month as 208,000 government jobs got the boot because of Census de-hiring. But, private payrolls rose 83,000, the sixth straight gain.

In July, trends are anticipated to be similar. Economists look for total jobs to decline 63,000 as temporary jobs for the Census are once again terminated. Private payrolls are anticipated to rise 91,000. The unemployment rate is expected to tick up one-tenth to 9.6%.

“With stimulus from last year's Recovery Act fading, hopes are riding on the labor market to sustain income growth and spending,” said economists at Nomura. “The last two Employment Reports disappointed, with slow private sector job growth and no improvement in hours worked. If the jobs picture remains poor, we believe further easing would become likely.”

Economists at IHS Global Insight predicted the report will “reinforce recent evidence of an anemic labor market recovery.”

They said another 140k Census jobs should disappear, while private jobs should advance  70k.

“State and local government employment likely took a hit at the start of the new fiscal year (we expect a 50,000 decline,” they wrote. “We expect the unemployment rate to edge up to 9.6% from 9.5%.”

3:00 ― Consumer Credit plunged $14.9 billion in April and contracted $9.1 billion in in May, marking the 19th decline since August 2008. In this report for June, the index is set to fall another $5 billion. The declines signal that consumers remain hesitant to pile on new debt ― good for them perhaps, but bad for the economy, four-fifths of which is driven by consumer spending.

“Consumer credit growth remains very weak, with negative readings and downward revisions in most recent reports,” said economists at Nomura. “We expect this trend to continue for the time being due to weak income growth and still-elevated debt levels.”