Markets are nearly certain that Greece will default on its debt after a weekend meeting of financial ministers in Marseille, France, failed to produce substantial action.

"Growing concerns that Greece is on the brink of default and that the northern European countries are balking at further bailouts are at play," said BMO Capital Markets.

The Greek one-year bond yield is 112% and the CDS market is pricing in a more than 90% probability of default.

Juergen Stark, chief economist at the European Central Bank, resigned during the meeting "over his opposition to the ECB's bond buying program," BMO said. "So after the dust settled and the communiqué was written and everyone flew home, was anything decided upon? Not really."

Widespread concerns sent Japan's Nikkei index down 2.31% to its lowest in two-and-a-half years. Shares on Hong Kong fell 4.21% to their lowest since May 2010.

The safe haven bid pushed the 10-year Treasury yield to as low at 1.88% in early trading - its lowest in at least 60 years. The two-year yield is two basis points firmer at 0.17% and the 30-year yield is four basis points firmer at 3.21%.

BMO noted the U.S. dollar is stronger and the euro sits near $1.360, "down more than 5% in the past two weeks to seven month lows."

S&P 500 futures are 22.3 points lower (-1.94%) at 1,130 and the Dow is off 160 points (-1.46%) at 10,789.

Light crude oil turned 1.35% lower overnight to $86.02 per barrel, while gold prices fell 0.77% to $1,845.20.

Although there's Fed-Speak from Fisher and a 3yr Note Auction at 1pm, no scheduled economic reports hit the US markets today, leaving most of the attention turned toward the European debt crisis.

Key Events This Week


5:00 - Richard Fisher, president of the Dallas Fed, speaks on monetary policy in a global context to NABE's annual meeting in Dallas.

  • Treasury Auctions:
  • 11:30 - 3-Month Bills
  • 11:30 - 6-Month Bills
  • 1:00 - 3-Year Notes


2:00 - The monthly spending imbalance in the Treasury's Budget Statement for August is expected to be $130 billion. Forecasts of the monthly deficit range from $75 billion to $132 billion, versus gaps of $90.5 billion in August 2010 and $103.6 billion in August 2009.

"We estimate that Treasury receipts grew by 6% year-over-year in August, but were dwarfed by a surge in government outlays of 21.0%," said Nomura Global Economics. "As such, the US budget deficit likely widened to $133 billion compared to $90.5 billion in August 2010. The US budget deficit is tracking -$1,400 billion in fiscal 2011 compared to -$1,294 in fiscal 2010."

  • Treasury Auctions:
  • 11:30 - 4-Week Bills
  • 1:00 - 10-Year Notes


8:30 - The Producer Price Index is anticipated to be cut by 0.1% in August, following a 0.2% gain in July and a 0.4% cutback in June. The core index, which excludes volatile oil and food prices, is forecast to rise 0.2% following gains of 0.4% and 0.3%.

The expected drop in prices is due mostly to a steep drop in energy prices, while food prices are expected to remain elevated. 

"Commodities prices beat a hasty retreat in August, as flagging economic conditions in the US, China, and Brazil provided something of a demand-side shock to the energy and industrial metals sectors," said Janney Capital Markets. "That's good news for producers, who have generally found some traction in passing along early 2011 cost increase onto consumers and can now save a few pennies from falling input costs."

8:30 - While consumer confidence fell to multi-year lows in August, economists believe Retail Sales were fairly healthy thanks to back-to-school spending and preparations for Hurricane Irene. The median estimate is a 0.2% increase, with predictions ranging from a 0.3% drop to a 0.6% jump. July reported a 0.5% uptick, while June saw sales grow 0.3%.

"Building materials and garden supply stores should rebound in August since many communities along the East coast prepared for Hurricane Irene, and needed to make repairs in its aftermath - a double bump up," said IHS Global Insight. The forecasting firm said retail sales excluding auto sales should grow 0.4%.

"We think there were some important spending shifts due to the storm, including a pullback at restaurants," added Citigroup. "But this likely was offset by slightly higher purchases at grocery and drug stores and front-loaded purchases of gasoline. Large retail chains and motor vehicle dealerships reported healthy sales right through the storm and aftermath."

Citi's estimate is double the consensus at 0.4%. Such a gain, they said, would put consumer spending on track for a 2.5% gain in the third quarter.

10:00 - Business Inventories are forecast to grow at a 0.5% pace in July, following a 0.3% pickup in June a 0.9% leap in May. 

Citigroup said the gain should be "healthy" and noted inventories are likely to "increase substantially" later this year "when auto dealers can finally restock lots."

Nomura Global Economics added: "Upside risk to expectations could come in the form of higher energy prices and inventory building of motor vehicles as supply opened up from Japan."

  • Treasury Auctions:
  • 1:00 - 30-Year Bonds


8:30 - The four-week average for Initial Jobless Claims was last at 414,750. Weekly claims have swayed between 399k and 421k over the past six weeks; in the period ending Sept 10, economists anticipate 410k new filings. Forecasts range from 400k to 430k.

"While it is apparent that businesses are not conducting large scale layoffs, financial conditions have become less supportive of growth and hiring activity has slowed in response," said Nomura Global Economics.

Citigroup expects weekly filings to drop around 10k, but said there could be "a possible influx" in the wake of Hurricane Irene. 

"The storm affected coastal and inland areas along the eastern seaboard from North Carolina to Maine," Citi said. "Damage estimates have ranged from $8 billion to $16 billion."

8:30 - As with producer costs, the Consumer Price Index is anticipated to rise at a slower pace in August thanks to falling energy prices. This should help confirm that rapid inflation is a diminishing risk, given the slow growth of spending. Overall prices are forecast to rise 0.2%, following a 0.5% jump in July and a 0.2% fall in June. Core prices too are expected to rise 0.2%, after a 0.2% rise in July and a 0.3% pick up in June.

"Consumer price measures have ticked modestly higher in recent months, but we view these increases as the after effects of late 2010 - early 2011 commodity price hikes flowing through the inflation pipeline," said Janney Capital Markets. "Considering that these commodities hikes were largely one-time events rather than sustained rates of price increases, this flow through is likely a temporary happening."

Also pay attention to the owners' equivalent rent component, which accounts for nearly a third of the consumer goods basket within this index.

It's "essentially calculated by taking rental property rates and applying them to estimate the 'equivalent' monthly cost of an individual renting a house which they actually own," Janney said. "With rental property demand increasing at the expense of owned property demand, this owners' equivalent rent calculation is upward biasing the CPI, just as greater housing demand in the middle part of last decade downward biased the CPI."

8:30 - The Empire State Manufacturing Survey is the first regional index to come out each month. Recently it has shown contraction for the past three months, the largest string of declines since the April to June 2009 period when the recession technically ended. In August, the index fell to -7.7 from -3.8; economists expect no real improvement this month with the consensus estimate at -3.5.

Because the survey is released so early, Nomura Global Economics said it can reflect some of prior month's activity. They therefore expect a decline.

"Given the heightened market volatility that prevailed throughout August and continued into early September, we are looking for continued weakness in the regional manufacturing surveys," Nomura said, forecasting a decline to -11.1.

9:15 - A lack of employment growth, slower vehicle assembly, and reduced electricity usage conspired to slow Industrial Production down in August. Economists are expecting a meagre 0.1% advance, following a robust 0.9% jump in July and a 0.4% gain in June.

"Retrenchment in light vehicle production and a downdraft in utility output after a July heat wave should pull industrial production down 0.2% in August," said IHS Global Insight. "Non-vehicle manufacturing should creep higher, but total manufacturing hours worked outside the autos sector went sideways, leaving only modest productivity gains to lift output. July was a generally good month for production, but a repeat of performance in August would not be consistent with barely-above-breakeven ISM-manufacturing readings."

Citigroup points out that even with a soft August reading, the July-August average could be 4.8% annualized above the second quarter. 

"That would be a sharp reversal from the 1.0% rise in the second quarter," Citi said. "The lift from production, along with indications on consumer spending and the trade report, limit the downside to third quarter GDP growth."

10:00 - Just ninety minutes after the Empire State survey, the Philadelphia Fed will release its look at regional manufacturing conditions. It last suffered a staggering drop to -30.7, as every component contracted including double-digit losses among new orders and shipments. Economists expect a smaller contraction this month, with the median estimate at -15. Forecasts are all negative, ranging from -2 to -25.

"We think the August reading exaggerated the weakness in the region because the survey was taken during the debt ceiling negotiations and the US sovereign credit rating downgrade," Citigroup said.


9:55 - Consumer Sentiment has no reason to rebound in September, but the general consensus is for a small uptick now that the debt ceiling debate has concluded. August's preliminary reading was the lowest since 1980 until later revisions took it up 0.8 points to 55.7, its lowest since November 2008. A continuation of that trend should push sentiment up to 56.5, or even as high as 59.6, economists say.

"Consumers face many headwinds such as poor job prospects, volatile equity markets, smaller 401(k)s, and the bickering in Washington D.C. over the debt ceiling was not very helpful," said IHS Global Insight. "The preliminary reading in September should improve on August since the negative impact on consumer mood due to the debt ceiling crisis should wear off a bit."