The Day Ahead: Retail Sales, PPI, Bernanke

Benchmark interest rates are once again under pressure as equities attempt another recovery bounce .

The 10-year Treasury note yield is three basis points higher at 3.015% and the Fannie Mae 4.0 MBS coupon is -6/32 at 100-20. S&P 500 futures are 10 points higher at 1,281.50, and Dow futures are 47 points higher at 11,932.

In addition to fresh data on retail sales and producer prices, Fed chairman Ben Bernanke speaks this afternoon on "fiscal sustainability."

"While policy is unlikely to tighten for some time, the prospect of further easing appears dim, barring a sustained rise in the unemployment rate and downward lurch in inflation expectations," commented economists at BMO Capital Markets. "Overnight, Dallas Fed President Fisher - a voter - affirmed his strong opposition to QE3, which Bernanke also appears opposed to for the simple reason that it risks causing more harm than good to the economy."

Key Events Today:

8:30 - The Producer Price Index is finally expected to cool after several months of energy-led cost jumps. Economists expect headline prices to tick up just 0.1% in May, following hefty gains of 0.8% and 0.7% in the prior two months (one economist estimated that 40% of the jump in April came from higher gasoline prices). The core index, which excludes volatile food and energy prices, is expected to rise a tame 0.2%, following a 0.3% rise in April and a 0.2% cut in March.

"After rising 23% over the past nine months, energy prices at the producer level are set to decline," said economists at Citigroup. "The turn in crude prices in May has prompted a drop in gasoline and fuel oil prices at a time when seasonal factors anticipate large increases. The expected decline in energy prices is likely to keep May overall producer prices unchanged." 

8:30 - Ben Bernanke's description of the economic recovery as "frustratingly slow" and "uneven" should be borne out in May Retail Sales. Following a monthly gain of 0.5% in April, sales are expected to be trimmed by 0.3%. One culprit is auto sales, as motor vehicle unit sales declined 11% last month; economists at Citi noted that was the worst month for auto sales since "cash for clunkers" program concluded in 2009.

"Potential [car] buyers have likely delayed purchasing until more models are available - a prime example of how supply disruptions stemming from Japan's 11 March disaster have fed through from production to final demand," said economists at Nomura Global Economics.

The negative reading would break a 10-month trend of gains.

Excluding autos, sales jumped 0.6% in April but are now anticipated to rise only 0.3% as 

Aside from weak vehicle sales and a drop in gasoline station receipts due to lower oil prices, Citi expects to see "modest but healthy" gains.

"It looks like consumer spending is on a path toward a 1.25% gain," Citi said. "While this would be the lowest reading since 2009, keep in mind that there will be a powerful rebound in vehicle sales later in the year once production normalizes."

10:00 - Business Inventories are expected to rise 1% in April, in line with the 1.1% and 0.7% increases of the prior two months. But estimates are pretty wide, ranging from 0.5% to 1.1%, as some forecasters believe retail inventories could drop sharply. 

Economists at Nomura note that manufacturing and wholesale inventories jumped 1.3% and 0.8% in April, but that retail shelves likely grew at a slower pace "amid slowing sales and falling deliveries of auto sales."

"Business sales likely came under pressure in April following the 11 March Japan earthquake and uncomfortably high input costs," they added.

2:30 - Federal Reserve Chairman Ben Bernanke speaks on "Fiscal Sustainability" before a Committee for a Responsible Budget conference, "The Debt Ceiling, Fiscal Plans, and Market Jitters: Where Do We Go From Here?" No Q&A.