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Who Out There Needs Bonds?

If investors haven't picked up any government bonds yet, they'll have a big opportunity this week.

If investors haven't picked up any government bonds yet, they'll have a big opportunity in the coming week. Of course, it won't be the last chance they'll get.

Several Treasury note auctions will be held over the next five sessions, although the three major ones will come in the middle of the week. Tuesday will see a $35 billion auction of 3-year Treasury notes, Wednesday will have a $19 billion auction of 10-year notes, and Thursday will see an $11 billion 30-year bond auction.

After a week where the focus fell on

General Motors'


bankruptcy filing and the latest read on the labor market, Treasury auctions may not seem all that interesting. But market analysts say the outcome will point the direction for stocks over the near term.

The reason, says Robert Pavlik, chief market strategist with Banyan Partners, is that these auctions will show how successful the Treasury will be in its ongoing saga of having to issue new bonds to fund its programs. With a rate of 3.89% on the 10-year note, Pavlik says its recent climb closer to 4% is "worrisome."

"It will be interesting to see where the 10-year note auction prices, as well as the bid-to-cover ratios," said Pavlik. "Worse-than-expected results from the auctions will mean higher interest rates and pressure on the market. Better-than-expected results, however unlikely, will mean lower interest rates and the market will see a bid."

Michael Pento, senior market strategist with Delta Global Advisors, takes a harder stance on what the Treasury auctions will mean next week, arguing that "it is not possible to underestimate the importance."

"If the 10-year note auction does not perform well, and it might not because of the weakness we've seen in the dollar, we might see foreign investors balk at this," Pento said. "If that doesn't go well, you will have to really focus myopically on what

Federal Reserve

Chairman Ben Bernanke does and whether he will allow that rate to rise. I don't think there is anything more critical in the market."

Commodity prices will also be a major focus for investors over the coming week, as oil increased 3.2% to $68.44 a barrel in the last week. The weaker dollar has fueled strength in commodity prices and the basic materials sector. If the dollar continues to weaken, the physical commodities will be worth watching.

"Attention must be paid to where the dollar is trading and where oil is trading," said Pavlik. "It's a real concern to the market to have oil in striking distance of $70 a barrel. The impact of higher oil prices and gas prices will definitely have an impact on consumer spending, and the economy doesn't need that impact right now."

If oil climbs above $70 a barrel and continues moving towards $75, Pavlik says, it will be the story of next week.

Once again, investors will have plenty of economic data to sift through. The economic docket is void Monday, but Tuesday will bring the April read on wholesale inventories, which economists believe declined 1% after a 1.6% fall in March.

The Fed's latest beige book release will be the highlight of Wednesday's session. The report, published for the fourth out of eight times this year, summarizes business activity in the Fed's 12 districts. In the last report released in April, five districts noted a moderation in the pace of economic decline, and several saw signs that activity in some sectors was stabilizing at a low level.

"The beige book is going to highlight the fact that there are early signs the economy is turning around," said Pavlik. "We're looking for that trend to continue. The economic reports are showing that the pace of decline is decelerating. I can't imagine we'd get anything more out of that, though. If anything, it may highlight that energy prices are moving up."

In addition to the beige book, the trade balance report for April and the Treasury budget for May are due to be released Wednesday. Economists expect the trade deficit to expand to $28.7 billion from $27.6 billion in March.

Thursday's main feature will be retail sales data for May, which are expected to show a 0.3% rise last month after a surprising 0.4% dip in April. Excluding auto sales, retail sales are expected to have climbed 0.2% last month.

At this point, though, a 0.3% rise would be surprising given the worse-than-expected monthly comp sales data from the previous week. According to the chain store data, May comp sales fell 4.8% from a year ago, according to Thomson Reuters, compared to expectations of a 4.1% decrease.

Pento wouldn't be surprised by a negative read on retail sales. "You haven't addressed the real underlying issue, which is debt," he said. "Until you satisfy that issue, you're going to be predisposed to weakness in the retail sales numbers. That's going to be an ongoing issue for quite some time."

Aside from the retail sales data, the weekly jobless claims will be posted Thursday at 8:30 a.m. EDT, followed by the 10 a.m. EDT release of the April business inventories. As the week winds to a close Friday, May import and export prices will be released, along with the University of Michigan's preliminary consumer sentiment index for June.

Pento says he will be watching the jobless claims numbers closely to see whether the GM bankruptcy filing pushes the claims number higher.

"I want to know if the layoffs from Detroit and the closures of a lot of dealerships are going to start to filter into the claims numbers," Pento said. "I believe it will, and that will undo the better-than-expected

nonfarm payrolls number from Friday


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