An already gloomy economic outlook darkened further last week. The global slowdown caught up with US manufacturing, as the key ISM manufacturing index dropped below breakeven for the first time since July 2009. The ISM nonmanufacturing index, while still in expansion territory, showed slower growth. And the June employment report delivered another month of sub-100,000 payroll gains.

Central banks take action. Foreign central banks stepped in to try to support their own faltering economies, with rate cuts in the Eurozone (to a new record low) and China, and more quantitative easing from the Bank of England. The weak domestic news raises the question of whether the Federal Reserve might do more than just extending Operation Twist. A more worrisome question is whether the world's central banks can collectively generate much traction to support growth, especially in the developed world, where policy is already so loose.

Lighter data schedule this week. The data calendar lightens this week, with reports on international trade, producer prices, and consumer sentiment the highlights. The effects of lower oil and gasoline prices should be evident in all three. The trade balance likely narrowed in May on lower oil imports, while producer prices probably fell on lower petroleum product prices, and consumer sentiment may have stabilized in early July, helped by cheaper gasoline.

Markets looking for clues on the Fed’s next move. Also vying for market attention, especially in the light of last week's disappointing economic reports, will be the minutes from the June 19–20 FOMC meeting. At that meeting, Fed participants downgraded their outlooks for the recovery, and the FOMC extended “Operation Twist” through the remainder of the year, while signaling that further easing was possible. The minutes will add color to the forecast revisions, and may indicate how confident committee members are in their revised outlook (which we think is still too optimistic). Meanwhile, though the decision to extend Operation Twist was nearly unanimous, the idea of further action is much more contentious, as the minutes will probably indicate. We think that the Fed will ultimately come through with another round of quantitative easing after the Twist expires. But the minutes will be parsed for clues as to where committee members currently stand, and what economic developments they would need to see to justify such a step.

Wednesday, July 11 – Trade Balance (May)

• IHS Global Insight: -$47.5 Billion
• Consensus: -$48.4 Billion
• Last Actual: -$50.1 Billion (Apr.)

What to Look For

• A smaller deficit, driven by lower oil imports

Implications

The foreign trade deficit is expected to narrow to $47.5 billion in May, from $50.1 billion in April. Both imports and exports should fall, but imports should drop faster, largely due to oil imports. Sharply lower petroleum prices should combine with weaker imported oil volumes to pull down overall imports. Moderate private-sector activity will continue to weigh down on nonpetroleum imports. Weaker global demand will once again lead to lower US exports. Foreign trade should be close to neutral for growth in 2012.

Friday, July 13 – Producer Price Index (Jun.)

Total

• IHS Global Insight: -0.6%
• Consensus: -0.6%
• Last Actual: -1.0% (May)

Core

• IHS Global Insight: 0.2%
• Consensus: 0.2%
• Last Actual: 0.2% (May)

What to Look For

• Another sharp headline decline on lower energy prices

Implications

Producer prices for finished goods should drop 0.6%, driven by lower prices for gasoline and other petroleum products. Core inflation is expected to be little changed at 0.2%, but intermediate and crude materials prices should reflect tumbling commodity prices.

Friday, July 13 – Reuters/University of Michigan Consumer Sentiment Index (July, Preliminary)

• IHS Global Insight: 74.0
• Consensus: 73.5
• Last Actual: 73.2 (Jun.)

What to Look For

• A dismal consumer mood, partly mitigated by falling gasoline prices and slower food inflation

Implications

Weak job prospects, worries over the European debt crisis, and a steady stream of weak economic news will keep the Reuters/University of Michigan consumer sentiment index in recession territory, though perhaps not quite so soft as in June. On the consumer front, there have been two solid pieces of good news—gasoline prices have fallen and food price inflation has slowed down.