The crux of the argument calling for a 2nd half recovery is predicated on an inventory replenishment cycle, led by the auto sector. The stabilization in the capital markets has also boosted the expectations components (and not current conditions) of many economic indicators. Thus, as we enter Q2 earnings season, forward looking guidance will be more relevant for the markets than what is actually said for Q2. Alcoa begins it all on Wednesday. The June ISM services index is expected to rise 2 points to 46 and it would be at the highest level since Sept ’08 when it was at 50. Services make up more than 80% of the US economy and therefore it’s a key data point. Supply will also be a key influence on Treasuries beginning with the 10 yr TIPS auction today as the implied inflation rate has fallen to the lowest since May 18th coincident with the 8% drop in the CRB index from its recent high. Chinese stocks continue to buck the global pullback.
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