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Market Insider: Thursday Look Ahead

How deep is the consumer's funk?

Thursday's markets will be watching for clues to that trend when chain stores report their July sales. Analysts expect a tepid 2.3 percent increase for July, even with the boost from stimulus rebate checks. But it's the comments about the important back-to-school shopping season that will tell the story.

Back-to-school is the second most important period for retailers, after the year-end holiday shopping period. It is also viewed as a precursor to holiday sales and from all accounts, neither are looking too good this year.

The International Council of Shopping Centers predicts a 1 percent increase in back-to-school sales, the slowest growth since 2001. Some early data from Master Card shows sluggishness in the last three weeks even in the usually busy electronics sector.

The National Retail Federation expects a 5 percent increase in K-12 spending, but a 7 percent decline in spending for college students.

Paralleling weak sales are concerns about consumer credit quality and availability. The latest consumer credit data for June is reported at 3 p.m. Thursday. Economists are watching that trend carefully as banks and other lenders pull back.

Just this week, Morgan Stanley cut back on home equity lines and the withdraw of auto industry leasing programs has been well documented.

There should still be some kick from stimulus rebate checks in the July retail sales, but economists think that effect will soon start to wane. Deutsche Bank chief U.S. economist Joseph LaVorgna said in a note Wednesday that he expects to see a "sharp retrenchment " in household spending in the near term as household incomes fail to keep pace with inflation; the stimulus boost dries up and unemployment continues to increase.

Dollar vs. Euro

Before the bell, the European Central Bank and Bank of England have interest rate decisions. Both are expected to leave rates unchanged, but comments from ECB president Jean Claude Trichet will be key for the U.S. dollar.

Traders are watching to see if he will talk tough on inflation or concede that slowing growth in the eurozone might reduce that threat. They are betting on tough talk.

The dollar rose 0.32 percent against the euro and a big 1.4 percent against the yen Wednesday. At 0.6488 euros, the dollar was at its highest 4 p.m. close since June 13.

Econorama

Other data due Thursday includes weekly jobless claims at 8:30 a.m. and pending home sales for June at 10 a.m.

In Wednesday's session, the Dow rose 40 or 0.3 percent to 11,656, and the S&P 500 finished up 4 points to 1289. The Nasdaq though was up 28 points, or 1.2 percent, to 2378.

Cowen and Co.'s Todd Leone said the stock market was a bit "topsy-turvy" Wednesday, but all in all turned in a decent performance after Tuesday's triple digit bounce. For one, oil cooperated, falling slightly to close at $118.58 per barrel after dipping close to $117 during the trading day.

Energy stocks were the best performers, up 1.9 percent even as oil declined, and telecoms were the worst performers, down 1.4 percent. Financials fell 1 percent and consumer discretionary stocks were down nearly a half percent. Materials rebounded 1.4 percent and tech was up 1.3 percent.

Commodities remained under pressure. Gold fell $3 to $875.60. The yield on the 10-year rose to 4.050 percent, its highest yield since July 25, and the two-year increased to 2.571 percent.

"I think it's good that stocks held up. The market was up big yesterday, and the Dow was up 40," he said. Traders will be monitoring retail reports Thursday and a few earnings headlines.

Earnings Central

Hanging over Thursday's market is AIG's after hours report of a large and unexpected loss. AIG stock tumbled after it said it lost $0.51 per share, on an adjusted basis, on revenues of $19.9 billion. Analysts had expected a profit of $0.63 per share on revenues of $31.15 billion. AIG's total second quarter loss, including items was $5.36 billion. CEO Robert Willumstead said the company would unveil a plan to get through this troubled period and rebuild shareholder value in September.

Toyota is among the companies reporting Thursday, as is Barr Pharmaceuticals , DirecTV , Sempra Energy , Allianz and Williams Cos . Crocs reports after the bell.

Market Call - Bad News, Good News

UBS strategist David Bianco is throwing up the red flag on the global economy. He's also cutting his forecast for the S&P 500 for this year, mainly because he sees continued problems and a longer recovery time for the financial sector.

Bianco took his target to 1550 for year end on the S&P 500 from 1650. His 12-month target remains 1650. Bianco says in a note Wednesday that he's still bullish but the financials are a drag on the earnings picture and his price target.

He did say he believes financials could appreciate 30 percent into early 2009 from current levels. He said he hadn't expected the credit costs to be so high and the group's problems are not yet over. He raised his estimate of financial asset writedowns to $110 billion for 2008 from $70 billion.

In the note, Bianco said UBS economists believe there will be a shallow but longer U.S. recession and a sizeable European slowdown. UBS believes the U.S. has been in a recession and that will continue through the end of 2008 but not into 2009. They reduced GDP growth to negative 0.5 percent for Q4, from 1 percent growth, and they trimmed first quarter to 1.1 percent growth from 1.8 percent.

The economists also recently cut 2009 European GDP estimates and trimmed expectations for key emerging market economies. UBS now sees global growth at 3.4 percent in 2008 and 2.9 percent in 2009.

Bianco says he still overweight energy, industrials and technology, and he likes big-cap internationally exposed stocks. He still likes emerging market exposure, through S&P industry leaders. Bianco said the late 1990/1991 period is analogous to this market period, and that most recessionary troughs are followed by 20 percent plus gains in six months for the S&P 500.

Questions? Comments? marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.