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This past week saw a mix of winners and losers on Wall Street for earnings and economic data. But with a late rally on Friday, all major equity indexes pulled off net gains for the week. Given the continued negative news on housing and another spike in oil prices, the up week should especially be savored by investors.
 This past week, investors got sizeable doses of both good news and bad news but at the end of the week they simply chose to focus on the positives. Equities swung notably during the week with most indexes declining the first two days of the week, rebounding the next three. The week started off with weaker-than-expected earnings by Bank of America pulling down the blue chips as well as the small caps. Stocks saw sharp declines across the board on both a surge in oil prices to near $120 per barrel and on a drop in existing home sales, indicating no sign of stabilization for that sector. Also, a dip in McDonald’s same store sales raised concerns about the health of the U.S. consumer sector. McDonald’s stronger-than-expected earnings came from overseas and repatriated funds boosted by a lower dollar. A weaker dollar boosting overseas earnings is a theme that will help many U.S. firms.
The mood on Wall Street turned around on Wednesday with better-than-expected results from Boeing setting the tone. Philip Morris showed strong results with overseas earnings leading the way. On the downside, Delta and Northwest airlines posted sizeable losses related to higher fuel costs. Thursday saw broad-based gains that were initiated by Apple which beat expectations after Wednesday's close. Weighing on the markets, however, was a sharp drop in new home sales to a 17 year low. But giving investors a boost in confidence was an unexpected and sizeable drop in initial jobless claims. Also, markets focused on the boost in the ex-transportation component in durables orders rather than on the headline drop. Friday was an up day for most indexes except for the Nasdaq which was pulled down by Microsoft’s downgraded earnings forecast. Other indexes edged up despite a 26-year low in consumer sentiment.
Last week, major indexes were up as follows: the Dow, up 0.3 percent; the S&P 500, up 0.5 percent; the Nasdaq, up 0.8 percent; and the Russell 2000, up 0.1 percent.
For the year-to-date, major indexes are still down from year end as follows: the Dow, down 2.8 percent; the S&P 500, down 4.8 percent; the Nasdaq, down 8.6 percent; and the Russell 2000, down 5.8 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 There were countervailing undercurrents this past week in the Treasury market. Rates ended higher but that was not apparent at the start of the week. Flight to safety from stock market declines softened rates on Monday and Tuesday as did a drop in existing home sales. Rates firmed the remainder of the week. A record supply of 2-year debt of $30 billion in the Treasury’s Wednesday auction boosted yields as did Thursday’s poor results for 5-year notes. Also on Thursday, the unexpected and sharp drop in initial jobless claims and better-than-expected ex-transportation durables orders more than offset the reported drop in new home sales, helping rates to firm. Rates firmed on Friday with a variety of factors contributing including higher commodity prices.
 Treasury yields were up last week as follows: 3-month T-bill, up 1 basis point, the 2-year note, up 28 basis points; the 5-year note, up 27 basis points; the 10-year bond, up 15 basis points; and the 30-year bond, up 8 basis points.
Throughout the past week a number of factors provided support for higher rates. Traders have been boosting the odds that the Fed will not cut the fed funds target on April 30. Higher oil and food prices have supported this view. Also, many investors see Treasuries as overpriced and have been seeking higher returns in other instruments. The lows for Treasury rates this rate cutting cycle are likely behind us.
 What else can you say – the spot price for West Texas Intermediate set new record highs in four of last week’s five trading days. Factors boosting prices included: rebel attacks on Nigerian oil pipelines, a threatened strike by Scottish refinery workers working North Sea production, a larger-than-expected drop in U.S. gasoline stocks, and the usual factor of a weaker dollar. During the week, the dollar fell to an all-time low against the euro.
Net for the week, the spot price for West Texas Intermediate jumped $3.01 per barrel to $119.70 per barrel – a new record high for daily settle.
 With the recent run up in oil prices, how do current prices compare in inflation adjusted terms to past highs' Until recent history, the long-term current dollar high had been considered to be the monthly average of $39.50 per barrel seen in mid-1980. Friday’s record high of $119.70 per barrel in current dollars translates into $46.33 per barrel in inflation-adjusted terms. Despite the huge run up in oil prices over the last year, it has only been since March that prices have exceeded historical highs in inflation adjusted terms. The chart for inflation adjusted oil prices shows monthly averages except for April 2008 which reflects Friday’s record high settle price.
This past week we had limited data on the economy. What data we had pointed toward further weakening in housing but possibly a slowing in the decline in manufacturing.
 Existing home sales dropped 2.0 percent in March to a 4.93 million annual rate back near the cycle and historical low of 4.89 million set in January. January was the lowest rate in nearly 10 years of available data. But the really bad news was a jump in supply on the market which spiked to 9.9 months from 9.6 months in February.
Supply and demand eventually work their magic on prices even in the price-sticky housing sector. And housing demand has been weak due to job concerns and tighter lending standards while supply continues to build. But the monthly home price numbers are affected by the composition of high and low end sales and this showed up in a 2.5 percent rise in March to a median $200,700. The year-on-year rate of minus 7.7 percent shows the outcome of the ongoing demand weakness and supply glut and is next only to February's minus 8.2 percent for the steepest price decline on record.
 It’s not just existing home sales that are suffering from a soft consumer sector and tighter lending standards but also new home sales. March's new home sales plummeted 8.5 percent from February to an annual rate of 526,000 -- the lowest rate since 1991. The year-on-year decline of 36.6 percent is the worst since 1981. Because of the drop in sales, months’ supply jumped to 11.0 months from 10.2 months in February for the most bloated reading since 1981.
New home prices plunged 6.8 percent in the month for a 13.3 percent year-on-year decrease -- the steepest decline since 1970. But the median price is affected by the mix of high versus low-priced homes sold and there may have been a greater dip at the high end. Nonetheless, the trend suggests that home sellers are having to cut prices to move homes in this depressed market.
The bottom line is that based on bloated supply of both existing and new homes on the market, the housing sector is a long way from recovery and a long way from adding to GDP growth.
 We are getting a lot of mixed signals for the manufacturing sector although the majority of them have been negative since the start of this year. But the latest good news is that this sector’s weakness may not be worsening and conditions could even be flat to marginally positive for the first quarter as suggested by the overall tenor of the latest durable goods report. Durable goods orders in March continued to decline but at a slower pace and with weakness concentrated in transportation. While the headline number slipped 0.3 percent after a 0.9 percent drop in February, durables excluding the transportation component rebounded 1.5 percent in March, following a 2.1 percent fall the month before.
Weakness for the latest month was in one category that indeed is cyclically soft but also by one component that is extremely volatile on a monthly basis. That is, the drop in transportation durables was led by declines in motor vehicles and in defense capital goods. While demand for motor vehicles has weakened in recent months and justifies the dip in orders, the same cannot be said for defense capital goods. That category is simply volatile on a monthly basis. Declines in March were also seen in communications equipment and in electrical equipment. But importantly, most industry categories rebounded in the latest month. These included primary metals, fabricated metals, machinery, and “other” durables.
The bottom line for the latest durables report is that weakness is not widespread and some industries are actually healthy. Clearly, the weak dollar is supporting a number of key industries and the others have softened only moderately.
Housing is still trying to find a bottom. It's difficult to imagine sales getting any lower but the inventory overhang of unsold homes is going to weigh on new construction for a long time. Manufacturing appears to be holding up to a flat status rather than a full-fledged contraction. Net, the overall economy remains near flat.
This coming week is packed with market moving indicators but the highlights are likely to be Wednesday’s FOMC statement and Friday’s employment report. Other market moving indicators out during the week include the first release of first quarter GDP, personal income, and the ISM report on manufacturing. This will be an important week for gauging the strength of the economy and the direction for company earnings.
The Conference Board's consumer confidence index in March further plunged while at the same time inflation expectations spiked – the worst results this report can signal. Consumer confidence fell to 64.5 in March from February's 76.4 reading. Both March and February were the lowest readings since the beginning of the expansion in 2003. The worst news in the report may have been a spike in inflation expectations as 1-year inflation expectations surged 7 tenths to 6.1 percent.
Consumer confidence Consensus Forecast for April 08: 62.0
Range: 58.0 to 65.0
GDP in the fourth quarter appears to have kept the U.S. economy out of the technical definition of recession with an annualized 0.6 percent increase and now we get to see if the same holds true for the first quarter. There is a lot of uncertainty over whether the first quarter will stay out of negative territory or not but most economists are expecting a near flat number whether it has a plus sign or a minus sign. For the first quarter, the composition of GDP will be important. Inventory accumulation should not be too high, exports should continue to rise, and consumer spending should not soften too much if the economy is to rebound in the second half. On the inflation front, the fourth quarter GDP price index was relatively strong at an annualized 2.4 percent. The first quarter number is likely to be similar or higher as the quarterly CPI growth rate remained strong and import prices surged during the quarter.
Real GDP Consensus Forecast for advance Q1 08: +0.3 percent annual rate
Range: -0.2 to +1.5 percent annual rate
GDP price index Consensus Forecast for advance Q1 08: +3.0 percent annual rate
Range: +2.3 to +4.2 percent annual rate
The employment cost index for civilian workers held steady in the fourth quarter with a softening economy being counterbalanced by selective shortages of skilled workers. The employment cost index rose a non-annualized 0.8 percent in the quarter for a year-on-year rate of 3.3 percent, with both readings unchanged from the third quarter. Compensation in the report is split between wages & salaries, at 0.8 percent for a third straight quarter, and benefits, which edged 1 tenth higher to 0.9 percent. But the recent trend is that employers are cutting costs by reducing benefits as year-on-year benefits growth slipped 1 tenth to 3.1 percent with wages & salaries at 3.4 percent for a 1 tenth gain. The modest softening in the labor market has yet to improve compensation inflation.
Employment cost index Consensus Forecast for Q1 08: +0.8 percent simple quarterly rate
Range: +0.7 to +1.0 percent simple quarterly rate
The NAPM-Chicago purchasing managers' index in March showed a contraction but not as steep as the prior month. The headline index rose nearly 4 points but to a still sub-50 level of 48.2. The new orders index suggested future improvement in the overall index as it increased more than 5 points to 53.9 and ended back-to-back sub-50 readings. The worst news in the report was another rise in prices paid, which jumped 4.5 points to 83.9 reflecting high fuel costs and also high costs for other raw materials including steel.
NAPM-Chicago Consensus Forecast for April 08: 47.5
Range: 45.0 to 50.0
The FOMC announcement for the April 29-30 FOMC policy meeting is expected to tell the markets whether the current rate cutting cycle is over or not. The markets still project a 25 basis point cut to 2.0 percent for the fed funds rate target because until recently the Fed had strongly hinted they would make at least one more cut for recession insurance. But that was before the latest surge in oil prices, grain prices, and the further fall in the dollar. There still is a good chance that the Fed will not cut. Whether the Fed cuts the rate target again or not, there will be greater than usual attention give to language in the statement. Odds are there will be language indicating that the rate cutting cycle is over barring new turmoil in the financial markets that cannot be met by the Fed’s new tools.
FOMC Consensus Forecast for 4/30/08 policy vote on fed funds target: 2.0 percent
Range: 78 percent probability for a 25 basis point cut and a 22 percent probability for no change based on fed funds futures settle on April 25
Personal income is still the key to keeping the consumer sector healthy and for maintaining growth in consumer spending. But despite a good income number for February, income growth is uncertain. Personal income in February jumped 0.5 percent but the reason for the jump is largely technical. There was a 2.2 percent jump in the personal current transfers component (various types of government and private sector assistance). The portion reflecting federal Medicare part D prescription drug payments returned to normal in February after being depressed for technical reasons – and this factor will not repeat in March. In February, the wages and salaries component advanced a more moderate 0.3 percent. But we could see improvement in this component based on the March employment report. Average weekly earnings jumped 0.6 percent, following a 0.3 percent gain in February. On the spending side, personal consumption rose a modest 0.1 percent in February and we may see an even weaker number for March as retail sales fell 0.6 percent in March. Retail sales provide source data for durables and nondurables PCEs. The overall PCE price index slowed to 0.1 percent in February as did the core PCE price index. But more recently the headline CPI jumped to 0.3 percent for March while the core CPI firmed to 0.2 percent. The average consumer is increasingly screaming that headline inflation is what is killing their budgets and the Fed may be listening and giving more attention to headline PCE inflation.
Personal income Consensus Forecast for March 08: +0.3 percent
Range: +0.2 to +0.4 percent
Personal consumption expenditures Consensus Forecast for March 08: +0.3 percent
Range: +0.1 to +0.5 percent
Core PCE price index Consensus Forecast for March 08: +0.2 percent
Range: +0.1 to +0.3 percent
Initial jobless claims dropped a surprising 33,000 in the April 19 week to 342,000 for the lowest rate in two months. But recent initial claims have been volatile as the latest drop pushed the four-week average down by only 7,000 to 369,500. The improvement in initial claims was confirmed by continuing claims which fell 65,000 to 2.934 million for the April 12 week.
Jobless Claims Consensus Forecast for 4/26/08: 360,000
Range: 352,000 to 370,000
The Institute for Supply Management's manufacturing index is still pointing toward contraction in the manufacturing sector, although not by much. The manufacturing sector continued to slip lower in March, according to the ISM index which came in at a sub-50 level of 48.6, up 3 tenths from February but still indicated month-to-month contraction. The index has now come in below 50 in three of the last four reports and new orders in the March report moved further into negative territory, suggesting no improvement for April. However, the worst news in the March report was prices paid which jumped 8 points to 83.5 for its worst reading in nearly four years, reflecting higher commodity prices.
ISM manufacturing index Consensus Forecast for April 08: 48.0
Range: 45.5 to 49.3
Construction spending continued downward in February with both residential and nonresidential components falling. Construction outlays posted a 0.3 percent drop, following a 1.0 percent fall in January. February's decrease in construction spending was led by a 0.9 percent decline in private residential outlays with private nonresidential construction slipping 0.1 percent. Public outlays advanced 0.4 percent in the latest month. With housing starts dropping a sharp 11.9 percent in March, the residential outlays component is likely to tug sharply downward on overall outlays in the upcoming release.
Construction spending Consensus Forecast for March 08: -0.9 percent
Range: -1.0 to -0.4 percent
Sales of domestic motor vehicle were unusually weak in March, coming in at an 11.0 million unit annualized pace, down from 11.6 million the month before. Sales of light trucks were especially weak, dropping to a 6.1 million rate for domestics from 7.1 million in February as high gasoline prices are cutting into demand along with the softer economy. Domestic car sales slipped to 4.8 million units from 4.9 million in February.
Motor vehicle sales Consensus Forecast for April 08: 11.5 million-unit rate
Range: 11.1 to 15.4 million-unit rate
Nonfarm payroll employment is now the focal point of evaluating whether the economy is in recession or perhaps even in a worsening recession. Payroll employment has fallen three months in a row. Nonfarm payroll employment dropped by 80,000 in March, following a decline of 76,000 in February and a decrease of 76,000 in January. In the latest month, payroll weakness was led by the goods-producing sectors again but softness also continued in services. Construction jobs fell by 51,000 while manufacturing employment declined 48,000. Service-providing jobs rose a mere 13,000 in March. Despite weakness in hiring, wage based inflation pressure is still on the firm side. Average hourly earnings increased 0.3 percent in March, leaving the year-on-year rate at 3.6 percent. Weakness in hiring and increased lay-offs pushed the civilian unemployment rate up to 5.1 percent from 4.8 percent in February. March's unemployment rate is the highest since 5.1 percent for September 2005.
Nonfarm payrolls Consensus Forecast for April 08: -75,000
Range: -150,000 to -25,000
Unemployment rate Consensus Forecast for April 08: 5.2 percent
Range: 5.1 to 5.3 percent
Average workweek Consensus Forecast for April 08: 33.7 hours
Range: 33.7 to 33.8 hours
Average hourly earnings Consensus Forecast for April 08: +0.3 percent
Range: +0.2 to +0.3 percent
Factory orders are showing a weak manufacturing sector, falling 1.3 percent in February. Part of the weakness was due to a temporary drop in energy costs as the nondurables component fell 1.5 percent. Durables fell 0.9 percent for the revised February number. More recently, in the advance report, durables slipped 0.3 percent with most of the weakness in defense capital goods and motor vehicles. Expect a bump up in energy prices to lead to a rebound in nondurables orders. Excluding transportation, the overall orders number should post a moderate gain.
Factory orders Consensus Forecast for March 08: +0.3 percent
Range: -0.6 to +1.5 percent
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