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While the second quarter has turned in surprisingly healthy growth overall, the same cannot be said for the third quarter based on early results. Growth overall likely will be close to flat. In contrast, early inflation numbers for the quarter are very disconcerting – including at the core level. And we may not get as much help on headline inflation as believed just a week ago since crude oil prices have rebounded somewhat. Stagflation appears to be digging in.
 Equities ended down for the past week despite a sizeable rally on Friday. Credit market concerns and weak economic data primarily weighed on stocks. Fannie Mae and Freddie Mac stocks fell on Monday after a news report by Barron’s weekly indicated that the firms would not be able to raise adequate capital and that a government takeover is unavoidable. These concerns took other financials down also. Lehman Brothers got unwelcome attention when JP Morgan stated that Lehman will likely write down $4 billion in credit losses. However, on Friday, Lehman actually helped fuel the end-of-week rally with rumors that Korean investors might buy the firm.
Pulling stocks down on Tuesday were a drop in housing starts and a surge in producer prices. Late in the week, a negative Philly Fed report weighed on the small caps. Retailer earnings also were disappointing – with weak earnings or warnings coming from Home Depot, Target, Saks, and Staples.
Oil prices played a role in equity swings this past week with Thursday’s near $7 per barrel surge weighing on stocks while the $7 fall on Friday added to lift from other factors, including comments by Fed Chairman Ben Bernanke.
Fed Chairman Bernanke stated just after equities opened on Friday that he believed inflation would be coming down due to sluggish economic growth, a firming in the dollar, and stabilized oil prices. Markets took this to mean that the Fed would not need to raise rates soon, helping to fuel Friday’s rally. Nonetheless, major indexes were down net for the week.
For this past week the Dow was down 0.3 percent; the S&P 500, down 0.5 percent; the Nasdaq, down 1.5 percent; and the Russell 2000, down 2.1 percent.
For the year-to-date, major indexes are down as follows: the Dow, down 12.3 percent; the S&P 500, down 12.0 percent; the Nasdaq, down 9.0 percent; and the Russell 2000, down 3.7 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields were mostly little changed this past week despite thin trading typical of the August vacation season. The first half of the week had yields nudging downward as funds flowed out of depressed equities and into the safety of Treasuries. Also, the markets looked past the high PPI numbers (counting on more recent lower oil prices to bring official inflation numbers down) and focused on the continuing decline in housing starts. Credit market concerns boosted Treasury prices and nudged yields down. These were largely continued worries over Freddie Mac and Fannie Mae and more recently additional losses expected for Lehman Brothers. Later in the week, yields firmed slightly due to flow into equities which had been encouraged by remarks from Fed Chairman Ben Bernanke that the Fed essentially is counting on slow growth to bring inflation down rather than needing to raise rates soon.
 For this past week Treasury rates were mixed but mostly little changed as follows: 3-month T-bill, down 14 basis points, the 2-year note, up 2 basis points; the 5-year note, up 4 basis points; the 10-year bond, up 3 basis points; and the 30-year bond, unchanged.
Rates have come down from recent highs due to continued flight to safety, slowing economic growth, and a recent improvement in the dollar.
 Crude oil prices were up only modestly net this past week even though there were wild gyrations during the week. Early in the week, prices for crude fell on concerns over weakening demand with slowing economic growth. Also, the reopening of a major Turkish pipeline weighed on prices. The first really wild swing last week was on Thursday when the spot price of West Texas Intermediate jumped $6.68 per barrel to $120.93. Boosting prices were a drop in the dollar and investors pulling funds out of financials into the believed safety of commodities. U.S.-Russia tensions also boosted oil after the U.S. and Poland signed a missile shield agreement to station defensive missiles in Poland. But all of that reversed on Friday with a rise in the dollar and increased fears of slowing demand. The initiator of the one day drop of $6.69 per barrel was a report from the UK that showed that country’s second quarter growth to be zero. The release followed news the prior week showing sluggish economies in Japan and in the euro zone.
Net for the week, spot prices for West Texas Intermediate edged up 47 cents per barrel to settle at $114.24—21.4 percent below the record high of $145.29 set on July 3.
There was little good news on the economic front as data on housing and manufacturing continued to be negative while inflation numbers remain elevated.
 Producer price inflation eased very little at the headline level in July, remaining quite strong. Given that oil prices have come down somewhat (net) in recent weeks, we can expect at least temporary improvement in the headline numbers. But the worrisome problem is that earlier strong gains in oil and other commodities – as well as import prices – have lifted the trend in underlying inflation.
Indeed, producer price inflation in July remained red hot and even sharply accelerated at the core level. The overall PPI inflation rate barely slowed from June's torrid pace, posting a 1.2 percent increase, following a 1.8 percent surge in June. The core PPI rate jumped 0.7 percent, surging beyond June's 0.2 percent increase. The headline number was led by energy but the core was boosted by a number of components.
Energy led headline inflation in July with a 3.1 percent boost after a 6.0 percent spike in June. Food price inflation moderated to 0.3 percent after a 1.5 percent spike in June.
What is particularly worrisome is the 0.7 percent hike in core prices. Passenger cars and light trucks led the way with increases of 1.4 percent and 0.8 percent, respectively. But gains were widespread with notable strength seen in items such as pet food, pharmaceutical preparations, soaps, tires, newspapers, floor coverings, household appliances, sporting goods, jewelry, and the vast majority of capital equipment components. The point is that higher costs are boosting inflation at the producer level and may be nudging core consumer inflation in coming months.
There has been a clear upward trend in both headline and core PPI inflation. For the overall PPI, the year-on-year rate surged to up 9.8 percent from 9.1 percent in June (seasonally adjusted) and compared to the cycle low of minus 2.8 percent for January 2002. The core rate rose to up 3.6 percent in July from up 3.1 percent the prior month. The cycle low was minus 0.6 for December 2002. Even as of 2006, more recent lows for headline and core PPI inflation year-on-year were minus 1.2 percent and plus 0.8 percent, respectively.
 While inflation remains hot, real activity is cooling. The latest data focus on housing and manufacturing. Housing starts in July fell sharply as expected after an artificial boost in the multifamily component in June. Starts fell 11.0 percent, following a 10.4 percent surge in June. The July pace of 0.965 million units annualized was down 29.6 percent year-on-year. The drop in starts was led by a 23.6 percent monthly falloff in multifamily starts, following a 41.3 percent spike in June. Single-family starts continued their downward spiral, falling 2.9 percent in the latest month, after declining 3.2 percent in June. July's level in starts was a return to more normal conditions after a change in building code in New York City - taking effect July 1 - led to a run on both permits and starts to grandfather in the less restrictive code.
By region, the drop in starts was led by a monthly 30.4 percent decline in the Northeast with the South and West also declining, both by 8.2 percent. The Midwest posted a 10.0 percent gain.
Permits also fell in July - by 17.7 percent, following a 16.4 percent surge in June. July's 0.937 million unit pace for permits was down 32.4 percent year-on-year.
The report shows housing continuing to decline but not as severely as suggested by July's monthly percentage. The point of focus should be the further gradual decline in the single-family component indicating that residential construction has not hit bottom yet. The July numbers were close to expectations and should not have much impact on the markets.
 The latest data also show manufacturing in decline – specifically for the Mid-Atlantic region. The Philadelphia Federal Reserve's manufacturing index came in at minus 12.7 for August, slightly improved from minus 16.3 for July. August was the ninth consecutive month in negative territory. Looking ahead, Mid-Atlantic manufacturing is not likely to improve in the near-term as the new orders index also remains in contraction mode, posting a minus 11.9 in the latest month and following July's minus 12.1.
 However, there is contradictory movement between the orders numbers and the six-months out readings. The future general business conditions index jumped to 27.6 from 18.0 in July. The outlook index may be up merely because the current index is so low. The implications are that current activity may be near bottom though weak order data suggest improvement will be slow coming.
There was some improvement in inflation news but price pressure is still quite high. Input prices are not quite as severe as the prices paid index eased back nearly 20 points to a still very elevated 57.5 in August. The improvement is likely related to the very recent dip in oil and other commodity prices that have yet to show up in the PPI. The Philly Fed’s prices received index slipped to 27.0 in August from 28.8 the month before but remains relatively strong.
 Also pointing to stagnant growth ahead is the Conference Board's index of leading economic indicators which plunged 0.7 percent in July, after no change the month before. The latest number was atypically weak, skewed lower by a huge drop in building permits tied to one-time effects from New York City. Excluding the permits component, the leading index would have dipped a more modest 0.2 percent. But other components were lower as well including stock prices and jobless claims. Jobless claims were propelled lower by the recent expansion of benefits by special legislation. This effect will continue into August data – cutting chances for any major drop in claims during the latter part of the month. The bottom line is that excluding special factors, the leading index points toward flattish growth instead of toward recession.
And the latest figure for the report's coincident indicator, closely watched for signals on recession, rose 0.1 percent in July following no change in June. Essentially, this index still shows that the economy is not in recession.
The current official agency inflation numbers are very disconcerting with headline numbers starting to look like the 1970s. The good news is that we are likely to get a little help on headline numbers from the impact of the recent decline in oil prices. But this past week’s trading in the oil pits suggests that the help will be short-lived and only moderate as oil prices have partially rebounded. We had only limited data this past week on the real sector but they point to very soft growth rates for the economy in coming months. A slowing economy eventually will bring inflation down but until then the economy clearly is in stagflation mode. In fact, last week’s remarks by Fed Chairman Ben Bernanke echoed this view.
“In view of the weakening outlook and the downside risks to growth, the Federal Open Market Committee (FOMC) has maintained a relatively low target for the federal funds rate despite an increase in inflationary pressures. This strategy has been conditioned on our expectation that the prices of oil and other commodities would ultimately stabilize, in part as the result of slowing global growth, and that this outcome, together with well-anchored inflation expectations and increased slack in resource utilization, would foster a return to price stability in the medium run. In this regard, the recent decline in commodity prices, as well as the increased stability of the dollar, has been encouraging. If not reversed, these developments, together with a pace of growth that is likely to fall short of potential for a time, should lead inflation to moderate later this year and next year.”
The plain English translation is that growth is expected to be very low, inflationary pressures have risen, but inflation is expected to moderate. The coming months will present a challenging environment for consumers and businesses.
This coming week the three market moving indicators are durables orders, GDP and personal income. Although not technically an indicator, traders will be giving lots of attention to Tuesday’s release of minutes for the August 5 FOMC meeting.
Existing home sales continued their downward spiral in June, falling 2.6 percent to an annualized 4.86 million pace. June sales were down 15.5 percent on a year-ago basis. The 4.86 million unit rate is the lowest in nine years of available data. Supply is still bloated at 11.1 months of inventories at the current sales rate. The median price did rise 3.5 percent in the latest month to $215,100 but the year-on-year rate is very weak at minus 6.1 percent.
Existing home sales Consensus Forecast for July 08: 4.94 million-unit rate
Range: 4.88 to 5.00 million-unit rate
New home sales slipped 0.6 percent in June to an annualized 530,000 pace – down 33.2 percent from June 2007. Sales are extremely weak with the current pace at the lowest since the 524,000 for October 1991 just after the 1990-91 recession. Looking ahead, conditions are mixed with labor markets weakening but the July pending home sales index up slightly from the month before. However, the National Association of Homebuilders’ housing market index indicated that buyer traffic is down. In the upcoming report, traders will be watching the inventories number. Unsold homes on the market are still high with months supply for June coming in at a bloated 10.0 months.
New home sales Consensus Forecast for July 08: 525 thousand-unit annual rate
Range: 500 thousand to 540 thousand-unit annual rate
The Conference Board's consumer confidence index rose 9 tenths to 51.9 in July. But the level is still among the very lowest in more than 40 years of data. Not only do higher gasoline prices have consumers depressed but also the weakening job market. Those saying jobs are currently hard to get rose to 30.3 percent for a 6 tenth gain in the month. Those saying jobs are plentiful fell 6 tenths to 13.5 percent. Inflation expectations remain severely elevated but slipped back 1 tenth to 7.6 percent.
Consumer confidence Consensus Forecast for August 08: 53.0
Range: 50.0 to 54.5
The Minutes of the August FOMC meeting are scheduled for release at 2:15 p.m. ET. The current priority of the Fed is stabilization of the credit markets even though several regional Fed presidents have raised the decibel level of concern over inflation. Markets will be poring over the minutes for any additional clues as to when the Fed will decide that credit markets have stabilized and start raising interest rates.
Durable goods orders in June were surprisingly strong – even after discounting a bump up in aircraft orders. Durable goods orders jumped 0.8 percent in June, following a 0.1 percent rise in May. Excluding the transportation component, new orders rebounded a sharp 2.0 percent, following a 0.5 percent decline in May. But more recent manufacturing surveys suggest that manufacturing is flat.
New orders for durable goods, total, Consensus Forecast for July 08: +0.1 percent
Range: -1.0 percent to +2.2 percent
New orders for durable goods, ex-trans., Consensus Forecast for July 08: -0.3 percent
Range: -1.3 percent to +0.5 percent
GDP for the second quarter came in relatively strong compared to expectations just a few months ago. Second quarter real GDP posted a 1.9 percent annualized gain, following a 0.9 percent rise the prior quarter. Since the initial estimate, improvement in the trade sector and a rise in inventories point toward an even higher estimate for second quarter GDP – perhaps even a 3.0 percent pace. The second quarter overall inflation number was extremely quirky. The GDP price index rose an annualized 1.1 percent – down from the first quarter increase of 2.6 percent. The overall price index was moderated by the interaction of the import price index with other components. For now, for the overall economy, one should focus on the price index for domestic purchases which accelerated sharply to an annualized 4.2 percent from 3.5 percent in the first quarter. Headline PCE inflation jumped to 4.2 percent from 3.6 percent while core PCE inflation eased to 2.1 percent from 2.3 percent in the first quarter.
Real GDP Consensus Forecast for preliminary Q2 08: +2.7 percent annual rate
Range: +2.3 to +2.9 percent annual rate
GDP price index Consensus Forecast for preliminary Q2 08: +1.1 percent annual rate
Range: +1.0 to +1.4 percent annual rate
Initial jobless claims eased back in the week ending August 16, slipping 13,000 to 432,000. Continuing claims for the previous week also fell back, declining 17,000 to 3.362 million. Levels in both series remain very high, consistent with the ongoing contraction in payroll jobs. Nonetheless, initial claims data over the past several weeks have been skewed higher by Washington's counter-cyclical effort to widen eligibility for benefits and the magnitude of the impact is largely unknown. The Labor Department said the program is affecting claims but to an unknown degree.
Jobless Claims Consensus Forecast for 8/23/08: 427,000
Range: 410,000 to 430,000
Personal income in June decelerated after a sharp boost in May – primarily due to a drop off in income tax rebates. Inflation, however, worsened – even at the core level. Personal income in June edged up 0.1 percent, following a 1.8 percent surge in May. Within personal income, the wages and salaries component eased to a 0.2 percent gain, following a 0.3 percent boost in May. On the spending side, personal consumption in June remained on the high side with a 0.6 increase after surging 0.8 percent in May. Spending was led by a 1.3 percent boost in nondurables which includes gasoline. Essentially, June's gain was due to a spike in gasoline prices as overall real spending slipped 0.2 percent. On the inflation front, the headline PCE price index worsened to a 0.8 percent gain after jumping 0.5 percent in May. The core PCE price index also firmed in June, increasing 0.3 after a 0.2 percent rise in May. Looking ahead, at least the wages & salaries component of personal income is likely to be sluggish in July as weekly earnings (from the employment report) slipped 0.1 percent for the month. Rebate checks should decline further. Based on the July retail sales numbers, nominal PCEs will be near flat but with strength in nondurables (boosted by gasoline) and weakness in durables (pulled down by auto sales). Also, the July CPI increase of 0.8 percent points to a strong gain in the PCE headline price index while a 0.3 percent rise in the core CPI suggests a core PCE inflation number that is hotter than the Fed’s preference.
Personal income Consensus Forecast for July 08: -0.1 percent
Range: -1.0 to +0.6 percent
Personal consumption expenditures Consensus Forecast for July 08: +0.2 percent
Range: -0.2 to +0.4 percent
Core PCE price index Consensus Forecast for July 08: +0.3 percent
Range: +0.2 to +0.3 percent
The NAPM-Chicago purchasing managers' index edged back into positive territory in July, reaching 50.8 and following a string of five straight sub-50 readings. We may see a little further improvement in August as new orders were a little further above the break even mark, coming in at 53.5 versus 52.0 in June. The prices paid index has been extremely elevated in recent months with July's reading of 90.7 the highest since a 90.9 level in March 1980. But the prices paid index may start to ease with the recent declines in oil prices.
NAPM-Chicago Consensus Forecast for August 08: 49.8
Range: 49.0 to 51.5
The Reuter's/University of Michigan's Consumer sentiment index may have bottomed but it still remains depressed as sentiment edged higher in mid-August to 61.7 from July's 61.2. The latest number was bumped up by improved expectations. The current conditions component actually slipped. Recent declines in gasoline prices appear to have helped to ease inflation expectations. For one year out, inflation expectations fell 3 tenths from July to 4.8 percent.
Consumer sentiment Consensus Forecast for final August 08: 62.0
Range: 61.0 to 63.0
Econoday Senior Writer Mark Pender contributed to this article.
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