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After the disappointing employment situation report for May earlier this month, traders have been more sensitive to measures of health on the consumer sector. At the end of the trading week, markets got a double dose of news on the consumer—with numbers headed in opposite directions.
 Equities started the week on a down note as the disappointment from the prior Friday’s jobs report weighed on stocks. A dip in the euro also bumped equities down as that currency is now seen as a proxy for the amount of concern over European sovereign debt. But Monday evening comments by Fed Chairman Bernanke that the economy is not likely headed for a double dip sent most equities up the next day. Also helping boost stocks was a report on small business optimism that came in better than expected and a rise in the euro. Higher crude oil prices lifted the energy patch and other commodity producers.
At mid-week, most stocks headed down despite a generally favorable Beige Book. All 12 Fed District Banks reported improved economic conditions. Rumors that British Petroleum might have to cut its dividend to pay for the oil spill sent its stock down along with those of other oil companies.
But equities got a huge boost on Thursday on news that Chinese exports were up sharply—indicating healthy global demand. Many indexes were up 3 percent or more for the day despite a smaller-than-expected dip in initial jobless claims and slippage in exports for the U.S. A late session rally on Friday (thinly traded) left most indexes with healthy gains despite a surprise decline in retail sales. Partially offsetting the drop in retail sales was an unexpectedly strong improvement in consumer sentiment.
Equities were up this past week. The Dow was up 2.8 percent; the S&P 500, up 2.5 percent; the Nasdaq, up 1.1 percent; and the Russell 2000, up 2.4 percent.
For the year-to-date, major indexes are mixed as follows: the Dow, down 2.1 percent; the S&P 500, down 2.1 percent; the Nasdaq, down 1.1 percent; and the Russell 2000, up 3.8 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury rates ended the week up only slightly despite sharp daily swings. Treasury yields largely followed the stock market with flight to safety boosting demand for Treasuries on down days for stocks. Yields were up significantly Thursday with the huge rally in equities that day. Good news on Chinese exports also lifted yields. At week end, the plunge in retail sales led Treasury yields down notably.
Throughout the week, worries over sovereign debt in Europe weighed on U.S. rates. The U.S. Treasury likely is the biggest beneficiary of these concerns. Demand for Treasuries has remained strong despite sizeable supply. This past week the Treasury had successful auctions for $36 billion in 3-year notes, $21 billion of 10-year notes, and $13 billion in 30-year bonds.
For this past week Treasury rates were mostly up slightly as follows: the 2-year note, up 1 basis point; the 5-year note, up 4 basis points; the 7-year note, up 3 basis points; the 10-year bond, up 3 basis points; and the 30-year bond, up 2 basis points. The 3-month T-bill declined 6 basis points;
 Spot prices for West Texas Intermediate drifted upward this past week even as economic forecast updates were mixed. Fed Chairman Ben Bernanke’s comments on an improved economy apparently carried more weight than the forecasts for WTI by the U.S. Energy Department and Societe Generale SA. The latter two cut their forecasts for crude prices on higher-than-expected oil supplies and downgrades in demand.
Crude jumped by over $2 per barrel at mid-week after the EIA reported a sharper than expected drop in crude inventories. News of strong Chinese exports also boosted WTI. The dollar also had weakened the past two days. A vote by the UN Security Council to impose tighter sanctions on Iran also put upward pressure on oil prices.
Crude was lifted further on Thursday by favorable economic news on Chinese exports, Japan GDP, and Australian employment. Crude, however, eased on Friday after the unexpectedly weak U.S. retail sales. Net for the week, spot prices for West Texas Intermediate gained $2.27 per barrel to settle at 73.78.
Data were mixed for the consumer sector as retail sales fell sharply in the latest report while consumer sentiment surprised on the upside. Unfortunately for U.S. manufacturers, exports fell in the most recent month. But for both retail sales and exports, the numbers may just reflect monthly volatility.
 Although the markets were disappointed at the time of release, a reversal in retail sales in May is not yet disconcerting in the context of recent increases. Overall retail sales in May fell 1.2 percent after gaining 0.6 percent in April and jumping 2.1 percent in March.
Sales ex-autos decreased 1.1 percent after gaining 0.6 percent in April. Also excluding gasoline, sales posted a 0.8 percent drop, following a 0.6 percent boost in April.
The drop in sales for overall sales in May was centered in a 9.3 percent plunge in building materials. This was the largest fall for this component since the start of the series over 18 years ago. However, this component jumped 8.1 percent in March and 8.4 percent in April. So, the decline in May is not terrible when in context.
Nonetheless, the trend in overall sales is upward and healthy—we probably should only worry about the May decline if we get a repeat for June. Overall retail sales on a year-ago basis in May came in at 6.9 percent compared to 9.0 percent the month before. Excluding motor vehicles, the year-on-year rate slipped to 6.1 percent from 7.8 percent in April.
What have been component trends' The strongest year-ago gain is 20.2 for gasoline stations, reflecting still high (compared to a year ago) gasoline prices. Nonstore retailers are doing quite well, posting a 15.6 percent boost. This category includes Internet sales, home delivery pizza, and purchases delivered directly to the consumer. Motor vehicles are doing quite well, up 11.2 percent. General merchandise (including department store sales) is about in the middle of the pack with a 6.0 yearly boost. Despite price declines (according to the CPI), electronics & appliances are up a moderate 5.0 percent.
The laggards are building materials, up 3.1 percent, and food & beverages, up 2.6 percent. Building materials are still being held back by soft housing. Given the food & beverages are necessities, one should not expect strong numbers there.
For now, May is just a partial offset to earlier strong numbers. The big question is whether June makes a comeback. Based on the latest reading on consumer sentiment, there is a good chance for an upward bounce.
 Consumers appear to be focusing specifically on the health of the U.S. economy—shrugging off sovereign debt worries in Europe and the recent drop in stocks. The Reuters/University of Michigan Consumer Sentiment Index rose to 75.5 in the mid-June reading versus 73.6 for the final reading of May. The nearly two-point gain was sizable and put the index at its best level since the January 2008 figure of 78.4.
Gains were posted for both the current conditions and expectations components. At 82.9, current conditions is at it highest level since 84.2 for March 2008. Expectations, which has been a laggard, is showing improvement at 70.7—well above the recent low of 49.2 for June 2008.
Although the May retail sales number was disappointing, the latest advance in sentiment indicates that the sales number may simply reflect volatility and that the consumer sector is gaining momentum, albeit gradually.
 According to the Fed, consumers are taking on a little more debt—but it’s narrowly focused. Consumer credit edged up $1.0 billion in April. This was the first increase in three months. The bad news is that the original estimate for March of a $2.0 billion rise was revised downward by $7.4 billion and now shows a $5.4 billion contraction.
For the latest month, non-revolving credit, reflecting strong car sales, jumped $9.4 billion in April but was offset by a nearly as large of a fall in revolving credit. Basically, consumers are still in a deleveraging mood. That is, it’s OK to use credit for something really needed—such as a car or SUV. But it’s not OK to pull out the plastic for much of anything else as consumers are paying down credit card balances. Also, bank charge offs are high and this is cutting into revolving debt.
The bottom line is that even though consumers are more optimistic about the economy, they are not willing to expand spending on credit. While this may weigh on sales growth in the short term, it also means that spending growth that does occur is sustainable.
 Are the stronger dollar and European debt worries weighing on exports' Have businesses cut back on their sales forecasts and dialed back on imported goods' Those are key questions arising out of the latest monthly trade numbers.
The overall trade gap widened to $40.3 billion from $40.0 billion in March. For the latest month, exports slipped 0.7 percent while imports decreased 0.4 percent.
By end-use categories, goods exports’ weakness was led by a $0.7 billion decline in consumer goods. Foods, feeds & beverages fell $0.6 billion. Industrial supplies and autos were up $0.6 billion and $0.1 billion, respectively.
 Softness in goods imports was led by a $1.7 billion fall in consumer goods—indicating that businesses are more cautious about consumer demand in coming months. Auto imports dipped $0.2 billion. However, the bright spot in imports was a $1.4 billion jump in capital goods excluding autos. Businesses appear to see demand strong enough to expand or upgrade capacity.
It is too early to tell if the April report shows the start of new trends—lower exports and lower imports. We have had oscillations in the numbers even in recent months. Thus far, the problems in Europe do not appear so serious as to completely derail recovery there. Also, growth in Asia appears quite healthy. Most likely trade will rebound for both exports and imports but the underlying rates may have been nudged down from earlier months.
The recovery continues but at an uneven pace. This is much as forecast—it’s just than when the trajectory is moderate, the oscillations stand out more. We had key updates on the consumer sector and trade sector. On average, they are doing fine. We will need more than one month’s negative numbers to result in a new trend.
Will housing starts sputter in Wednesday’s report as the key deadline for special homebuyer tax credits has expired' Later that morning, industrial production should confirm that manufacturing remains robust. The Fed will be watching Wednesday’s PPI and Thursday’s CPI numbers to see if policy can stay on hold for an extended period.
The Empire State manufacturing index for May came in at 19.11, well above the break-even mark of zero to signal significant growth compared to April. However, the May number was notably below April’s 31.86, indicating moderation in growth. June may also show moderation as May’s new orders index came in at 14.3—down from April's 29.49.
Empire State Manufacturing Survey Consensus Forecast for June 10: 21.0
Range: 16.0 to 25.0
Housing starts in April advanced 5.8 percent to an annualized pace of 0.672 million units. April’s gain was led by a 10.2 percent increase in single-family starts while the multifamily component fell 18.6 percent. We may see some slowing in starts in May as April housing permits declined 11.5 percent, following a 5.4 percent boost in March.
Housing starts Consensus Forecast for May 10: 0.650 million-unit rate
Range: 0.575 million to 0.662 million-unit rate
The producer price index eased to down 0.1 percent in April from a 0.7 percent spike in March. Declines in both food and energy helped pull the headline figure down. At the core level, the PPI came in with a 0.2 percent increase, following a 0.1 percent uptick in March. The key factor behind the boost in the core was cuts in discounts by auto dealers. Gasoline price weakness should pull the headline number down for May.
PPI Consensus Forecast for May 10: -0.5 percent
Range: -0.8 to -0.2 percent
PPI ex food & energy Consensus Forecast for May 10: +0.1 percent
Range: +0.1 to +0.2 percent
Industrial production jumped 0.8 percent in April, following a 0.2 percent rise the prior month. But the all-important manufacturing component showed back-to-back 1.0 percent gains in the latest two months. Although still soft, capacity utilization is on the rise, coming in at 73.7 percent overall for a 6 tenths gain from March. Looking ahead, we are likely to see a strong production number for May, given that production worker hours in manufacturing spiked 1.0 percent for the month. Also, the ISM manufacturing index was healthy at 59.7 for the month.
Industrial production Consensus Forecast for May 10: +1.0 percent
Range: +0.6 to +1.6 percent
Capacity utilization Consensus Forecast for May 10: 74.5 percent
Range: 74.2 to 75.0 percent
The consumer price index in April dipped 0.1 percent after edging up to 0.1 percent the month before. Core CPI inflation was flat for two months in a row. At the headline level, a drop in energy prices weighed on costs while food was still moderately strong. The core was kept low by extremely soft shelter costs along with a decline in apparel. Weakness in crude oil prices could give us a second consecutive negative number at the headline level.
CPI Consensus Forecast for May 10: -0.2 percent
Range: -0.2 to -0.1 percent
CPI ex food & energy Consensus Forecast for May 10: +0.1 percent
Range: 0.0 to +0.1 percent
Initial jobless claims for the June 5 week edged down 3,000 to 456,000. But the four-week average--due to a 28,000 jump the May 15 week—rose for the fourth straight week to its highest level in three months to 463,000. However, continuing claims fell a very steep 255,000 in the May 29 week to 4.462 million and the lowest level since late 2008.
Jobless Claims Consensus Forecast for 6/12/10: 450,000
Range: 445,000 to 460,000
The Conference Board's index of leading indicators in April edged down 0.1 percent, following a 1.3 percent surge the month before. The latest number primarily reflected a decline in building permits and shortened delivery time. In contrast, the index of coincident indicators rose 0.3 percent in April, following a 0.1 percent boost the month before. This index has been on an upward trend since July 2009. We should see a rebound in the May LEI despite the downward tug from a drop in stock prices and building permits. Positives are likely in the factory workweek, vendor performance, nondefense capital goods orders, interest rate spread, and consumer expectations.
Leading indicators Consensus Forecast for May 10: +0.6 percent
Range: +0.1 to +0.8 percent
The general business conditions index of the Philadelphia Fed's Business Outlook Survey in May edged higher to 21.4 from April's 20.2. But we may see a less robust number for June as the new orders index slipped in May to 6.1 from the 13.9 reading in April.
Philadelphia Fed survey Consensus Forecast for June 10: 20.0
Range: 13.8 to 21.5
Quadruple Witching
R. Mark Rogers is the author of The Complete Idiot’s Guide to Economic Indicators, Penguin Books, October 2009.
Econoday Senior Writer Mark Pender contributed to this article.
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