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The past week, housing sales dropped further and durable goods orders fell back. Nonetheless, equities ended the week near break even or even slightly positive. Neither economic news nor company earnings were as bad as feared. But equities and bonds still were looking ahead to outcomes of the Fed’s stress tests of major banks and a quarterly refunding announcement by the Treasury.
 Yes, the economic news was negative as new and existing home sales dropped again and durables orders turned down. And yes, the recession is still on. But beating expectations is what mattered and most economic data came in less weak than predicted. Traders now are talking about the recession flattening out by the third quarter but there still is plenty of opinion that contraction will continue through the end of the year. Nonetheless, equity traders this past week were anticipating earnings improvement down the road, helping to offset still negative housing and manufacturing news.
Company earnings and warnings played key roles this past week – notably on Monday as Bank of America sent stocks plunging. Even though Bank of America reported better than expected profits, a warning about deteriorating credit quality sent investors running from financials and pulled down other sectors. However, there was some bounce back on Tuesday on bargain hunting in financials. Techs got a boost from better-than-expected earnings from IBM and Texas Instruments. Comments by Treasury Secretary Geithner that most banks are OK (anticipating outcomes of the Fed’s stress tests) also helped to lift financials.
Stocks were mostly up Thursday and especially on Friday on less negative to good earnings reports. Better-than-expected reports came from a variety of sectors – including Marriott in lodging, Apple in techs, and ConocoPhillips in energy. But financials surged on lower-than-expected losses from Fifth Third Bancorp with American Express, Bank of America, and Capital One jumping notably on Thursday. Boosting equities at week end were announcements by the Fed that most of the 19 major banks undergoing stress tests are adequately capitalized, better-than-estimated results from Ford Motor and from American Express, and not-as-negative-as-feared numbers in durables orders and new home sales.
But still weighing on markets is concern that the Fed’s stress tests may not adequately explain what shape banks are really in. Financials easily could jump or sink this coming week. Also, markets are worried about how well the Treasury’s quarterly refunding will go. Inability to absorb supply could rattle markets.
The blue chips ended the week slightly down while techs were up modestly. The broad market was barely in negative territory.
Equities were mixed this past week. The Dow was down 0.7 percent; the S&P 500, down 0.4 percent; the Nasdaq, up 1.3 percent; and the Russell 2000, down 0.1 percent.
For the year-to-date, major indexes are mixed as follows: the Dow, down 8.0 percent; the S&P 500, down 4.1 percent; the Nasdaq, up 7.4 percent; and the Russell 2000, down 4.1 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields swung sharply last week but netted somewhat firmer rates for longer maturities. Rates, however, headed down at the start of the week on heavy flight to safety as equities plunged on Monday, led down by financials. Rates firmed three of the four remaining days as better-than-expected company earnings boosted equities and drawing monies out of Treasuries. Not-as-negative-as-forecast durables orders and new home sales spurred rates higher at week end.
 But looming supply is a growing worry despite Fed purchases of longer-term Treasury securities. The Treasury makes its quarterly refunding announcing this Wednesday for needs in the upcoming two quarters. Also, the Treasury announced last week that it will auction $40 billion in two-year notes on April 27, a record $35 billion in five-year notes on April 28, and a record $26 billion in seven-year T-notes on April 29.
For this past week Treasury rates were mixed as follows: 3-month T-bill, down 3 basis points, the 2-year note, down 1 basis point; the 5-year note, up 4 basis points; the 10-year bond, up 3 basis points; and the 30-year bond, up 7 basis points.
The yield curve remains relatively steep due to the Fed keeping short rates near zero while long-term yields show concern about rising inflation potential and looming supply problems.
 Crude oil prices were little changed net this past week although there were some sizeable intraweek swings. Spot prices for West Texas Intermediate dropped a sharp $4.45 per barrel on Monday to $45.88 – the lowest since March 10. A stronger dollar weighed on prices along with worries over demand as reflected in the day’s plunge in equity prices. Prices, however, firmed throughout the rest of the week on better-than-expected company earnings reports lifting expectations about economic growth (or at least reduced decline). Equity gains on Thursday and Friday in particular lifted spirits in the energy pits despite somewhat higher than expected oil inventories on Wednesday. A lower dollar also bumped up the price of crude during the latter part of the week.
Net for the week, spot prices for West Texas Intermediate edged up 47 cents per barrel to settle at $50.80.
The economy continued to worsen this past week but at a less rapid decline. There are hints that housing may be near bottom – although that hardly means a recovery for this sector is happening any time soon. Manufacturing took a step backward but not as much as expected.
 Housing sales continued their downward spiral in March – both for existing and for new homes. The good news, however, is that the declines were at a less rapid pace than in recent months. Existing home sales fell 3.0 percent in March to an annual sales rate of 4.57 million units. The market consensus had expected a decline to 4.70 million – an exception to the rule of better-than-expected numbers this past week. Supply was little changed but still quite heavy at 9.8 months versus 9.7 months in February. Bargains are slowing the decline in the sales pace. Distressed sales rose to a 50 percent share of March sales compared to 45 percent in February.
 New home sales also fell but only a very slight 0.6 percent in March. Sales came in at a notably higher-than-expected annual unit sales rate of 356,000, the consensus was 330,000. On top of that, numbers for February and January were both revised higher. Total supply on the market eased to 10.7 months from 11.2 months in February and 12.5 in January. This indicates that the very worst for housing is coming to a close. Still, this does not mean that a rebound is in short order – more likely flat levels for some time.
 House prices in two of three different reports added to the market view that housing may be near bottom – but there are some hefty caveats and more data coming. First out was the Federal Housing Finance Agency (FHFA) house price index – purchases only - for February which rose 0.7 percent after a gain of 1.0 percent in January. The National Association of Realtors reported on Thursday that the median price for existing home sales rose 4.2 percent in March to $175,200. In contrast, median prices for new home sales slipped 3.5 percent in March to $201,400.
 But markets took heart that all three reports showed year-ago house prices to be less negative than for the month before. The FHFA purchase index came in at down 6.5 percent for February from down 6.9 percent the month before. The existing home median sales price stood at down 12.4 in March, compared to down 13.1 percent the month before. Finally, the new home median sales price was down 12.2 percent, improved from down 14.9 percent in February.
But there are some heavy caveats. Same-house price comparisons are not available for either existing or new homes. They do not compare same house transactions. There is a change in the sample of houses monthly, reflecting shifts in composition of sales between high-end and low-end sales.
The FHFA data do match price changes for the same house – repeat transactions. However, House Price Index is derived from transactions involving conforming conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac. In contrast to other house price indexes, the sample is limited by the ceiling amount for conforming loans purchased by these government sponsored enterprises (GSEs). The loan limit in 2007 was $417,000. The limit was raised temporarily in February 2008 to as much as $729,750 in high cost areas of the country. The loan limit for 2009 was $417,000 for one-unit homes in most areas, but could be up to $625,500 in certain high cost areas in the continental United States. Mortgages insured by the FHA, VA, or other federal entities are excluded because they are not “conventional” loans. The bottom line here is that major segments of the housing market are not covered by the FHFA house price index where much price weakness likely can be found.
But next week, we’ll get a reading for Case-Shiller home price indexes. These are repeat transactions data and cover the entire market. Then, we’ll have a more accurate reading of house price trends.
 The bottom line is that the declines in durables orders are not as deep as they have been during the second half of 2008 and January 2009. Durable goods orders in March declined less than expected, falling back 0.8 percent after a 2.1 percent rebound in February. The latest number was much better than market fears of a 1.8 percent drop. The negative news, however, was that February sharp gain was whittled down substantially in revisions. The prior month’s increase originally had been estimated at 3.5 percent. Excluding the transportation component, new orders decreased 0.6 percent in March, after advancing 2.0 percent the prior month.
Weakness in new orders was widespread in the latest month. Year-on-year, overall new orders for durable goods slipped to down 25.2 percent in March from down 24.8 percent in February.
Overall, the March durables orders indicate that the contraction in manufacturing may be slowing – which still is good news. However, we certainly will have to pay more attention over the next few months to ex-transportation since auto manufacturers are shutting down some assembly lines due to weak sales and high inventories.
At the end of the first quarter, the economy was still in decline but not at as rapid a pace as in the fourth quarter or even early first quarter. Contraction will likely continue in the second quarter but at a milder pace.
After a quiet week, this pace for economic news picks up sharply and could overshadow earnings. On Wednesday, we get the first reading on first quarter GDP growth. Later that day, the Fed releases its FOMC statement. While there is expectation for no change in the fed funds target, markets will be parsing the text for changes in Fed views on the economy and for updates on quantitative easing. We’ll get an important update on the consumer sector with personal income on Thursday and on manufacturing with the ISM manufacturing index on Friday.
The Conference Board's consumer confidence index in March edged slightly higher but remained deeply depressed at a reading of 26.0. Pessimism on the current assessment of the jobs market was still very deep with only 4.6 percent saying jobs are plentiful versus 48.7 percent who say they are hard to get. The bad news in the report was that buying plans eroded further. Only 3.9 percent of the sample planned to buy a car in the next six months, down 8 tenths in the month. Those planning to buy a house fell to 2.0 percent from 2.3 percent while those planning to buy a major appliance fell 1 percentage point to 24.0 percent.
Consumer confidence Consensus Forecast for April 09: 30.0
Range: 28.0 to 33.0
GDP ended the final quarter of 2008 with a sharp 6.2 percent annualized decline. Analysts are expecting even worse news for the first quarter – but hold onto the belief that the first three months of the year were the worst of the recession. Along with weak economic activity, inflation was subdued in the final quarter of last year as the GDP price index rose a mere 0.5 percent annualized – also due to declining oil prices.
Real GDP Consensus Forecast for advance Q1 09: -5.0 percent annual rate
Range: -6.2 to -3.5 percent annual rate
GDP price index Consensus Forecast for advance Q1 09: +1.8 percent annual rate
Range: -0.4 to +2.5 percent annual rate
The FOMC announcement for the April 28-29 FOMC policy meeting is expected to leave the fed funds target range unchanged at zero to 0.25 percent since the Fed has announced it expects to maintain a low fed funds rate for some time. Instead, markets will be focusing on two things – any language that says FOMC participants believe the contraction is not as severe and how well quantitative easing is working. The Fed will likely discuss whether a Plan B is needed for the flop thus far for TALF. There has been little participation in this program intended to loosen up credit markets for consumers and small businesses.
FOMC Consensus Forecast for 4/29/09 policy vote on fed funds target range: unchanged at a range of zero to 0.25 percent
Personal income in February slipped 0.2 percent, following a 0.2 percent boost in January. But the latest drop was even worse for the wages and salaries component which fell 0.4 percent, after slipping 0.2 percent in January. This is the component that average consumers use for paying bills and making purchases. Consumer spending slowed to a 0.2 percent rise, after a 1.0 percent jump in January. But firming oil prices bumped up overall consumer inflation for a second consecutive month as the headline PCE price index jumped 0.3 percent, equaling the rise in January. Meanwhile, the core PCE price index rose 0.2 percent – the same as for January. Looking ahead, a March decline in 0.1 percent for aggregate weekly earnings (from the employment report) portends sluggish personal income for March – at least for wages & salaries.
Personal income Consensus Forecast for March 09: -0.2 percent
Range: -0.4 to +0.3 percent
Personal consumption expenditures Consensus Forecast for March 09: 0.0 percent
Range: -0.4 to +0.2 percent
Core PCE price index Consensus Forecast for March 09: +0.2 percent
Range: +0.1 to +0.2 percent
The employment cost index for civilian workers showed little wage inflation in the fourth-quarter, rising only 0.5 percent, compared to three prior quarters of 0.7 percent increases. The year-on-year rate of 2.6 percent was the lowest on record (1982). Increases in both wages and benefits were mild at 0.4 percent and 0.5 percent, respectively.
Employment cost index Consensus Forecast for Q1 09: +0.5 percent simple quarterly rate
Range: +0.4 to +0.8 percent simple quarterly rate
The Chicago PMI Business Barometer index for March fell nearly 3 points to 31.4 – a very contractionary reading below the breakeven level of 50. However, some components did show steady or even easing rates of contraction including employment which gained nearly 3 points but was at level of 28.1, reflecting negative growth. The input price index fell to 34.1 from February's 37.8, maintaining concern over deflation.
Chicago PMI Consensus Forecast for April 09: 35.0
Range: 33.0 to 38.0
Sales of domestic motor vehicles made a moderate comeback in March, rising to an annualized 6.9 million units from 6.3 million the month before. . But year-on-year, sales are still depressed. GM showed a 44.7 percent year-on-year drop while Ford and Chrysler were down 40.8 percent and 39.3 percent, respectively. Combined domestics and imports rose to a 9.9 million unit pace in March from 9.1 million the month before.
Motor vehicle domestic sales Consensus Forecast for April 09: 7.2 million-unit rate
Range: 6.8 to 7.2 million-unit rate
The Reuter's/University of Michigan's Consumer sentiment index for mid-April showed that depressed consumer attitudes are improving from rock bottom – hinting that the worst of the recession is over. The Reuters/University of Michigan's consumer sentiment index rose solidly to 61.9 from 57.3 for March. Both the expectations and current conditions components picked up. The bad news is that one-year inflation expectations shot up 1 full percentage point to 3.0 percent. This could be due to higher gas prices and due to concern over both loose monetary policy and ballooning federal deficits.
Consumer sentiment Consensus Forecast for final April 09: 61.9
Range: 60.0 to 62.0
The Institute for Supply Management's manufacturing index edged 5 tenths higher to 36.3 in March, suggesting that manufacturing is declining less rapidly. The best news in the report was an 8 point jump in the new orders index to 41.2—still a negative number. But supplier deliveries—an indicator of tightness in the supply chain—fell in the latest month, indicating slack conditions. The prices paid index was little changed at 31.0.
ISM manufacturing index Consensus Forecast for April 09: 38.3
Range: 35.0 to 40.0
Factory orders rose a very solid 1.8 percent in February in a gain driven by a sharp jump in durables and moderate rise in nondurables. Unfortunately, more current data point to a reversal for March. Durable goods orders fell back 0.8 percent in March, following a downwardly revised 2.1 percent rebound in February. The prior month’s increase originally had been estimated at 3.5 percent.
Factory orders Consensus Forecast for March 09: -0.5 percent
Range: -2.2 to +0.6 percent
Econoday Senior Writer Mark Pender contributed to this article.
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