Last week saw the markets nervous over recession talk - which had been reinvigorated the previous week by misreported comments by former Fed Chairman Alan Greenspan and then again by Greenspan later actually giving his own odds for recession this year - 30 percent incidentally, before this week's data came out. A moderately healthy employment report killed the recession talk - at least for the day on Friday - and equities responded with a mild boost while Treasuries slipped.
Recap of US Markets
OIL PRICES
Oil prices remained in a narrow range last week despite some volatility from changes in demand forecasts and in inventories. The biggest moves were on Monday, Thursday, and Friday during last week. Spot prices for West Texas Intermediate fell $1.57 per barrel to $60.07 per barrel due to concern over risks to weak economic growth. The fears were mainly fueled by declines in European and Asian stock markets. Spot prices rebounded $1.23 per barrel on Thursday due to lower U.S. inventories of distillates. Prices fell again on Friday by $1.59 per barrel - due to a realization that Thursday's inventory numbers had been affected by fog that delayed the unloading of some ships on the Gulf coast and due to an announcement by Shell that a Los Angeles area refinery was back on-line after a power outage. For the week, prices were down on a net basis, closing Friday at $60.05 per barrel - down $1.59 per barrel from the prior Friday close.
STOCKS
Equities ended a two-week slide with most indexes up moderately for the week on net. However, volatility clearly is back as the markets generally went in the opposite direction each day until Friday. Monday down over concern over sell-offs in European and Asian markets. Sub-prime lender woes also kept some financials weak. The decline in the ISM non-manufacturing index also exerted downward pressure. Stocks rebounded Tuesday as talk of collaboration by Google and Apple boosted techs. Merger news from Citigroup gave a lift to financials and markets in general as did gains overseas. Equities slipped Wednesday - largely over general concern about soft economic growth. The Fed's Beige Book was released Wednesday afternoon and was seen as indicating a slowing in growth. Thursday saw a rebound in stocks which was initiated by a rebound in Asian stocks earlier in the day. Finally, Friday's favorable employment report boosted equities notably at the open and during the first half of the day. However, profit taking in the afternoon left the gains modest. But net for the week, equities had regained some of their recent losses.
Last week, the Dow was up 1.3 percent; the S&P 500, up 1.1 percent; the Nasdaq, up 0.8 percent; and the Russell 2000, up, 1.2 percent.
Year-to-date, major indexes are still down. The Dow is down 1.5 percent; the S&P500, down 1.1 percent; the Nasdaq, down 1.1 percent; and the Russell 2000 is down 0.3 percent.
BONDS
Interest rates mostly headed up during last week. Rates were flat to down incrementally with little news to move the markets. Rates drifted on Tuesday but upward, led by weakness in the dollar and strength in equities. Wednesday's release of the Fed's Beige book led traders to see the economy as weakening and boosted bond prices. However, on Thursday traders turned their attention to the next day's release of the employment report and bets were for employment to show on the stronger side - or at least not come in weak. Friday's employment report indeed pushed rates up. By Friday's close, the 10-year Treasury stood at 4.59 percent - its highest in almost two weeks.
Net for the week the Treasury yield curve was up notably. Yields were up as follows: 2-year Treasury note, up 13 basis points; 3-year, up 13 basis points; 5-year, up 10 basis points; the 10-year bond, up 9 basis points; and the 30-year bond, up 8 basis points. The 3-month T-bill was down 2 basis points.
Last week's jump in rates primarily took place on Friday.
Rates reversed course last week, putting most rates back up to where they had been about two weeks earlier.
Markets at a Glance
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
The Economy
Last week was dominated by the employment report which pushed aside recent talk of recession. Despite the slowing in employment growth, labor markets remain tight.
Employment report boots the "r" word
Last week's employment report showed payroll employment at its lowest in two years but the markets saw the report overall as corroborating continued healthy economic growth. Fears of recession dissipated quickly in the markets due to moderately healthy employment gains. Nonfarm payroll employment rose by 97,000 in February, following a revised 146,000 boost in January and a 226,000 advance in December. Two factors gave a positive spin to the payroll employment numbers. First, January and December were revised up by 35,000 and 20,000, respectively, for a net boost of 55,000. Second, weakness in the February job numbers was primarily in construction, which lost 62,000 jobs during the month. However, severe weather was behind much of the decline. Taking the second factor into account, February's modest gain looks even better.
Job growth has been consistently healthy for some time - there has not been a monthly decline in payroll jobs since the 42,000 dip in August 2003.
Within the payroll survey, strength was in the service-providing industries as goods-producing fell. Overall service-providing industries rose by 168,000 in February, following a 120,000 boost in January. Goods-producing jobs fell 71,000 with construction dropping 62,000; manufacturing declining, 14,000; and natural resources & mining, up 5,000.
However, a concern that the bond markets noticed more than the equity markets was a jump in average hourly earnings. Average hourly earnings jumped 0.4 percent in February, following a 0.2 percent increase the prior month. The labor market is the key area that currently is of concern for the Fed. Average hourly earnings have been on a steady uptrend from early 2004 through 2006 with only a possible leveling off during the last few months - but at a high level. Average hourly earnings are up 4.1 percent on a year-on-year basis in February - the same as for the prior month.
Year-on-year gains have been strongest for natural resources & mining, up 7.0 percent; leisure & hospitality, up 6.5 percent; professional & business services, up 6.2 percent; financial activities, up 5.3 percent; and construction, up 4.7 percent. Wage gains have been soft for utilities, down 0.6, and manufacturing, up 1.8 percent.
Other data from last week's employment report also show a tight labor market. The civilian unemployment rate slipped to 4.5 percent from 4.6 percent in January. Despite a slowing in real economic growth, the unemployment rate has not strayed from this cycle's low of 4.4 percent set just last October.
Household employment is up 2.0 percent year-on-year and is down slightly from 2.2 percent for January. Meanwhile, nonfarm payroll employment is up 1.5 percent year-on-year for February, compared to 1.6 percent for January.
Two other measures of labor force tightness eased marginally in February. The employment-population ratio edged down to 63.2 percent from 63.3 percent in January while the labor force participation rate slipped to 66.2 percent from 66.3 percent the prior month. Both measures remain high, however.
Overall, the February jobs report shows a slowing economy but not one weak enough to fall into recession. The bottom line is that the soft landing is still in place but wage inflation is remaining stubbornly high.
International trade data show continued strength in exports
While manufacturing has been on the soft side recently, the trade sector has been doing its part to support U.S. factories. The U.S. trade deficit narrowed to $59.1 billion in January, down 3.8 percent vs. December's $61.5 billion. Exports were strong, rising 1.1 percent, while imports dipped, down 0.5 percent. Strength was centered in exports of capital goods, up $1.0 billion with civilian aircraft up $0.5 billion. An especially good sign in the data was a decrease in imports of consumer goods, down a sharp $1.4 billion in the month.
Exports are up 10.7 percent on a year-on-year basis while imports are up 2.7 percent.
Fed funds futures sees Fed cutting rates by end of June
Friday's stronger-than-fears employment report boosted implied rates for fed funds futures. Implied rates are now back above rates before the pick up in recession talk over the last week and a half. Nonetheless, despite the strength in average hourly earnings, the fed funds futures market still sees the Fed easing in coming months but more so for in the latter part of this year and in 2008. The fed funds futures market is now pricing in a quarter point cut in fed funds as likely by July 2007 and another by October of this year. However, views on the next move by the Fed are becoming polarized. There remains a vocal minority that believes the next Fed move will be up - not down.
The bottom line
The economy is maintaining moderately healthy growth with strength in the services sector. Manufacturing and construction are likely to remain soft over the next few months. The Fed is likely to be even more in a wait-and-see mode than prior to the latest employment report.
Looking Ahead: Week of March 12 through March 16
Looking ahead, this week has a number of heavy duty economic indicators on the status of the economy. For the consumer sector, retail sales will be out for February, and the industrial production report will give us a good look at the manufacturing sector. Both the PPI and CPI reports will give us the latest detail on inflation trends.
Monday
The U.S. Treasury monthly budget report showed surplus of $38.2 billion in January. The month of February typically shows a large deficit for the month. Over the past 10 years, the average deficit for the month of February has been $72.1 billion.
Treasury Statement Consensus Forecast for February 07: -$120.0 billion
Range: -$125.0 billion to -$100.0 billion.
Tuesday
Retail Sales were unchanged in January, following a 1.2 percent surge in December. Weakness in January was primarily in autos and in gasoline - with gasoline pulled down by a price drop. Excluding both gas station and motor vehicles components, retail sales increased 0.5 percent in January, following a 1.0 percent rise in December. More recently, motor vehicle sales have stabilized and gasoline prices, based on independent survey data, have firmed. These point to a stronger sales figure for February - especially since healthy income numbers should support further gains.
Retail sales Consensus Forecast for February 07: +0.3 percent
Range: +0.1 to +0.5 percent
Retail sales excluding motor vehicles Consensus Forecast for February: +0.3 percent
Range: 0.0 (flat) to +0.5 percent
Business inventories were unchanged in December while business sales rose 1.4 percent, driving the stock-to-sales ratio down 2 tenths to 1.28. More recently, manufacturers' inventories in January fell 0.2 percent while wholesale inventories jumped 0.7 percent. Both manufacturers' and wholesale inventories for motor vehicles jumped in January. Markets should be watching the retailer equivalent in overall business inventories to see whether manufacturers will need to pare back on motor vehicle production or not. More recent sales data indicate that sales have been steady at respectable levels.
Business inventories Consensus Forecast for January 07: +0.1 percent
Range: -0.1 to +0.3 percent
Wednesday
Import prices import prices fell 1.2 percent in January and excluding petroleum were unchanged. We know petroleum prices have rebounded moderately in February so we should expect the overall import price number to be up. Attention should focus on the ex-petroleum numbers for a clearer picture of inflation trends from overseas.
Import prices Consensus Forecast for February 07: +1.0 percent
Range: +0.7 to +1.0 percent
The U.S. current account deficit widened to $225.6 billion in the third quarter from $217.1 billion in the second quarter, reflecting an oil-inflated widening in the trade gap. However, we should see improvement in the fourth quarter due to lower oil prices cutting back on the dollar volume of oil imports.
Current account Consensus Forecast for Q4 06: -$203.0 billion
Range: -$215.0 billion to -$198.0 billion
Thursday
The producer price index fell 0.6 percent in January, following a 0.9 percent increase in December. The decline was led by energy components. However, oil prices have since firmed and should boost the February PPI. The core rate rose 0.2 percent in January - with declines in prices for passenger cars and for light trucks pulling the core down. Any reversal or even flattening in motor vehicle prices could exert upward pressure on the core PPI.
PPI Consensus Forecast for February 07: +0.5 percent
Range: +0.1 to +1.1 percent
PPI ex food & energy Consensus Forecast for February 07: +0.2 percent
Range: +0.1 to +0.3 percent
Initial jobless claims dropped 10,000 in the week ending March 3 to 328,000 but the four-week average still shows emerging weakness in the labor market, up 3,750 in the week to 339,000 and the highest level since October 2005.
Jobless Claims Consensus Forecast for 3/10/07: 325,000
Range: 320,000 to 340,000
The Empire State manufacturing index jumped sharply to 24.4 in February from a soft January reading of 9.1. New orders also improved, suggesting forward momentum. However, last week's reported manufacturing aggregate production hours in the employment report showed a dip of 0.1 percent for February - suggesting weakness in manufacturing for the month.
Empire State Manufacturing Survey Consensus Forecast for March 07: +16.0
Range: +10.3 to +20.0
The general business conditions component of the Philadelphia Fed's business outlook survey index fell to 0.6 in February from 8.3 in January. The new orders index actually turned negative with a reading of -0.5 from January's 1.3. The Philadelphia Fed manufacturing survey has been one of the weaker regional surveys in recent months.
Philadelphia Fed survey Consensus Forecast for March 07: +5.0
Range: -5.0 to +10.0
Friday
The consumer price index slowed to a 0.2 percent rise in January, following a 0.4 percent jump in December. The moderation was primarily due to weaker oil prices bringing energy inflation down. The core CPI, however, rose 0.3 percent, following a 0.1 percent increase in December. However the unrounded core increase of 0.25565 was not as scary as the rounded figure. The Bureau of Labor Statistics is now releasing unrounded monthly figures for the CPI changes. The big special factor in the firming in the core was the spike in medical expenses - apparently reflecting start-of-the-year increases in prescription prices and various medical services which are difficult to seasonally adjustment. The medical component bears watching for any technical slowing in February from January's jump.
CPI Consensus Forecast for February 07: +0.3 percent
Range: +0.1 to +0.5 percent
CPI ex food & energy Consensus Forecast for February 07: +0.2 percent
Range: +0.1 to +0.3 percent
Industrial production fell 0.5 percent in January, following a 0.5 percent boost in December. The manufacturing component was even weaker, declining 0.7 percent, following a 0.8 percent boost in December. Last month's weakness was led by a decline in motor vehicle production and this component is likely to be weak again given recent inventory problems.
Industrial production Consensus Forecast for February: +0.3 percent
Range: -0.2 to +0.4 percent
Capacity utilization Consensus Forecast for February 07: 81.3 percent
Range: 80.9 to 82.4 percent
The University of Michigan's Consumer sentiment index fell to 91.3 in February from a January reading of 96.9. Inflation expectations were 3.0 percent, unchanged from the final January readings. The level for overall consumer sentiment is consistent with moderate economic growth, but a further decline would be of concern to the markets.
Consumer sentiment Consensus Forecast for preliminary March 07: 89.8
Range: 87.0 to 93.3
Jobs thump recession talk
