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Equities fell back this past week despite generally better-than-expected earnings. And the economic data were mixed—net positive and certainly not decidedly negative. Cutting into stocks primarily were downgrades to future earnings with a key one for a rail company.
 This past week started on a positive note as equities rebounded on Monday with the Dow moving back over the 10,000 mark and reaching a one-year high. Equities were lifted by general optimism in the equity markets. During the week, for companies reporting, that optimism was met most of the time with earnings frequently beating expectations and even with revenues topping expectations in a number of cases. But company news sank equities significantly by the end of the week.
Along the way, some economic indicator news moved the markets while others were ignored. Weaker-than-expected housing starts played a role in bumping down equities on Tuesday, especially homebuilders. The Beige Book on Wednesday was as expected and neutral for markets. Leading indicators posted a strong gain in Thursday’s report, helping to boost equities for the day. Existing home sales spiked at week's end but markets discounted the huge increase as temporary and related to the pending expiration of tax credit for first time home buyers.
Even
though most equity indexes were down for the week, there was some significantly
positive company news. Apple
sharply topped estimates after close on Monday with Caterpillar also beating
estimates on Tuesday. Earnings winners also included SanDisk and Yahoo, which also helped boost the tech sector for most of the week. Many financials beat expectations, including Wells Fargo, Morgan Stanley, and U.S. Bancorp. Giving equities a big day on Thursday were better-than-expected earnings from Travelers, AT&T, and McDonald’s. Microsoft and Amazon in particular had an excellent day on Friday but other events pulled stocks down sharply the last trading day of the week.
Those falling short of expectations included Boeing, Coca-Cola, DuPont, Merck. Wal-Mart dropped on guidance that it expects a soft Christmas and plans on price cutting. Despite generally better-than-expected earnings, financials took a hit after an analyst downgraded Wells Fargo from neutral to sell, calling attention to loan losses that seemed to be accelerating. Also weighing on bank stocks were announcements by the administration that it would cut pay for executives at some of the financial firms that took government bailouts.
Equities fell sharply at week end with a dip in oil prices pulling down the energy sector for the day.
Over the week, the biggest sector hit likely was transports. Pulling this sector down were higher oil prices net for the week and a downgrade on Friday for profit projections by railroad company Burlington Northern Santa Fe Corp. This downgrade for rails was seen as an indication that overall economic activity, based on rail traffic, is sluggish.
Equities were down this past week. The Dow was down 0.2 percent; the S&P 500, down 0.7 percent; the Nasdaq, down 0.1 percent; and the Russell 2000, down 2.5 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 13.6 percent; the S&P 500, up 19.5 percent; the Nasdaq, up 36.6 percent; and the Russell 2000, up 20.3 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 up this past week with rates showing stronger gains for mid-maturities. Yields started the week on a soft note the first two days. Weaker-than-expected housing starts and decines in headline and core PPI numbers helped rates ease early in the week.
 That trend reversed on Wednesday as bond traders were a little more sensitive to the Fed’s Beige Book that were equity traders. Bond traders interpreted the Beige Book to be slightly more upbeat than the previous. Also, favorable profits reports helped rates to firm.
On Thursday, the Treasury announced plans to sell a record $123 billion of notes and inflation-protected Treasuries which boosted rates. A strong leading indicator report also helped yields to rise. Bond traders at week end prepped for the coming week’s heavy supply from auctions by demanding higher yields. Also, the bond market did not discount the strong existing home sales number as much as equity traders did.
For this past week Treasury rates were mostly up as follows: 3-month T-bill, down 1 basis point; the 2-year note, up 5 basis points; the 5-year note, up 11 basis points; the 7-year note, up 12 basis points; the 10-year bond, up 9 basis points; and the 30-year bond, up 5 basis points.
 Crude oil prices continued their upward trend this past week. The spot price of West Texas Intermediate netted a moderate gain this past week. Starting the week, crude rose on a drop in the dollar and in tandem with equity gains. Net for the
week, spot prices for West Texas Intermediate rose $2.17 per barrel
to settle at $80.05.
 After slipping marginally Tuesday, crude surged over $2 per barrel after Wednesday’s inventory report showed a smaller-than-expected rise in crude inventories and a larger-than-projected drawdown in gasoline stocks. WTI spot topped $81 per barrel for the day.
Prices eased Thursday and Friday on slightly higher-than-expected initial jobless claims and on on speculation that OPEC increase production at a December meeting. OPEC’s secretary general had commented that the organization may raise output to keep prices in a $75 to $80 per barrel range.
Net for the week, spot prices for West Texas Intermediate rose $2.17 per barrel to settle at $80.05.
Housing data were mixed this past week but mostly positive. The latest Beige Book shows the recovery continuing while the index of leading indicators suggests forward momentum for the economy in coming months.
 If expectations and revisions did not matter, September’s starts numbers would look good compared to the recession low—especially for single-family starts. Housing starts rose in September but from a downwardly revised level for August. Housing starts in September rose 0.5 percent, following a revised 1.0 percent decline in August. But the September pace of 0.590 million units was below the market forecast for 0.615 million units and even fell short of the initial August estimate of 0.598 million units. The September pace of overall starts was down 28.2 percent year-on-year.
 Over the past year, a clear divergence has arisen in the trends for single-family and multifamily starts. The single-family component has been on a moderate uptrend while multifamily starts have been on a notable decline. Single-family starts have risen a cumulative 40.3 percent since February 2009 while the multifamily component has fallen 67.4 percent since September 2008.
The latest report on starts follows these trends as the advance in September was led by the single-family component which increased 3.9 percent after dropping 4.7 percent the month before. In contrast, the multifamily component fell 15.2 percent after rising 20.7 percent in August.
The fundamentals for single-family housing starts have improved relatively to the multifamily component. Although still elevated, months’ supply of new homes on the market has come down and mortgage rates are low. Additionally, single-family starts have benefitted from a sales boost from tax credits for first-time buyers. In contrast, credit has dried up for new multifamily projects. Nonetheless, the outlook for the single-family component is not rosy. Rising foreclosure rates and increased unemployment threaten to slow further progress for single-family housing starts.
In fact, housing permits point toward a pause or temporary leveling in the housing recovery, slipping 1.2 percent, following a 2.8 percent rise in August. Permits in the latest month stood at an annualized 0.573 million units and were down 28.9 percent on a year-ago basis.
The bottom line is that markets appear to have gotten a little too optimistic about the upward trend in starts continuing without any bumps in the road. Homebuilders appear to recognize that supply of homes on the market is still elevated and with high unemployment that a strong recovery in new construction is not yet called for.
 The clock ticking down on tax credits for first time home buyers helped boost existing home sales sharply in September as sales spiked 9.4 percent to a 5.57 million annual rate. Existing home sales have been on a healthy uptrend in recent months, showing gains in five of the last six months.
The latest increase was split evenly between single-family sales, up 9.4 percent to 4.89 million, and condo sales, up 9.7 percent to 680,000.
Closely watched by homebuilders wanting to get back in the game, supply on the market fell back sharply which is very good news, down 7.5 percent in the month to 3.63 million units for the lowest level in 2-1/2 years. Supply at the latest sales rate fell to 7.8 months, down from 9.3 months and vs. 10.1 months a year ago.
But distressed sales pulled prices down in September. Prices dipped 1.4 percent in the month to a median $174,900. Distressed sales made up 29 percent of total sales in the month, down from 50 percent levels earlier in the year and down from 31 percent in August. Nonetheless, the share of distressed sales is still high.
The year-on-year decline for median prices, however, has moderated from low double digits in prior months to 8.5 percent in September. Still, home values are very weak. This is a concern for consumer confidence and spending. Curiously, low sales prices have been cutting into sales as a significant percentage of pending sales have been failing to close because of low appraisals low (falling below mortgage amounts). For the housing market to really improve, prices will have to firm and improve the odds of favorable appraisals.
We are likely to see some easing in home sales in coming months given the currently scheduled end of first-time buyer credits at end of business on November 30. Even if current efforts in Washington to extend the credits are fruitful, the boost to sales likely will not be as great as the original version of the tax credit unless it is expanded beyond just first time buyers.
But the good news supporting home sales is that housing is still quite affordable. According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to 5.06 percent in September from 5.19 percent in August; the rate was 6.04 percent in September 2008.
 At the producer level, inflation is not a problem. Instead, the problem at least temporarily is declining prices. The overall PPI fell back 0.6 percent in September after rebounding 1.7 percent the month before. The decrease in the latest month was led by a 2.4 percent fall in energy costs with food price inflation dipping 0.1 percent. The PPI core rate surprising slipped 0.1 percent, following a 0.2 percent increase in August. The decline was due in part to a drop in prices for light trucks. The consensus had forecast a 0.1 percent gain for September.
 The September drop in energy prices was led by gasoline which fell 5.4 percent after a 23.0 percent surge the month before.
Turning to the core, this rate dipped largely on a 1.4 percent drop in light truck prices and a 0.6 percent decrease for computer prices.
For the overall PPI, the year-on-year rate dropped to minus 4.7 percent from minus 4.3 percent in August (seasonally adjusted). The core rate year-ago pace declined to up 1.8 percent from up 2.3 percent the prior month. On a not seasonally adjusted basis, the year-ago decrease for the headline PPI was 4.8 percent while the core was up 1.8 percent.
 Further up the production chain, inflation is also soft. Year-on-year, intermediate producer prices were down 11.6 percent in September while producer prices for crude material were down 31.5 percent. Much weakness is still energy related, but excluding food and energy, intermediate was down 7.5 percent, year-on-year, while crude was minus 19.6 percent.
Inflation clearly has been smothered by weak demand and an earlier dip in oil prices. But in coming months we may see a rise in the headline number from recently strong oil prices.
 The odds of a double dip are falling, according to the Conference Board’s index of leading economic indicators. Indeed, continued recovery is more likely as this index jumped 1.0 percent in September for the sixth gain in a row.
Eight of the ten components of the leading index rose in the latest month. The largest contributor in September was the rate spread between the federal funds rate, which is very low, and the 10-year Treasury note. This widening spread is still signaling economic strength—bond traders expecting higher yields. Or it could simply mean that supply has bumped prices down.
Despite the question about the meaning of the higher rate spread, other components were strong with the second biggest contributor being consumer expectations. However, that component is likely to be negative in October based on weakness in the mid-month Reuters/University of Michigan consumer sentiment report. Improvement in jobless claims, stock prices, and a little less responsiveness for supplier deliveries were also positives. On the negative side were a decrease in the manufacturing workweek and a dip in building permits. Despite some question marks about the two main contributors in the latest month, the breadth of component gains and string of increases overall are reassuring that the recovery is well underway.
On the debate about when recovery began, July is still the statistical favorite based on the coincident index. This index, which weighs heavily in the decisions on business cycle peaks and troughs, was unchanged in September. This index first showed an increase in July then in August, both at 0.1 percent gains.
The Fed's latest Beige Book--prepared for the upcoming November 3-4 FOMC policy meeting— indicates that the recovery continues. However, it indicated that Santa’s bag may not be as full as many hope due to a cautious consumer. Most of the Fed Districts "indicated either stabilization or modest improvements in many sectors since the last report, albeit often from depressed levels." Gains in economic activity generally outnumbered declines. Leading the improvement were more positive reports in residential real estate and manufacturing. Consumer spending and nonfinancial services were mixed. Commercial real estate was reported to be one of the weakest sectors.
Looking ahead for expectations for holiday sales, reports were mixed.
"Chicago anticipated improved sales, while Philadelphia retailers expected consumers to limit spending. However, Third District merchants also noted that store traffic increased recently. Atlanta reported that two-thirds of contacts expected flat or declining sales over the next three months."
Comments on labor market conditions were much as expected. Conditions were generally reported as weak or mixed across Fed Districts. While employment activity is soft, some Districts reports a slowdown in layoffs. The bit of good news is that some Districts and others indicated signs of improvement in contract and temporary employment. Contract and temp employee hiring and firing tend to lead the overall labor market. Wage and price pressures were generally described as subdued.
Inflation is subdued other than for some commodities.
"Prices followed a similar pattern to wages, with reports of little significant pressure on either input or output prices, although moderate increases were observed for materials prices."
Overall, the Fed's Beige Book reports a sluggish economy that is slowly moving along recovery. Sectors are mixed with the consumer sector soft but stable. Housing is improving from low levels of activity but commercial real estate appears to be in decline. The biggest positive is the moderate rebound in manufacturing. With few signs of inflation, the Fed will be able to maintain its current policy stance-very low interest rates-for some time.
The latest housing numbers for starts and existing home sales show notable improvement since recent bottoms. However, tax incentives were part of the reason behind recent gains and we may see some leveling off or even slippage temporarily. But as suggested by the latest leading indicators report and Beige Book, the recovery is still on for the overall economy, albeit at a modest pace.
This week is chock full of news on whether the economy is in recovery with the highlight being advance GDP for the third quarter. Other market moving indicators include durables orders and personal income. Consumer confidence and new home sales reports will get heightened attention.
The Conference Board's consumer confidence index fell back to 53.1 in September from 54.5 in August as consumers became more worried about the jobs picture. Both major components declined. The present situation index declined in part due to more respondents indicating that jobs are hard to get. The expectations index decreased to 73.3 from 73.8 in August.
Consumer confidence Consensus Forecast for October 09: 54.0
Range: 51.0 to 55.0
Durable goods orders in August dropped a revised 2.6, after a 4.8 percent surge in July. But excluding the transportation component, new durables orders were unchanged, following a 0.9 percent boost in July. The latest drop in new orders was led by transportation, which fell 9.3 percent and largely reflected a huge fall in nondefense aircraft orders. Otherwise, new orders were mixed.
New orders for durable goods Consensus Forecast for September 09: +1.5 percent
Range: -0.8 percent to +2.5 percent
New home sales edged 0.7 percent higher in August to a 429,000 annual rate. Over the last five months, new home sales have risen a cumulative 29.2 percent.
The median price of a new home tumbled 9.5 percent in August to $195,200 for the lowest level since 2003, an indication that homebuilders are giving customers big concessions. But months’ supply dropped to 7.3 months which is the lowest level in more than 2-1/2 years. Based on last week’s surge in existing home sales, we should see a nice jump in new home sales as they, too, likely will be boosted by first time homebuyers taking advantage of the tax credit that expires November 30.
New home sales Consensus Forecast for September 09: 440 thousand-unit annual rate
Range: 430 thousand to 450 thousand-unit annual rate
GDP was still barely in negative territory in the second quarter with the Commerce Department nudging up its third estimate to an annualized 0.7 percent decrease from the previous estimate of a 1.0 percent decline. Final sales were revised to be more positive at an annualized 0.7 percent gain in the second quarter, compared to the second estimate of a 0.4 percent gain. On the inflation front, the GDP price index was flat for the quarter. Looking ahead, traders are expecting the advance estimate for third quarter GDP to clearly establish that the economy was in recovery in the third quarter. The big question is by how much. Since this release is expected to show the first positive GDP growth since the second quarter of 2008, this report will get heightened attention.
Real GDP Consensus Forecast for advance Q3 09: +3.0 percent annual rate
Range: +2.0 to +4.0 percent annual rate
GDP price index Consensus Forecast for advance Q3 09: +1.4 percent annual rate
Range: +0.3 to +2.3 percent annual rate
Initial jobless claims edged higher in the October 17 week, up 11,000 to 531,000. But the four-week average continued to move lower, down for the seventh week in a row to 532,250 for a decrease of about 20,000 from month-ago levels. Continuing claims dropped 98,000 for the October 10 week to 5.923 million, roughly 100,000 below month-ago levels. But reading the latest number is difficult due to an uncertain combination of new hiring and the expiration of benefits.
Jobless Claims Consensus Forecast for 10/24/09: 525,000
Range: 520,000 to 530,000
Personal income in August edged up 0.2 percent after a 0.2 percent increase the month before. Also, the important wages and salaries component also rose 0.2 percent in the latest two months.
Consumer spending spiked on cash-for-clunkers auto purchases as personal consumption expenditures surged 1.3 percent in August, following a 0.3 percent rise in July. But spending in other components was generally healthy. Inflation was mixed as the headline PCE price index jumped to 0.3 percent while core PCE inflation was unchanged at 0.1 percent. Looking ahead, at least the wages & salaries component is likely to dip as average weekly earnings slipped 0.2 percent in September. Personal consumption expenditures are likely to be mixed. Overall PCEs are likely to drop in September as unit new motor vehicle sales plunged a monthly 34.6 percent for the month. But retail sales excluding autos rose 0.5 percent, indicating that outside of autos, PCEs should be moderately healthy. For inflation, look for moderately firm numbers as the headline CPI rose 0.2 percent in September as did the core CPI.
Personal income Consensus Forecast for September 09: 0.0 percent
Range: -0.2 to +0.2 percent
Personal consumption expenditures Consensus Forecast for September 09: -0.5 percent
Range: -0.8 to +0.5 percent
The employment cost index for civilian workers rose 0.4 percent in the second quarter, up from a 0.3 percent rise in the first quarter. But the year-on-year rate of increase eased, to 1.8 percent from the first quarter's 2.1 percent. Surprisingly, pressure in the second quarter, despite a weak labor market, was in wages & salaries, up 0.4 percent vs. the first quarter's 0.3 percent. Benefits eased to an increase of 0.3 percent vs. an increase of 0.5 percent in the first quarter.
Employment cost index Consensus Forecast for Q3 09: +0.5 percent simple quarterly rate
Range: +0.3 to +0.7 percent simple quarterly rate
The Chicago PMI rattled financial markets last month as it fell to 46.1 in September from 50.0 in August, indicating overall business in the Chicago area contracted slightly for the latest month. The index covers both manufacturing and non-manufacturing. Looking ahead, expect another soft reading in October as the new orders index for September also slipped back into negative territory.
Chicago PMI Consensus Forecast for October 09: 48.5
Range: 47.1 to 51.0
The Reuter's/University of Michigan's Consumer sentiment index for mid-October fell back more than 4 points to 69.4. Weakness was concentrated in the expectations index component which fell nearly 6 points to 67.6. The current conditions index dipped almost 1-1/2 points to 72.1. On the positive side, the latest overall number was still much improved from July and August’s depressed levels and especially from latter 2008.
Consumer sentiment Consensus Forecast for final October 09: 70.0
Range: 68.0 to 74.0
R. Mark Rogers is the author of The Complete Idiot’s Guide to Economic Indicators, Penguin Books.
Econoday Senior Writer Mark Pender contributed to this article.
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