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Despite mostly favorable earnings reports, stocks were up only modestly for the week as traders are waiting to see if the second round of quantitative easing is actually implemented by the Fed and by how much at its November 2-3 policy meeting. Also, traders were a little nervous about the G20 meeting at weekend and its potential impact on the dollar. Meanwhile, economic news was mixed, adding to the view that the recovery continues but at a sluggish pace.
 Stocks were mostly up for the week with earnings generally healthy and on continued hope for a second round of quantitative easing by the Fed. The week got off to a good start with Citigroup’s earnings topping estimates on Monday, more than offsetting an unexpected dip in industrial production. A modest bump up in the NAHB’s housing market index also supported equities.
Good economic news on Tuesday—an unexpected rise in housing starts—was overshadowed by worries over the banking sector. Bank of America led financials—and equities in general—down on news that PIMCO, Blackrock, and the Federal Reserve are seeking to make the bank buy back bad loans that had been bundled for investors. Also, techs were bumped down by Apple falling short on expected sales of iPads. The energy patch was knocked down by a drop in oil prices after China raised its benchmark rates for monetary policy.
The roller coaster continued on Wednesday as a lower dollar bumped up oil and commodity stocks. Many traders interpreted the Beige Book release as giving the Fed the green light for further quantitative easing (although that belief is open to debate), which weighed on the dollar and lifted stocks. In corporate news on Wednesday, Boeing beat analysts’ forecasts as did Wells Fargo (after close on Tuesday).
Most stocks were up on Thursday with a Wednesday after close report by Netflix setting the tone by beating estimates. Adding to forward momentum was a lower-than-expected number of first-time filers for jobless claims and a positive leading indicators report (partially offset by a sluggish Philly Fed release). Most earnings reports were positive for the day with the likes of McDonald’s showing a sharp gain in profits for the third quarter. A strong number for Chinese GDP also supported equities.
The last trading day was mixed with no indicator news but with earnings reports still mostly positive.
Equities were mostly up this past week. The Dow was up 0.6 percent; the S&P 500, up 0.6 percent; and the Nasdaq, up 0.4 percent. The Russell 2000 was barely in positive territory, rounding to flat.
For the year-to-date, major indexes are up as follows: the Dow, up 6.8 percent; the S&P 500, up 6.1 percent; the Nasdaq, up 9.3 percent; and the Russell 2000, up 12.5 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 For bond traders, the three big issues for the week were the Fed, the Fed, and the Fed. The November 2-3 FOMC meeting is approaching and FedSpeak has been mixed on the issue of more quantitative easing but with voting members notably more in favor. And, in turn, rates remain under downward pressure, slipping a little more this past week.
Rates softened the most on Monday with a disappointing number for industrial production and with Atlanta Fed President Dennis Lockhart stating that he is leaning toward additional expansion of the Fed’s balance sheet. Yields eased further on Tuesday despite a higher-than-expected housing starts figure. Also, on the speech circuit New York Fed President William Dudley and Chicago Fed President Charles Evans were bluntly in favor of QE2. However, at mid-week rates were little changed on the Beige Book report that was mixed but slightly more positive than the prior release.
 Yields firmed on Thursday on a lower-than-forecast initial jobless claims number. Also, traders became nervous about extremely low rates—meaning holding Treasuries were seen to be at risk of lower prices despite likely Fed quantitative easing.
For this past week Treasury rates were down as follows: 3-month T-bill, down 1 basis point; the 2-year note, down 1 basis point; the 5-year note, down 3 basis points; the 7-year note, down 1 basis point; the 10-year bond, down 1 basis point; and the 30-year bond, down 6 basis points.
Yields in the 2-year to 10-year maturity range continue to slip under pressure from increasingly anticipated QE2 and a sluggish economy.
Spot prices for West Texas Intermediate showed little net change for the week despite some daily volatility.
Crude dropped $3.23 per barrel on Tuesday on news that China had raised key monetary policy rates, implying less robust growth in Asia. A rise in the dollar also helped bump crude down. The Tuesday plunge was the largest daily drop in eight months.
But the biggest daily gain in five weeks was partially offsetting on Wednesday. The boost was due to a drop in the dollar and on a smaller-than-forecast rise in inventories.
Net for the week, spot prices for West Texas Intermediate edged down 69 cents per barrel to settle at $80.56.
Economic news was mixed this past week but still points to continued recovery, albeit at a modest pace.
 For the latest housing starts report, incoming information was mixed as starts showed signs of life but permits weakened. Importantly, the single-family component may be making a modest comeback.
Housing starts in September rose 0.3 percent after jumping 10.5 percent the prior month. The September annualized pace of 0.610 million units came in significantly above the market forecast for 0.580 million units and is up 4.1 percent on a year-ago basis. The boost in September was led by a 4.4 percent gain in single-family starts, following a 1.4 percent rise in August. The multifamily component dropped 9.7 percent after spiking 42.3 percent in August. The multifamily component is notoriously volatile as all units in a development are counted as started when the first unit breaks ground. And if weather is atypically favorable, then construction crews are more likely to be turning the dirt and that likely happened in August with the surge in multifamily starts.
 Permits fell back in the latest month, declining 5.6 percent after rebounding 2.1 percent in August. Weakness was in the multifamily component which dropped 20.2 percent after a 9.8 percent rise the prior month. Single-family permits edged up 0.5 percent in the latest month after dipping 0.7 percent in August. Overall permits came in at an annualized rate of 0.539 million units and are down 10.9 percent on a year-ago basis.
Despite volatility in various components, housing appears to have started an incremental recovery in a post-tax credits phase. The multifamily component for starts has been a lot more volatile than usual but the single-family component is somewhat encouraging with two consecutive monthly gains. Nonetheless, activity remains very soft and is not likely to contribute much to overall GDP growth in the near term.
 Manufacturing is not contributing as much to third quarter growth as hoped. Industrial production was disappointing in September, declining 0.2 percent, following a modest 0.2 percent gain in August.
By major components, manufacturing dipped 0.2 percent after a 0.1 uptick in August. Assemblies of motor vehicles & parts, however, provided some lift, rebounding 0.5 percent, following a 6.3 percent drop in August. Excluding motor vehicles, manufacturing posted a 0.2 percent decline in September, following a 0.5 percent boost the prior month.
 For other major industry groups, utilities output dropped 1.9 percent while mining gained 0.7 percent.
On a quarterly basis (thinking in terms of numbers comparable to GDP), industrial production gained an annualized 4.7 percent in the third quarter, easing from 7.0 percent in the second period.
On a year-on-year basis, overall industrial production slipped to up 5.4 percent from 6.4 percent in August.
Businesses are not getting motivation to invest in new facilities from stress in capacity. Capacity utilization is still low and even slipped to 74.7 percent from 74.8 percent in August.
The September dip in production hopefully is not the start of a trend. And there are reasons to expect a rebound. The data on the strength of the underlying trend, however, are mixed. On the positive side, a weaker dollar will likely boost exports. Also, the latest Empire State manufacturing survey for October was notably more positive and durable goods orders excluding transportation picked up recently. On the down side, the October Philly Fed report had notable soft components.
 The Philly Fed headline number creaked above breakeven but orders remain negative. The index for general business activity rose in October to 1.0 from minus 0.7 the month before. But there is not much forward momentum as the new order index came in at minus 5.0 in October, though less negative than September's minus 8.1 or August's minus 7.1. This means new orders are declining but at a less rapid pace.
Lightness in the pipeline makes manufacturers nervous about inventories. Manufacturing inventories in the region, in contrast to the nation, are coming down fast, at minus 18.6 in October following minus 16.7 in August and minus 11.6 in July.
 Factory orders are a volatile series and the underlying trend may not be obvious any given month. But manufacturers appear to be somewhat optimistic about production remaining on an uptrend as hiring is starting to pick up. The Philly Fed’s employment index in its manufacturing survey edged up to 2.4 from 1.8 in September. But this trend is not limited to the mid-Atlantic. Last week, we saw the New York Fed’s manufacturing survey post a jump in the employment index to 21.67 from 14.93 in September. So, odds are that manufacturing will improve in coming months.
 The economy may be regaining some momentum ahead of the fourth quarter as the Conference Board’s index of leading indicators firmed to a 0.3 percent boost in September after edging up 0.1 percent the month before.
As in recent months, strength was in the rate spread between the 10-year T-bond and fed funds which added 0.26 percentage points to the index. While it has been pointed out that there is little news in this contribution, few have noticed that it is not adding as much as it has some months ago. Just as recently as this past April the rate spread added a heftier 0.39 percentage points to the leading index. But this has come down as the yield on the T-bond has dropped notably with flight to safety over sovereign debt concerns, a softer recovery, and the Fed threatening a second round of quantitative easing.
Other components on the plus side for the September leading index were initial jobless claims, money supply, stock prices, and (just barely) new orders for consumer goods & materials. Negatives were seen in supplier deliveries, building permits, and consumer expectations.
The coincident indicator showed no change for a second month. Overall, the report points to modest improvement in economic growth—but a pace that remains soft.
The latest Beige Book does not provide clear ammunition either in favor of additional quantitative easing or not. The Beige Book prepared for the November 2-3 FOMC meeting shows the economy a little improved from the last report. According to the Fed report "on balance, national economic activity continued to rise, albeit at a modest pace, during the reporting period from September to early October." In contrast to the prior report, there was no mention of "deceleration" in the economy.
Consumer spending ranged from steady to up slightly across Fed Districts. New vehicle sales were steady or up with used car sales strong. Housing is still weak but housing prices appear to have stabilized. Commercial real estate is subdued. Manufacturing activity continued to expand, and several Districts reported gains in production or new orders across a wide range of industries.
On the inflation front, prices are stable for final goods and services and wage pressures are minimal. But there are rising production costs.
"Input costs, most notably for agricultural commodities and industrial metals, rose further. Shipping rates increased, and retailers in some Districts noted rising wholesale prices. However, prices of final goods and services were mostly stable as higher input costs were not passed on to consumers."
However, hiring remained limited, with many firms reluctant to add to permanent payrolls given economic softness. Reports were mixed on hiring temporary help.
Overall, the latest Beige Book shows modest improvement but a still sluggish economy. Does the report make the Fed more or less inclined for more quantitative easing' One can argue the real activity is improving and further ease is not necessary. But here's the counter argument: growth is so sluggish that insurance is needed. The FOMC will have to weigh the costs and benefits. Even on that, evidence is mixed—at least on inflation. Prices are tame for final sales. But commodities prices are showing price pressure. So, there are upside and downside risks according to the latest Beige Book.
The recovery continues at a modest pace and with sectors mixed. Housing is still basically flat but apparently no longer declining. Manufacturing does not have the momentum it had earlier in the recovery but the uptrend likely continues. And the Fed—although probably with heated debate—appears to be preparing for a second round of quantitative easing.
Homebuilders will hope for signs of supply being bumped down with existing home sales out on Monday and new home sales printing Wednesday. And retailers will look for improvement in consumer spirits with consumer confidence released Tuesday and sentiment at week end. But the market movers will likely be the manufacturing update with durables orders on Wednesday and a first look at third quarter GDP on Friday.
Existing home sales in August made a moderate comeback, rising 7.6 percent to a 4.130 million annual rate, up substantially from July's 3.840 million rate. Gains were broad based across regions. And supply edged down to 11.6 months from a recent high of 12.5 in July. Still inventories are quite bloated.
Existing home sales Consensus Forecast for September 10: 4.30 million-unit rate
Range: 4.21 to 4.60 million-unit rate
The Conference Board's consumer confidence index fell nearly five points in September to 48.5 for the lowest level since the beginning of the year. And worries still focus on the job market. Those saying jobs are currently hard to get rose four tenths to 46.1 percent for the largest share since March. Despite recent declines in initial jobless claims, consumers see companies as not engaged in healthy hiring now or down the road. Employment expectations six months out show sharp deterioration. There may not be much improvement in confidence in October. Gasoline prices have firmed and the job picture is showing little net change.
Consumer confidence Consensus Forecast for October 10: 50.0
Range: 47.0 to 53.0
Durable goods orders for August dipped a revised 1.5 percent, following a 1.2 percent rebound in July. But the underlying trend is back to positive. Excluding transportation, new durables orders gained a revised 1.7 percent, following a 2.1 percent drop in July. This series has risen in three of the last four months and in five of the last seven.
New orders for durable goods Consensus Forecast for September 10: +1.6 percent
Range: +1.0 percent to +5.6 percent
New home sales in August were unchanged at a 288,000 annual unit rate but were up from the initial estimate for July of 276,000. With the exception of June when sales came in at 312,000, recent months have been only barely above the series low of 282,000 set in May of this year. Supply is being swollen by a lack of sales not by the proportion of homes on the market as total supply fell 1.4 percent to 206,000 for the lowest level since 1968.
New home sales Consensus Forecast for September 10: 300 thousand-unit annual rate
Range: 295 thousand to 315 thousand-unit annual rate
Initial jobless claims fell a sharp 23,000 for the October 16 week to 452,000. But partially offsetting was a big 13,000 upward revision to the prior week. Net, the results were positive with the level a little below market expectations and the four-week average down 4,250 to 458,000.
Jobless Claims Consensus Forecast for 10/23/10: 455,000
Range: 440,000 to 460,000
GDP growth for the second quarter ended basically with a whimper with the third estimate coming in at 1.7 percent annualized from 1.6 percent in the second revision. But weakness for the quarter in exports made a big difference between domestic demand and overall demand. Real final sales to domestic purchasers were up a robust 4.3 percent while final sales of domestic product (adds in net exports) rose a slim 0.9 percent annualized. On the inflation front, the GDP price index was up 1.9 percent annualized.
Real GDP Consensus Forecast for advance estimate Q3 10: +2.0 percent annual rate
Range: +1.5 to +2.9 percent annual rate
GDP price index Consensus Forecast for advance estimate Q3 10: +2.0 percent annual rate
Range: +1.2 to +2.2 percent annual rate
The employment cost index for civilian workers in the second quarter was up 0.5 percent, compared to a 0.6 percent rise in the first quarter. Wage & salary pressure was steady at plus 0.4 percent while benefit costs came down to plus 0.6 percent versus the first quarter's 1.1 percent. Year on year, total costs were at plus 1.8 percent in the second quarter versus plus 1.7 percent in the first quarter.
Employment cost index Consensus Forecast for Q3 10: +0.5 percent simple quarterly rate
Range: +0.4 to +0.6 percent simple quarterly rate
The Chicago PMI in September jumped to 60.4 from 56.7 in August (breakeven of 50). The higher index number reflected accelerating growth in the economy, at least for businesses in the Chicago area. And we are likely to get another healthy number in October as the September new orders index spiked more than six points to a very strong 61.4.
Chicago PMI Consensus Forecast for October 10: 57.6
Range: 56.0 to 61.0
The Reuter's/University of Michigan's Consumer sentiment index slipped to 67.9 in mid- October from 68.2 for the final reading for September. The big downward movement was in the assessment of current conditions, likely reflecting concern over the job market and slow progress on income. The good news is that the expectations index rebounded moderately. This index is a leading indicator for the overall economy.
Consumer sentiment Consensus Forecast for final October 10: 68.0
Range: 67.5 to 69.0
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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