First quarter earnings announcements are generally outpacing expectations. The majority of announcements from S&P 500 companies are better than expected and this is helping boost equities. Oddly enough, the bulk of the improvement came in the Dow Jones Industrials rather than the Nasdaq composite index or the Russell 2000. While there is no question that good earnings helped buoy the equity market this week, investor psychology turned bullish after the minutes of the March 27-28 meeting were released which suggested to investors that the Fed will soon stop raising rates.
Equity investors generally ignored the fact that crude oil prices were rising all week as they focused on better news. However, on Friday, there was not much else on which to focus, and the spurt in crude oil prices to a new record over $75/barrel dampened the stock market. Crude oil surged on speculation that shipments from Iran and Nigeria would be reduced while the U.S. driving season would diminish gasoline stocks this summer.
All the key indexes posted healthy gains this week with the bulk of the rise coming on Tuesday. The Dow now stands 5.9 percent above year-end levels and is outperforming the S&P 500, which is up 5.0 percent from year-end. The Nasdaq composite is up 6.2 percent. The small cap sector is outperforming the rest of the market by a wide margin with the Russell 2000 up 14.7 percent from year-end levels.
BONDS
The minutes of the March 27-28 FOMC meeting dominated psychology this week. The minutes appeared dovish to bond investors and bond yields generally dipped over the week. The yield on the 30-year bond was the only security to show a slight rise in yields. After reading the minutes this week, investors are more comfortable with the view that the Fed will probably stop raising rates after the May 10 meeting, although there are still some Wall Street economists who are predicting that the Fed may still raise rates at the June meeting. But the majority view is that rate hikes will be over soon.
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
HOUSING MODERATES
Housing starts dropped 7.8 percent in March to a 1,960,000 unit rate after decreasing by a similar magnitude in February. Housing starts can fluctuate from one month to the next for any number of reasons, and that is why the Census Bureau believes it is best to look at a six-month moving average to determine the underlying trend in starts. The trend line in the chart below suggests that starts peaked in January and are now moderating. Of course, we have seen starts appear to slow and then accelerate once again. However, this time, economic conditions are somewhat different in that mortgage rates are rising due to a recent acceleration in long term Treasury securities.
Anecdotal evidence is suggesting housing activity is indeed cooling down, and that most of the moderation is coming from the speculative and second home market. That is, areas such Florida where market speculation was most dramatic is seeing a larger drop than areas where speculation is not rampant. Resort areas are seeing some housing price declines. This makes sense from an economic standpoint since potential homeowners of vacation homes are more likely to think twice about buying a home that they don't need when interest rates are rising.
ENERGY PRICES BOOST INFLATION INDEXES
The producer price index rose 0.5 percent in March, reversing some of February's 1.4 percent drop. Energy prices jumped 1.8 percent and food prices increased 0.5 percent. Excluding these two volatile components, the PPI inched up 0.1 percent in March, less than in the two previous months. On a year-over-year basis, the PPI moderated slightly to 3.5 percent, and the core PPI remained unchanged at 1.7 percent.
The CPI increased 0.4 percent in March, rising more sharply than in February when the CPI inched up 0.1 percent. Energy prices were up 1.3 percent for the month. Excluding food and energy, the CPI increased 0.3 percent, also faster than the two previous months. Despite the acceleration, the year-over-year rise in the total CPI was less than last month, and the core CPI is remaining stable. Nonetheless, the core CPI is on the high side of the Fed's comfort zone.
FED MANUFACTURING SURVEYS
The Empire State manufacturing index fell in April from the March level, while the Philadelphia Fed's index inched up marginally from the previous month. On the whole, the Empire State survey, which covers the New York Fed region, was showing somewhat stronger manufacturing activity than the Philadelphia Fed region over the past year. In April, the two surveys appear to be more in sync. In any case, both surveys show that manufacturing activity is continuing to expand, albeit at a slower rate than in 2004 and early 2005.
The Bottom Line
Economic indicators were sparse this week. Housing market activity appears to be moderating from the January peak. Also, Treasury yields are rising and these increases will impact mortgage rates. Higher mortgage rates will dampen housing activity further. Fed manufacturing surveys are generally on track with the pace of the past few months. Inflation news was generally friendly outside the energy sector. However, inflation figures still are on the high side relative to what Fed officials would like to see.
Financial markets rallied early this week on the perception that the minutes of the March 27-28 FOMC meeting were more dovish than the post-meeting statement. Equity and bond investors now believe that the Fed may stop raising rates in May.
The upcoming week will see a slew of data - including the first estimate of first quarter GDP.
Looking Ahead: Week of April 24 to April 28
Tuesday
The Conference Board's consumer confidence index increased almost 5 percentage points in March to 107.2. The University of Michigan's consumer sentiment index had remained nearly unchanged in early April and this suggests that The Conference Board's attitude survey could remain at the March level. However, these two surveys are often at odds with one another.
Consumer confidence Consensus Forecast for Apr 06: 105.5
Range: 102.5 to 109
Existing home sales increased 5.2 percent in February to a 6,910,000-unit rate, with gains in all regions of the country. The MBA purchase index was down in March over the February average suggesting some weakness during the month.
Existing home sales Consensus Forecast for Mar 06: 6.70 million-unit rate
Range: 6.40 to 6.95 million-unit rate
Wednesday
New orders for durable goods increased 2.7 percent in February after plunging in January. As usual, aircraft orders, which have generally been up over the past year, are causing most of the monthly volatility. Aside from aircraft, new orders have been sluggish.
Durable goods orders Consensus Forecast for Mar 06: 1.7 percent
Range: 0.0 to +4.0 percent
New single-family home sales plunged 10.5 percent in February to a 1,080,000-unit rate after decreasing more than 5 percent in January. The MBA purchase index declined in March. The January - February drop may turn out to be overblown, although there is no doubt among economists that housing activity will be moderating this year.
New home sales Consensus Forecast for Mar 06: 1,125,000-unit rate
Range: 1,050,000 to 1,153,000-unit rate
The Fed's Beige Book will be closely monitored by market players for signs of wage and price pressures as well as indications that the labor market is tightening rapidly. Analysts will also be interested in housing activity and retail sales across the country.
Thursday
New jobless claims fell 10,000 in the week ended April 15 to 303,000, and the 4-week moving average decreased to 305,250. Thus far, April claims are down from the March average.
Jobless Claims Consensus Forecast for 4/22/06: 305,000
Range: 295,000 to 315,000
Friday
The Commerce Department's final estimate showed that real GDP expanded at a sluggish 1.7 percent rate in the fourth quarter of 2005 with weakness in consumption expenditures and investment spending. Most economists are looking for a healthy rebound in the first quarter with growth nearing a 5 percent rate. Most economists also believe that the GDP deflator will show a more moderate gain in the first quarter than the fourth quarter's 3.3 percent rate.
Real GDP Consensus Forecast for Q1 06: 4.9 percent annual rate
Range: 4.4 to 5.6 percent annual rate
GDP deflator Consensus Forecast for Q1 06: 2.8 percent annual rate
Range: 2.0 to 3.8 percent annual rate
The Labor Department announced that they will be reporting a revamped version of the employment cost index. Revisions will not only be due to new seasonal factors, but also a rebenchmarking and a new classification system: the employment cost index is finally going to NAICS in line with all other economic indicators.
Employment Cost Index (Q/Q) Consensus Forecast for Q1 06: 0.9 percent
Range: 0.8 to 1.4 percent
At the mid-April reading, the University of Michigan's consumer sentiment index ticked up to 89.2 from a level of 88.9 in March. While labor market conditions remain healthy, consumers may be feeling the pinch of higher energy costs for their cars and homes.
Consumer sentiment Consensus Forecast for April 06: 89.0
Range: 86.5 to 90
The NAPM-Chicago's business barometer increased more than 5 percentage points in March to 60.4. This index, which measures both manufacturing and non-manufacturing activity in the Chicago region, is often considered a leading indicator for the ISM manufacturing index. Its monthly changes are often larger in magnitude than the ISM index.
NAPM-Chicago Consensus Forecast for Apr 06: 58
Range: 56 to 61
Markets rally on friendly FOMC minutes
