Politicians sometimes forget that it is expectations that matter to the markets.  More specifically, the key politician forgetting is a former New York Fed president, now serving as Treasury Secretary.  Markets had high expectations for the details of the Administration’s plan to bolster the credit markets.  But hopes were dashed by the lack of detail when the Secretary Tim Geithner’s speech finally came on Tuesday and equities tumbled. Negative sentiment was not all Geithner’s fault and a slow roll out of the rescue plan may have been the better approach - but he got the blame on Tuesday. Also, economic news was not helpful and House passage of Obama’s stimulus plan did not inspire hope of quick impact on the economy.

Recap of US Markets

STOCKS

This past week, equity traders basically were disappointed with Treasury Secretary Geithner’s rescue plan for the financial markets, and President Obama’s fiscal stimulus plan was largely seen as being uncertain and slow to have impact.  On Tuesday, Geithner’s rescue plan was anticipated to have been rolled out with enough details to give markets confidence that credit markets would be improving and lending increasing.  That did not happen as Geithner’s bank rescue plan turned out to just be an outline.  Bank stocks led the blue chips down as the Dow fell 4.6 percent for the day while the S&P 500 dropped 4.9 percent.  Investors had been buying into bank stocks on the belief that a rescue plan would improve the profit situation – or at least reduce losses for banks.

Economic news during the week did not inspire equities.  The international trade deficit narrowed but partly due to a drop in imports, reflecting a drop in domestic demand.  Also, exports continued to decline.  Retail sales made a comeback but from extremely weak levels.  Meanwhile, consumer sentiment fell back toward the historical low.  These were all reminders that the current recession is much deeper than expected just a few months ago.

At week’s end, the House did pass a $787 billion fiscal stimulus package before market close with a mostly partisan vote of 246 to 183.  No Republicans voted for the bill and 7 Democrats voted against the package.  The Senate was still debating the bill at market close for the week but was expected to pass the stimulus package in time for President Obama to sign by as soon as the Presidents Day holiday on Monday.

The bottom line, however, is that the bank rescue needs to be filled in and fiscal stimulus is going to be slow coming.  Meanwhile, equities do not have a lot of reasons to head up.

Equities were down this past week. The Dow was down 5.2 percent; the S&P 500, down 4.8 percent; the Nasdaq, down 3.6 percent; and the Russell 2000, down 4.7 percent.

For the year-to-date, major indexes are down as follows: the Dow, down 10.6 percent; the S&P 500, down 8.5 percent; the Nasdaq, down 2.7 percent; and the Russell 2000, down 10.2 percent.

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.

BONDS

It was dualing cross currents this past week.  The bond markets are worrying about both the depth of the recession and whether rescue plans are going to work and also the growing supply coming up to fund financial bailouts and fiscal stimulus plans.  Recession worries are weighing on yields while supply concerns are creating upward pressure on rates.

Early in the week, highly anticipated comments by Treasury Secretary Geithner on the Adminstration’s financial rescue plan were disappointing as too vague and led to a return of recession worries.  Also, stocks plummeted and led to flight to safety to bonds.  Some of the easing of rates was reversed on Friday as the House passed a version of President Obama’s stimulus package.  Comments by the White House that a plan to stem foreclosures would be announced this coming week also helped yields to firm.  But net for the week, safety first concerns and recession worrying traders came out ahead for the week as most bond yields eased net.

For this past week Treasury rates were mixed but mostly down as follows: 3-month T-bill, up 2 basis points, the 2-year note, down 4 basis points; the 5-year note, down 9 basis points; the 10-year bond, down 8 basis points; and the 30-year bond, down 2 basis points.

Longer Treasury yields remain somewhat elevated over supply worries due to funding needs for bailouts and fiscal stimulus.  Short-term yields remain under the thumb of extremely easy monetary policy.

OIL PRICES

Crude oil prices fell sharply this past week on recession worries, despite comments by OPEC officials that production cuts are being made.  Adding to the price declines was skepticism about Treasury Secretary Geithner’s outline of a plan to bolster the financial system, a forecast from the International Energy Agency (IEA) predicting a sizeable drop in oil demand for 2009, and a report that U.S. oil supplies were rising sharply.  Prices did get a mild bump up at week end on passage of a stimulus plan by the House and on OPEC comments.

Net for the week, spot prices for West Texas Intermediate fell $4.34 per barrel to settle at $37.51 – and coming in $107.78 below the record settle of $145.29 per barrel set on July 3.

The Economy

This past week we got mixed signals from the consumer sector but the limited positive news may have been more akin to a dead cat bounce than from any real improvement.  Meanwhile, the expanding global recession has further cut into exports.

Retail sales surprise with moderate rebound

Retail sales unexpectedly rebounded in January with a 1.0 percent gain, after a 3.0 percent drop in December. But the stronger number, which comes off a low comparison, is likely due to heavy discounting to move inventories sitting on store shelves.  Overall retail sales had become very weak, falling each of the last six months of 2008.

Excluding motor vehicles, retail sales made a 0.9 percent comeback, after falling 3.2 percent in December. Even though gasoline sales did boost spending, this was not the sole factor in overall strength. Excluding motor vehicles and gasoline, retail sales posted a 0.8 percent gain after a dropping 1.8 percent the month before.

By components, numbers were mixed. Strength was seen in nonstore retailers, electronics, gasoline, food & beverages, motor vehicles, clothing, general merchandise, and food services & drinking places. Declines were seen in building materials & garden equipment, furniture, miscellaneous store retailers, and sporting goods.

Overall retail sales on a year-on-year basis in January were down 9.7 percent, compared to down 10.5 percent the previous month.

Consumer sentiment drops back

Consumer sentiment numbers indicate that households are not in a spending mood. The Reuters/University of Michigan consumer sentiment index dropped 5 points at mid-February to 56.2 from January's 61.2.  February’s figure was barely above the record low of 51.7 set May 1980. Expectations, the leading component of the index, dropped to 49.1 for a nearly 9 point loss, a sizable loss that points to a run of disappointment ahead. Again, the expectations index was barely above the record low — 44.2.

Lower oil prices and retailer discounting have been weighing on inflation expectations. One-year inflation expectations suddenly eased as they did in December, falling 6 tenths to 1.6 percent. Gasoline prices have fallen to well under $2 per gallon in most areas from last year’s peak of over $4, and likely is a one reason for the decline.

The bottom line is that with consumer sentiment so abysmal, it is unlikely that consumer spending is going to pick up significantly anytime soon.

Trade gap shrinks again but so do exports

Once again, among the good news on the trade gap, there is bad news not far below the surface. The U.S. trade gap in December continued to contract, once again due to a drop in oil prices and a fall in import demand.  But exports also dropped again. The overall U.S. trade deficit shrank to $39.9 billion from a revised $41.6 billion gap the month before. The December narrowing was led by the oil deficit which decreased to $18.8 billion from $19.7 billion in November. The nonoil goods deficit also shrank to $31.6 billion from $32.9 billion the month before.

The bad news is that in December, overall exports declined 6.0 percent even though imports dropped 5.5 percent.  Weakness in exports was led by a $4.6 billion drop in industrial supplies, followed by a $1.3 fall in automotive exports.    Exports for capital goods, consumer goods, and foods, feeds & beverages also declined.  Import weakness was not limited to oil.  All major end-use categories fell, indicating a drop in demand in the U.S.

The latest trade report shows both domestic and worldwide demand contracting. This is not a good way to get an improvement in the trade deficit and points to the need for a stimulus package to get demand back up.

The bottom line

The latest numbers show the consumer sector in a deep funk despite a rebound in retail sales in January.  Consumer sentiment is excruciatingly low – indicating that the household sector is not going to do much for some time to get the economy moving.  And now exports are weakening.  The latest data point even more to the need for fiscal stimulus and measures to get housing up again.

Looking Ahead: Week of 16 through 20

This coming week is shortened by the Presidents Day holiday in the U.S. but the remaining four days are jam packed with market moving indicators.  These include housing starts, industrial production, producer prices, and consumer prices.  Plus on Wednesday, we get to see the minutes of the January 27-28 meeting.

Monday 

U.S. Holiday, Presidents Day.  All Markets Closed.

Tuesday

The Empire State manufacturing index showed modest improvement (less negative) in current readings for January but -- more importantly -- showed a deep breakdown in the 6-month outlook, a breakdown that underscores a deep pessimism among the region's manufacturers. First, the general business conditions index backed up to minus 22.2 from December's minus 27.9. But order readings barely show any improvement, at minus 22.8 for new orders and minus 26.1 for unfilled orders.  The really bad news in the Empire State report was the 6-month outlook where readings suddenly lurched into the negative column with the overall index plummeting to minus 4.0 from plus 18.1 in December.

Empire State Manufacturing Survey Consensus Forecast for February 09: -22.0

Range: -36.5 to -17.5

Wednesday

Housing starts in December continued to be pushed down by oversupply of unsold homes on the market. Starts fell another 15.5 percent, following a 15.1 percent plunge in November. The December pace of 550 thousand units annualized was down 45.0 percent year-on-year. December’s pace of new construction was the lowest since the starts series began in 1959. For the latest month, the fall in starts was led by the multifamily component which dropped 20.4 percent while the single-family component fell 13.5 percent. Starts are expected to remain weak due to still heavy supply on the market and lower demand from higher unemployment.

Housing starts Consensus Forecast for January 09: 0.530 million-unit rate

Range: 0.480 million to 0.570 million-unit rate

Import prices were extremely weak in December but downward pressure came mainly from falling prices for oil and other commodities. Import prices fell 4.2 percent in December after plunging 7.0 percent the month before.  In the latest month, petroleum import prices fell a whopping 21.4 percent. But excluding petroleum, import prices fell a more moderate 1.1 percent after a 1.8 percent decline in November. 

Import prices Consensus Forecast for January 09: -1.4 percent

Range: -2.5 to -0.5 percent

Industrial production in December plummeted on lower auto assemblies plus broad-based weakness.  Overall industrial production in December dropped 2.0 percent, following a 1.3 percent decline the month before. The all-important manufacturing component fell 2.3 percent after a 2.2 percent decline in November.  For the other major components in December, utilities slipped 0.1 percent while mining output decreased 1.6 percent.  A key part of manufacturing weakness was in motor vehicle assemblies which dropped to an annualized pace of 6.64 million units in December from 7.60 million in November – a 12.6 percent fall.  But weakness nonetheless was widespread. Overall capacity utilization in December fell to 73.6 percent from 75.2 percent in November.

Industrial production Consensus Forecast for January 09: -1.5 percent

Range: -2.5 to -0.5 percent

Capacity utilization Consensus Forecast for January 09: 72.5 percent

Range: 71.4 to 73.1 percent

The Minutes of the January 27-28 FOMC meeting are scheduled for release at 2:00 p.m. ET.

While markets certainly will be parsing the text for more information on the Fed’s new credit facilities—notably for consumer and small business credit markets, the main focus may be the latest Fed forecast for the economy in the minutes.

Thursday

The producer price index in December continued its streak of energy induced monthly declines.  The overall PPI fell 1.9 percent, following a 2.2 percent drop in November. Meanwhile, the core PPI rate rose 0.2 percent after edging up 0.1 percent in November. As in recent months, energy led the headline PPI down. For the latest month energy dropped 9.3 percent, led by a 25.7 percent plunge in gasoline prices.  Even food was weak with a 1.5 percent decline.  The core rate was moderate despite a 1.2 percent rebound in passenger car prices and a 0.8 percent boost in light truck prices.  Within the core, weakness was largely in capital equipment outside of light trucks.

PPI Consensus Forecast for January 09, m/m: +0.2 percent

Range: -1.1 to +2.0 percent

PPI Consensus Forecast for January 09, y/y: -2.1 percent

Range: -3.4 to -0.5 percent

PPI ex food & energy Consensus Forecast for January 09, m/m: +0.1 percent

Range: -0.4 to +0.6 percent

PPI ex food & energy Consensus Forecast for January 09, y/y: +3.8 percent

Range: +3.4 to +4.3 percent

Initial jobless claims were relatively steady in the latest week, coming in at 623,000 in the February 7 week – down 8,000 from 631,000 in the January 31 week. The four-week average jumped over the 600,000 level, up 24,000 to 607,500. These are the worst levels since the early 1980s.

Jobless Claims Consensus Forecast for 2/14/09: 620,000

Range: 590,000 to 660,000

The Conference Board's index of leading indicators rose 0.3 percent in December – largely on a surge in the money supply.  But without money supply, indications were very negative with the report warning that the results point to "intense recession" through the spring.  Without the money supply contribution, the leading index would have fallen 0.7 percent.

Leading indicators Consensus Forecast for January 09: 0.0 percent (flat)

Range: -0.5 to +0.4 percent

The general business conditions component of the Philadelphia Fed's business outlook survey index continued to contract in January – but not as quickly as in the prior month. The Philadelphia Fed's January index for general business conditions came in at minus 24.3, up moderately from minus 36.1 in December. Both new orders and shipments contracted but at slower rates than in December.

Philadelphia Fed survey Consensus Forecast for February 09: -26.0

Range: -34.0 to -21.4

Friday

The consumer price index continued downward in December with the  headline CPI falling 0.7 percent in December, following a 1.7 percent decrease in November. Meanwhile, core CPI inflation was unchanged after no change the month before. For the latest month, energy plunged a monthly 8.3 percent, with gasoline prices falling 17.2 percent.  Food posted a 0.1 percent decrease. The core was kept soft by several key components. Declines were seen in apparel, new & used vehicles, and lodging away from home. Also, owners’ equivalent rent posted a very small gain.

CPI Consensus Forecast for January 09, m/m: +0.3 percent

Range: -0.5 to +0.5 percent

CPI Consensus Forecast for January 09, y/y: -0.2 percent

Range: -1.0 to +0.2 percent

CPI ex food & energy Consensus Forecast for January 09, m/m: +0.1 percent

Range: -0.1 to +0.2 percent

CPI ex food & energy Consensus Forecast for January 09, y/y: +1.5 percent

Range: +1.3 to +1.6 percent

Econoday Senior Writer Mark Pender contributed to this article.