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This past week, major equity indexes posted four consecutive gains with many posting double-digit percentage advances for the week. Some of the biggest winners for the week were financials. Meanwhile, bonds retained their safe haven status and the consumer gave mixed signals on where this sector is headed.
 This past week was the best for many indexes since November of last year. Curiously, the week got off to a bad start, dipping significantly on Monday with comments from investor Warren Buffett that the economy is in shambles. But Tuesday saw some of the biggest gains of 2009 as for the day the Dow jumped 5.8 percent; the S&P 500, 6.4 percent; and the Nasdaq, 7.1 percent. Financials got the markets fired up as Citigroup announced profits for the first two months of the year. Also helping markets was an announcement by Representative Barney Frank that the uptick rule might be reinstated, which would limit short selling.
The second really big day for the week was Thursday. Both GE and GM played key roles in the rally. Standard & Poor's downgraded GE and GE Capital's long-term credit ratings but not as much as feared. General Motors indicated that it is financially stronger than many had believed. GM said it will not need $2 billion in additional federal loans this month because cost-cutting has improved its cash position.
For the week, financials posted many of the largest weekly gains, with advances ranging from 49 percent to 86 percent for the five day period. But not all financials benefited as much as Discover Financial Services and Capital One Financial Corp. were hurt by rising payment defaults.
Finally, health care firms boosted stocks significantly this past week. Humana Inc. jumped on investor bets that it will be acquired. Merck surged on upgrades the planned acquisition of Schering-Plough Corp.
Equities were up sharply this past week. The Dow was up 9.0 percent; the S&P 500, up 10.7 percent; the Nasdaq, up 10.6 percent; and the Russell 2000, up 12.0 percent.
For the year-to-date, major indexes are down as follows: the Dow, down 17.7 percent; the S&P 500, down 16.2 percent; the Nasdaq, down 9.2 percent; and the Russell 2000, down 21.3 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 In the bond markets, it almost was like the Sherlock Holmes story in which the big event was the dog that didn’t bark when the killer broke in. It’s the unexpected that makes you question common wisdom. With the huge rally going on in equities, you would have expected heavy reversal of flight to safety. But that did not happen. It seems that the bond market is not as optimistic as equities. And there are signs that financial markets recently are somewhat less stabilized rather than more.
 The usual pattern did set in on Tuesday as rates firmed – especially for bonds – on the stock market rally for the day. The Treasury had three coupon auctions this past week, starting with the 1-year and 3-year T-bonds on Tuesday. The auction had healthy demand but rates firmed in afternoon trading on the surge in equities. The 10-year auction on Wednesday attracted plenty of buyers as the fraction-below 3 percent rate seen on Tuesday was seen as a bargain, bumping the yield down somewhat. Rates eased marginally again on Thursday on continued demand from Wednesday’s auction and despite significantly better-than-expected retail sales.
 A big issue this past week was a speech by Chinese Premier Wen Jiabao in which he expressed concern that the ballooning U.S. budget deficit will cause the value of the huge amounts of Treasury debt his country to decline. But markets are shrugging off those concerns for now as a significant portion of this week’s auctions was taken by indirect bidders - a class of investors that includes foreign central banks.
For this past week Treasury rates, except for a rise in the long bond, were little changed as follows: 3-month T-bill, unchanged; the 2-year note, up 2 basis points; the 5-year note, unchanged; the 10-year bond, up 2 basis points; and the 30-year bond, up 13 basis points.
Still, rates barely budged except for the long bond – and its yield rose only very moderately. Part of the problem is that credit markets are still nervous about the health of banks and other financial institutions. And banks are still having trouble building capital – meaning they are hoarding cash and not lending much. This can be seen in a recent rise in the TED spread – the difference between the 3-month LIBOR and the 3-month Treasury bill. This spread hit 113 basis points at week end, was significantly higher than the recent low of 90 basis points on February 10 of this year. While equity markets have voted for pending recovery to be underway soon, the bond markets have not.
 Several events caused moderately notable swings in spot prices for West Texas Intermediate during the week, but the week end up only slightly. Talk of OPEC production cuts helped prices to firm early in the week only to be pulled down by an updated demand forecast from the U.S. Energy Information Administration (EIA). The EIA lowered its world oil demand forecast for 2009 to 84.27 million barrels per day, down 430,000 barrels from its earlier projection. Weighing on prices at mid-week was a jump in U.S. crude stocks while reports from China indicated that oil consumption had fallen more than anticipated. Yes, China is still a big player in the oil markets. The big move was on Thursday with a nearly $4 per barrel boost from unexpectedly strong retail sales numbers for the U.S. along with talk from OPEC of cutting production quotas. The improved retail sales numbers were seen as indicating that the consumer sector is not as weak as feared and will be keeping demand for oil from falling.
Net for the week, spot prices for West Texas Intermediate edged up 73 cents per barrel to settle at $46.25 – and coming in $99.04 below the record settle of $145.29 per barrel set on July 3, 2008.
The economy was mixed this past week with retail sales showing signs of having bottomed. But international trade indicated that declining exports is a continuing problem. And there are signs that the improvement in retail sales was temporary – consumer sentiment remains near historic lows.
 There may be signs that consumer spending is no longer in free fall. Retail sales in February were soft at the headline level but surprisingly strong at the core level. Overall retail sales fell back 0.1 percent in February, after a 1.8 percent rebound in January. Excluding motor vehicles, retail sales increased 0.7 percent, after a 1.6 percent gain in January. While gasoline sales were up sharply, this was not the only factor behind better sales. Excluding motor vehicles and gasoline, retail sales still posted a 0.5 percent advance after jumping 1.4 percent rebound the previous month.
 Overall, retail sales were mixed for February, hence the headline number near flat. Outside of gasoline, strength was seen in miscellaneous store retailers, clothing, electronics & appliances, and general merchandise (which includes department stores). Weakness was led by motor vehicles & parts and food & beverage stores.
The latest sales numbers suggest that first quarter GDP will not be as negative as recently feared. But the sales gains were likely at the cost of heavy discounting by businesses intent on bringing inventories down. So, count on a hit to profits for most retailers (but discounters are likely doing relatively well).
Also, while the important consumer sector may be stabilizing, it is at a low level—remember the six consecutive declines in the second half of 2008. With employment still declining, a real rebound in consumer spending is still some time off. But for now, apparent stabilization is a good thing.
Overall retail sales on a year-on-year basis in February were down 8.6 percent, compared to down 9.0 percent in January. Excluding motor vehicles, the year-on-year pace improved to down 5.0 percent from down 5.9 percent the prior month. Excluding motor vehicles and gasoline, the year-on-year pace stood at down 0.6 percent from down 1.3 percent the prior month.
Sometimes we get caught up in the most recent monthly gyrations in the data. Year-ago component percentage changes can be a reminder of the relative strengths and weaknesses in sales by type. Not surprisingly, the biggest losers over the last 12 months have been gasoline sales and motor vehicle sales. Gasoline has been pulled down by sharply lower prices while motor vehicles have been hit by higher unemployment, tight credit, and fears of bankruptcy for manufacturers.
Also, the housing recession has both building materials and furniture with double-digit declines.
The winners are health & personal care, food & beverages, and sporting goods. Apparently, the recession has given us more time to spend at the gym and hair salons; we still are taking time to eat and drink, and some of us actually are getting out and playing!
 Despite a positive headline number, the January international trade report really was more negative than on first appearance. The U.S. trade gap in January shrank again as exports and imports competed to see which could fall the fastest. The overall U.S. trade deficit narrowed to $36.0 billion from a revised $39.9 billion shortfall the month before.
In January, exports fell 5.7 percent while imports dropped 6.7 percent. The improvement in the overall deficit, however, was essentially in the oil gap. The January oil deficit decreased to $14.7 billion from $18.8 billion in December. The oil deficit was pulled down by both lower prices and barrels imported. The average price of imported oil declined to $39.81 per barrel in January from $49.93 per barrel the previous month. The number of barrels of crude oil imported in the U.S. actually fell 6.2 percent.
The nonoil goods deficit was little changed at $31.4 billion from $31.3 billion the month before. Nonoil exports dropped 8.0 percent while nonoil imports declined 5.8 percent – reflecting a greater percentage drop in demand overseas for U.S. products than the fall in U.S. demand for overseas goods and services. Exports declines were led by capital goods and by autos.
The latest trade report show shows trade improvement solely due to fewer oil imports. Certainly it is good news that consumers get a little more real income from lower gasoline prices and businesses get lower fuel costs. But the drop in is not good for U.S. manufacturers.
 The import price decline may be leveling off – but the cumulative impact over the past year has been dramatic. Import prices fell 0.2 percent in February, less severe than the 1.2 percent decline in January and the run of even much more severe declines in prior months. But the slower decrease was due to prices for imported petroleum rebounding 3.9 percent in February. Outside of petroleum, declining demand abroad is keeping prices down. Excluding petroleum, prices fell 0.6 percent, following a 0.8 percent decline in January. The latest declines are not as severe in recent months.
 On the export side, prices fell 0.1 percent in February, primarily due to a 1.7 percent drop for agricultural products. Prices for non-agricultural export products were little changed, up 0.1 percent in both February and January.
But the downtrends for import and export prices over the past year have been dramatic. Import prices were down 12.8 percent year-on-year with export prices down 4.5 percent. Both are record lows for year-ago numbers.
 While there are some positives in the latest consumer sentiment report, you have to look closely to find them and they are heavily offset by negatives. The headline index edged 3 tenths higher to a still severely low level of 56.6. But expectations, the report's leading component, did rise 2-1/2 points to 53.0 -- indicating that pessimism isn't getting worse and perhaps hinting that pessimism may now be receding. On the downside, though, the current conditions component fell more than 3 points to 62.3, a reflection of ongoing and very severe contraction in the labor market. While markets did everything they could to focus on the positives when the report was released, the bottom line is that consumers are still in a gloomy mood and businesses are going to have to give consumers plenty of incentives to spend – that is lots of discounting.
While equity markets were optimistic this past week, it was not entirely justified by the economic news. The consumer sector may be stabilizing, but there is no indication that this sector will be strengthening soon. This will keep the economy negative and then flat for some time.
This coming week is relatively busy with market moving indicators. The week begins with industrial production, followed by housing starts and the PPI on Tuesday. The CPI report and FOMC meeting announcement are made public on Wednesday.
The Empire State manufacturing index in February dropped more than 12 full points to minus 34.7. Meanwhile, the new orders index fell nearly 8 points to minus 30.5. Both these readings are record lows for the series going back to July 2001. The outlook worsened in February as respondents rated general business conditions six months ahead at minus 6.6, down 2-1/2 points from January.
Empire State Manufacturing Survey Consensus Forecast for March 09: -32.0
Range: -40.0 to -25.0
Industrial production in January fell another 1.8 percent, following a 2.4 percent plunge the month before. The all-important manufacturing component decreased a sharp 2.5 percent in the latest month. The manufacturing component saw broad-based weakness but was led downward by a drop in motor vehicle assemblies, reflecting to a degree shutdowns by some auto manufacturers for the month. Notably, every major industry group was down except for two—food & tobacco products and miscellaneous. Overall capacity utilization in January slipped to 72.0 percent from 73.3 percent the month before. Looking ahead, more recent manufacturing surveys showed worsening negative numbers for February and the employment situation report for the month indicated that production worker hours in manufacturing fell 2.0 percent.
Industrial production Consensus Forecast for February 09: -1.2 percent
Range: -2.2 to -0.3 percent
Capacity utilization Consensus Forecast for February 09: 71.1 percent
Range: 70.0 to 71.8 percent
Housing starts continued to freefall in January with a 16.8 percent decline, following a 14.5 percent plummet in December. The January pace of 0.466 million units annualized was down 56.2 percent year-on-year. The drop in starts was led by the multifamily component which fell a hefty 27.9 percent while the single-family component fell 12.2 percent. Permits also showed no signed of stabilizing, posting a 4.8 percent decrease in January, after a December fall of 11.1 percent. The January permit pace of 0.521 million units annualized was down 50.5 percent year-on-year. However, permits were not as weak as starts. When starts diverge significantly from permits, it is usually weather related since you actually have to go outside to make a start happen. So, while the starts level is likely to remain very low, we may see a weather-related bump up in starts for February. But don’t expect too much of a rebound. Months’ supply of new single-family homes stood at a record high of 13.3 months for January and will be keeping new construction weak.
Housing starts Consensus Forecast for February 09: 0.450 million-unit rate
Range: 0.420 million to 0.510 million-unit rate
The producer price index in January jumped sharply - both at the headline and core levels. The overall PPI rebounded 0.8 percent, following a 1.9 percent fall in January. Meanwhile, the core PPI rate surged 0.4 percent after a 0.2 percent increase the month before. For the latest month, headline inflation was pumped up by a jump in energy which increased 3.7 percent after a 9.1 percent fall in December. Food actually fell 0.4 percent in the latest month. Temporary factors were likely in play for the boost in the core. Pharmaceuticals jumped 1.1 percent while tobacco spiked 0.6 percent. Pharmaceuticals can be sporadic as price changes by drug companies can be infrequent and lumpy. Changes in tobacco prices also can be sporadic and difficult to seasonally adjust. Prices for light trucks increased 0.5 percent and may be coming off earlier discounting. So, we are likely to see some reversal of these factors in February for the core rate.
PPI Consensus Forecast for February 09, m/m: +0.4 percent
Range: 0.0 to +1.2 percent
PPI Consensus Forecast for February 09, y/y: +0.1 percent
Range: 0.0 to +0.3 percent
PPI ex food & energy Consensus Forecast for February 09, m/m: +0.1 percent
Range: 0.0 to +0.3 percent
PPI ex food & energy Consensus Forecast for February 09, y/y: +3.8 percent
Range: +3.7 to +4.0 percent
The consumer price index rebounded 0.3 percent in January, following a 0.8 percent drop the month before. Meanwhile, core CPI inflation firmed to 0.2 percent after no change in December. Headline inflation was led upward by energy in January. Energy rebounded a monthly 1.7 percent, with gasoline rising 6.0 percent. Food edged up a modest 0.1 percent. While energy causes the headline number to be volatile, the somewhat stronger core number is what caught market attention. But temporary factors seem to have been the culprits. Medical care rose 0.4 percent and that may have been due to difficulty seasonally adjusting some first-of-the-year cost increases. Also, it looks like a lot of discounting by retailers took place in December rather than January, meaning on a seasonally adjusted basis, we get a bump up in January. Case in point—apparel rebounded 0.3 percent in January after a 0.6 percent fall the month before. So, we may get a reversal of some of these factors and get a softer core number for February.
CPI Consensus Forecast for February 09, m/m: +0.3 percent
Range: -0.3 to +0.6 percent
CPI Consensus Forecast for February 09, y/y: 0.0 percent
Range: -0.7 to +0.3 percent
CPI ex food & energy Consensus Forecast for February 09, m/m: +0.2 percent
Range: 0.0 to +0.2 percent
CPI ex food & energy Consensus Forecast for February 09, y/y: +1.7 percent
Range: +1.5 to +1.8 percent
The FOMC announcement for the March 17-18 FOMC policy meeting is expected to leave the fed funds target unchanged at a range of zero to 0.25 percent. The Fed lowered the target to this historic low back in December and since has indicated that the target is going to remain low for some time. Market focus will be on any comments on improvement or worsening in the economy and whether there are any changes pending in Fed credit facilities.
FOMC Consensus Forecast for 3/18/09 policy vote on fed funds target range: unchanged at a range of zero to 0.25 percent
Initial jobless claims for the March 7 week rose 9,000 to 654,000 from 645,000 in the prior week. The level of claims has been steady for six weeks as reflected in the four-week average which is at 650,000. Continuing claims pose the worst news, jumping 193,000 in data for the February 28 week to a record 5.317 million. Rising for eight straight weeks, continuing claims indicate that it's taking more time for the jobless to find work.
Jobless Claims Consensus Forecast for 3/14/09: 654,000
Range: 625,000 to 690,000
The Conference Board's index of leading indicators posted a second consecutive gain in January – but the improvement has been largely due to just one or two components spiking. The index of leading economic indicators rose 0.4 percent in January reflecting a huge jump in money supply as the Fed and Treasury have been injecting massive amounts of funds into the banking system to provide relief to credit markets. Without money supply, the leading index would have slipped 1 tenth in the latest month. Also, the spread between the 10-year Treasury note and fed funds rate widened, adding to the leading index. But instead of the wider spread being due to a drop in the fed funds rate, it was because of a rise in the Treasury note! In real life, this is a negative. We will likely see additional positive contributions for February from the money supply and interest rate spread components for the same reasons – but this time they are likely to not be large enough to offset the negatives.
Leading indicators Consensus Forecast for February 09: -0.6 percent
Range: -1.1 to +0.2 percent
The general business conditions component of the Philadelphia Fed's business outlook survey index plunged 17 points in February to minus 41.3—which is the lowest level since minus 48.2 set in October 1990. Shipments, orders and unfilled orders also showed deterioration in the latest month, pointing to a likely weak number for March.
Philadelphia Fed survey Consensus Forecast for March 09: -38.0
Range: -45.1 to -30.0
Econoday Senior Writer Mark Pender contributed to this article.
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