Equities surged this past week on unexpectedly strong economic data and on Treasury Secretary Geithner announcing more details on the Treasury’s plan to buy up toxic assets – now renamed legacy assets for PR purposes.  Clearly, the economic news was better than it has been for a while.  But it likely is too soon to declare victory over recession.

Recap of US Markets

STOCKS

Stocks rose for the third consecutive week—largely boosted by the Obama Administration’s announcement to buy close to $1 trillion in bad bank assets and due to unexpectedly strong economic news.  The Dow and S&P 500 surged 6.8 percent and 7.1 percent, respectively, on Monday.  The Treasury stated that it would be spending $75 billion to $100 billion of taxpayer money to start the Public-Private Investment Program which is intended to create a market for bad debts held by banks and other financial institutions.  Private investors would only be putting about 7 percent of the value of the total of any transaction at risk.  The new details for getting legacy assets (a.k.a. toxic assets) off bank books was seen as a continuation of the progress made in behalf of improving financial markets when the Fed announced its plan for pumping another trillion dollars of liquidity into the economy with various asset purchase programs.

Also lighting the fireworks on Monday was an unexpected surge in existing home sales for February jumped 5.1 percent.  Unexpectedly strong economic news came into play on Wednesday as new durables orders spiked and new home sales made a sizeable comeback.

However, equities ignored the negative economic news on Thursday on a record high level for continuing jobless claims.  Taking center stage that day were unexpectedly better earnings from Best Buy and ConAgra.   Also, GM appeared to be making progress on cutting labor costs.

Overall for the week, optimism from Fed and Treasury financial recovery plans and better-than-expected economic news dominated.  Two sectors that were big winners were financials and homebuilders.

Equities were up this past week. The Dow was up 6.8 percent; the S&P 500, up 6.2 percent; the Nasdaq, up 6.0 percent; and the Russell 2000, up 7.2 percent.

For the year-to-date, major indexes are down as follows: the Dow, down 11.4 percent; the S&P 500, down 9.7 percent; the Nasdaq, down 2.0 percent; and the Russell 2000, down 14.1 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

Yields on Treasuries were mixed this past week with rates on the 10-year and 5-year notes up significantly, rising 11 basis points and 14 basis points, respectively.  There were several factors at play.  But first, these are the maturities where the Fed, under its plan announced at last week's FOMC meeting, is focusing its own purchases. Buying in these maturities was heavy after the FOMC announcement, driving yields down 25 basis points for the 10-year and 22 basis points for the 5-year.  This week's rise in yields largely was on reconsideration of the prior week's dip.

Helping the bond market reconsider yield levels was Wednesday’s $34 billion auction of 5-year notes that did not go as well as expected.  Participants again began to worry about building supply of Treasuries from the Administration’s fiscal stimulus and also from the need to finance various bailouts.  Rates rose despite the Fed actually jumping in and buying nearly $22 billion in notes that come to maturity from February 2015 to February 2019.  Yields eased on Thursday, however, as the Treasury’s auction of 7-year notes went better than expected.

Also tending to support a firming in rates were strong numbers for existing home sales, new home sales, and new orders for durable goods.

For this past week Treasury rates were mixed as follows: 3-month T-bill, down 8 basis points, the 2-year note, up 4 basis points; the 5-year note, up 14 basis points; the 10-year bond, up 11 basis points; and the 30-year bond, down 5 basis points.

OIL PRICES

Oil prices were moderately volatile this past week on a daily basis but ended the week up somewhat.  Boosting prices were healthy economic news on existing home sales, durables orders, and new home sales.  Also, the euphoria in equities spilled over into oil markets. But offsetting factors included the Energy Information Administration releasing a mixed inventory report, showing a spike in crude oil supplies but lower-than-expected gasoline stockpiles.  Late in the week, Japan retail sales for February showed a sharp and unexpected decline.  Japan is the number three energy consuming economy in the world.

Net for the week, spot prices for West Texas Intermediate firmed $1.32 per barrel to settle at $52.38.  While this is well below the record settle of $145.29 per barrel set on July 3, 2008, the latest represents a steady rise since the recent trough of $31.41 set on December 22, 2008.

The Economy

Economic data actually were mostly on the upside this past week and unexpectedly so.  There were signs that manufacturing and housing have hit bottom and could be in a leveling-off phase, preceding recovery.  But given how negative the prior numbers have been, it should not be a surprise to see random rebounds off low levels.  That may have been the case to some degree.  But first, we put to rest fourth quarter GDP as this week’s starting point.

GDP in Q4 revised down slightly

The Commerce Department final revision to fourth quarter GDP was anticlimactic but still showed the economy deep in recession.  Fourth quarter GDP was revised down marginally to a 6.3 percent drop from the prior estimate of a 6.2 percent annualized decline. The downward revision in real GDP in the fourth quarter primarily reflected lower estimates for inventory investment, nonresidential structures investment, and residential investment.  These were partly offset by less negative net exports.

On the inflation front, the GDP price index was unrevised at a 0.5 percent annualized increase.  

Year-on-year growth for real GDP was unrevised at minus 0.8 percent and is down from up 0.7 percent in the third quarter.  Year-on-year growth for the GDP price index was unrevised at up 2.0 percent, compared to up 2.6 percent in the third quarter.

By now, fourth quarter GDP seems like ancient history.  Markets and most economists put the first quarter at even somewhat worse than the fourth quarter.  But markets are now focusing on the second quarter with some seeing economic news over the past two weeks as possibly indicating a leveling off of the recession.  The latest indicator news indeed has more often than not been better than expected.

Personal income down but inflation up

The February report was much less positive than the month before as wage income fell and inflation picked up.  Overall personal income in February slipped 0.2 percent, following a 0.2 percent boost in January.

But for what really counts with consumers, the drop was even worse.  The wages and salaries component fell 0.4 percent, after slipping 0.2 percent in January.  This is the component that average consumers use for paying bills and making purchases.

Consumer spending slowed to a 0.2 percent rise, after a 1.0 percent jump in January.  The weaker growth was primarily due to a 1.3 percent fall in durables.  Nondurables was bumped up 0.8 percent on higher energy costs while services squeaked out a 0.1 percent rise for February.

Firming oil prices did damage overall consumer inflation for a second consecutive month. The headline PCE price index jumped 0.3 percent, equaling the rise in January.  Meanwhile, the core PCE price index rose 0.2 percent – the same as for January. 

What’s the outcome of modest spending and higher inflation'  You guessed it – real spending fell 0.2 percent after a 0.7 percent jump in January.  First quarter real consumer spending is still likely to be negative given that the fourth quarter ended at a low level with a 0.6 percent drop for December.

The latest personal income report shows the consumer losing ground.  With less income and a strong deleveraging trend (reducing debt), the outlook for consumer spending is not good.  While equity markets have been in general euphoria over other indicators over the past two weeks, the latest personal income report should give pause to how soon recovery is, and should give Fed reason to rethink comments that inflation is going to remain low for some time.

Consumer sentiment steady, just above bottom

Adding to the issue of the health of the consumer is continuing low sentiment. The Reuters/University of Michigan index edged slightly higher in March to 57.3 to show little change from mid-month or from February. The latest uptick was due to the expectations component as current currents fell back. Recent readings remain near historic lows. Inflation expectations for one year out, however, edged up to 2.0 percent from 1.9 percent in February. 

Durable goods surprise on the upside

Despite the mixed personal income report, a number of indicators indeed came in stronger than expected.  Probably at the top of the list is durable goods orders which rebounded a strong 3.4 percent in February, following a 7.3 percent plunge in January. New durables orders in February rose for the first time in seven months.

Excluding the transportation component, new orders made even more of a comeback, gaining 3.9 percent, after declining 5.9 percent in January. Industry components were mostly positive and notably so.

But it is still going to take some time to rebuild forward momentum.  Year-on-year, overall new orders for durable goods were still down 23.4 percent in February but that was an improvement from down 25.1 percent in January.  

Home sales rebound for both existing and new homes

Helping generate a positive mood on Wall Street this past week were back-to-back unexpectedly strong home sales reports. Some had begun to suspect that existing home sales might pick up due to bargain basement prices on foreclosed homes and low mortgage rates bringing in first time buyers.  And that turned out to be the case for February as existing home sales jumped 5.1 percent. Prices even firmed – although from low levels, rising 0.4 percent in the month.  The median price of $165,400 was still down 14.8 percent on a year-ago basis. Supply on the market was steady at 9.7 months.

Despite the rebound in existing home sales, many analysts were still skeptical of any strength showing up in new home sales as homebuilders were seen as having less flexibility on prices.

New home sales, however, jumped a monthly 4.7 percent.  The 337,000 million unit annual pace was still a very weak minus 41.1 percent compared to a year ago. Supply on the market fell to 12.2 months from 12.9 months in January, still quite swollen.

Despite expectations by some, homebuilders indeed are having to cut prices as the median price fell another 2.9 percent in the month to $200,900 for a year-ago pace of down 18.1 percent.

Fedspeak warns on the economy

While equity markets were more upbeat this past week about the economy, not everyone was and several Fed officials were at the top of that list.  San Francisco Fed President Janet Yellen spoke this past week, making an evaluation of the economy very similar to other speakers.  She focused on continued difficulties in financial markets and deleveraging resulting in reduced spending.

"Financial markets remain highly stressed and the adverse feedback loop between the economy and the financial sector shows little sign of slackening. These negative dynamics create severe downside economic risks. A process of balance sheet deleveraging has spread to nearly every corner of the economy: consumers are pulling back on purchases, especially on durable goods, to build their savings; businesses are cancelling planned investments and laying off workers to preserve cash; and financial institutions are shrinking their assets to bolster capital and improve their chances of weathering the current storm. Such precautions may be smart for individuals and firms, but they intensify economic distress for the economy as a whole."

Sandra Pianalto of the Cleveland Fed also cited her worries about "negative feedback."

Richmond Fed’s Jeffrey Lacker is somewhat more balanced, mentioning the positive effects to come from monetary policy but also the likely bad news in the near term.

"With this bad news behind us, are there any favorable signs' The answer is yes. First, economic history teaches one to not underestimate the power of monetary stimulus, and monetary policy has been highly stimulative since the recession began. The federal funds rate is five percentage points below its peak, and the size of our balance sheet has doubled in the last six months."

"Having said all that, it bears emphasizing that uncertainty about the economic outlook is particularly acute right now, and that while there are indications consistent with the emergence of positive momentum by the end of the year, we are likely to see quite negative economic reports in the meantime."

While these District Fed bank presidents expect recovery next year, they are not as optimistic as the equity markets for the near term.

The bottom line

The economy did show unexpected strength this past week.  But with the consumer sector still sliding backwards net, it likely is still too early to celebrate the end of recession.

Looking Ahead: Week of March 30 through April 3 

There are only two market moving indicators this coming week.  The ISM manufacturing index is due out Wednesday.  But we end the week with a splash as the Labor Department releases its Employment Situation report on Friday for March numbers.  After last week’s indicators and Geithner announcement boosted equities sharply, Friday’s report could be the deciding factor on whether the recent run of the bulls continues.

Tuesday

The ISM-Chicago business barometer edged 9 tenths higher in February but remained at a still severely contractionary 34.2.  This index has been stuck at such depressed levels for four straight months. New orders were little changed at 30.6 with backlogs showing slightly less contraction compared to January at 29.3.

ISM-Chicago Consensus Forecast for March 09: 35.0

Range: 32.0 to 40.0

The Conference Board's consumer confidence index in February fell to a record low in more than 40 years of data to 25.0 from 37.4 in January. The worst news in the report was a 15-point fall back in the expectations component, to 27.5. Expectations appear to have been knocked down largely on a bleak job market.  Only 4.4 percent of the sample said jobs are currently plentiful with 47.8 percent saying they are hard to get.  Based on the latest jobless claims numbers, the unemployment rate is still trending upward and likely is keeping confidence low.

Consumer confidence Consensus Forecast for March 09: 28.0

Range: 26.0 to 35.0 

Wednesday

Sales of domestic motor vehicles fell to a 6.4 million annual rate in February, down from an already deeply contractionary 6.8 million in January. Continued worries about rising unemployment and whether U.S. auto manufacturers will have to file for bankruptcy will likely keep the sales pace weak in March.

Motor vehicle domestic sales Consensus Forecast for March 09: 6.4 million-unit rate

Range: 5.2 to 7.3 million-unit rate

The Institute for Supply Management's manufacturing index edged 2 tenths higher in February to a 35.8 level that is only modestly above December's low of 32.9. Looking ahead, readings on new and unfilled orders were stable in February but deeply in negative territory at 33.1 and 31.0, respectively. This would indicate little improvement in the near term for the overall index.

ISM manufacturing index Consensus Forecast for March 09: 36.0

Range: 33.5 to 37.5

Construction spending in January fell at a faster pace, declining a monthly 3.3 percent in January, after dropping 2.4 percent the month before. Weakness in January was led by a sharp 4.3 percent plummet in private nonresidential outlays. The private residential component also declined and by 2.9 percent while public outlays rebounded 0.6 percent.  Looking ahead, we may get a small bump up in residential spending due to a rebound in housing starts.  But outlays are based on lagged effects from several months of starts, so don’t expect much of a rise in residential outlays.  Also, businesses and state and local governments are cutting back on new construction when possible due to revenue issues.

Construction spending Consensus Forecast for February 09: -1.5 percent

Range: -3.0 to -0.5 percent

Thursday

Initial jobless claims for the March 21 week rose 8,000 to 652,000, indicating that the trend in unemployment is still up. But the really worrisome numbers were for continuing claims for the March 14 week which surged 122,000 to another record level of 5.560 million.

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Jobless Claims Consensus Forecast for 3/28/09: 655,000

Range: 630,000 to 672,000

Factory orders fell 1.9 percent in January. Helping ease the decline was 0.5 percent boost in nondurable orders – a gain tied to higher oil prices. Looking ahead, we should see a smart rebound in February as durable goods orders rebounded a strong 3.4 percent in February.  Further gains in oil prices also should boost the nondurables component.

Factory orders Consensus Forecast for February 09: +1.5 percent

Range: -1.2 to +4.2 percent

Friday

Nonfarm payroll employment in February plunged 651,000, following a decline of 655,000 in January and a fall of 681,000 in December. Job cuts in the latest month were widespread in both service-providing and goods-producing sectors.  The soft labor market has weakened wage gains as average hourly earnings rose a modest 0.2 percent in February.  Also, the average workweek was unchanged at an anemic 33.3 hours.  From the household survey, the civilian unemployment rate surged further to 8.1 percent from 7.6 percent in January – hitting the highest rate in 25 years.  Looking ahead, record high continuing unemployment claims indicate that the unemployment rate will rise even further in March. 

Nonfarm payrolls Consensus Forecast for March 09: -650,000

Range: -711,000 to -525,000

Unemployment rate Consensus Forecast for March 09: 8.5 percent

Range: 8.2 to 8.6 percent

Average workweek Consensus Forecast for March 09: 33.3 hours

Range: 33.2 to 33.3 hours

Average hourly earnings Consensus Forecast for March 09: +0.2 percent

Range: +0.1 to +0.3 percent

The composite index from the ISM non-manufacturing survey fell 1.3 points in February to a 41.6 level that indicates accelerating contraction through the bulk of the economy. The business activity index, equivalent to a production index, fell a very steep 4 points to 40.2 from January's 44.2. Looking ahead, the new orders index also deteriorated in February to 40.7, indicating further deterioration ahead.

Composite index Consensus Forecast for March 09: 42.0

Range: 40.0 to 44.0

Econoday Senior Writer Mark Pender contributed to this article.