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It must be spring fever. As far as the economy is concerned, there is still plenty of winter snow on the ground. Equity traders, however, are looking for any signs of spring in company or economic news. This past week, a few positive signs from company news outweighed negative economic news and a dreary report from the Fed.
 Equities posted a fifth consecutive weekly net gain despite negative economic data. But the first two days of the holiday shortened week headed in the other direction. Sell recommendations — notably for bank stocks — from an analyst with Calyon Securites pushed financial stocks down early in the week. Worries over GM and Chrysler also weighed on equities as there was substantial chatter that GM was preparing for bankruptcy if the company cannot meet the Administration’s June 1 deadline for resubmitting a workable reorganization plan.
Stocks rebounded on Wednesday and especially on Thursday. Homebuilder Pulte gave that sector a lift by announcing that it is buying Centex, creating the nation’s largest homebuilder. Also, insurers got a boost when the Treasury announced that it will let certain insurers get help from TARP moneys.
But at the end of the week, banks turned the tables when Wells Fargo forecast a $3 billion first quarter profit, adding to belief that the financial sector is stabilizing. Stocks rallied across the board due to most analysts seeing improvement in the financial sector as a precondition for overall economic recovery – and traders liked the implications of Wells Fargo’s first quarter profits projection.
However, equities posted gains in the face of negative economic news. Consumer credit outstanding fell back as consumers are deleveraging and seeing credit lines cut back. The U.S. trade gap dropped sharply because of a drop in nonoil imports – implying businesses expect a drop in demand by consumers and businesses. And continuing jobless claims set another historical high. Stocks are doing quite a bit of looking ahead to ignore these reports.
Equities were up this past week. The Dow was up 0.8 percent; the S&P 500, up 1.7 percent; the Nasdaq, up 1.9 percent; and the Russell 2000, up 2.6 percent.
For the year-to-date, major indexes are mixed as follows: the Dow, down 7.9 percent; the S&P 500, down 5.2 percent; the Nasdaq, up 4.8 percent; and the Russell 2000, down 6.9 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields were mostly up this past week but only slightly. Yields moved only moderately to key events this past week. Early in the week, rates firmed slightly on worries about looming supply even though the Fed jumped in and bought $2.5 billion in T-notes. Tuesday saw yields dip on flight to safety as equities turned downward sharply.
On Wednesday, bond traders paid more attention to the Fed’s FOMC minutes than equity traders. Treasury yields slipped on commentary in the minutes that nearly all the participants said economic conditions had worsened compared to their expectations at the January meeting. Finally, at the close of the week on Thursday, reversal of flight to safety boosted yields as funds flowed into the Thursday stock market rally. Also, better-than-expected earnings projections from Wells Fargo soothed bond markets somewhat.
For this past week Treasury rates were mixed as follows: 3-month T-bill, down 2 basis points, the 2-year note, unchanged; the 5-year note, up 2 basis points; the 10-year bond, up 3 basis points; and the 30-year bond, up 6 basis points.
 Treasury yields have been in a relatively tight pattern in recent weeks. Of course, the 3-month T-bill has been staying not far above zero, reflecting the Fed’s target range of zero to 0.25 percent for fed funds. Yields on notes and bonds have remained somewhat low despite supply concerns due to continued negative economic news and fears that the Fed will continue to weigh on yields with its plan to buy long-term Treasuries to continue quantitative easing.
Oil prices were relatively calm this past week, essentially unchanged net. Weakness was primarily the first two days of the week. Oil prices fell on Monday, following the lead of equities over concerns that bank losses are going to be worse than currently expected. Spot prices for West Texas Intermediate fell further on Tuesday as traders positioned themselves for Wednesday’s inventories report, expecting a rise in inventories.
But prices firmed slightly on Wednesday as oil stocks grew less than expected. The story on Thursday was not complicated—oil prices followed equities' jump at the end of the week on belief that stock traders were correctly pegging the claimed signs of improvement in the economy. Oil traders were ignoring the negative economic news as much as the equities traders.
Net for the week, spot prices for West Texas Intermediate slipped 27 cents per barrel to settle at $52.24.
Economic news was limited this past holiday-shortened week. But the details of the reports showed the economy is still deep in recession.
 A narrowing in the trade deficit is supposed to be good news. But this really depends on what caused the gap to shrink—with February a case in point. The U.S. trade deficit in February unexpectedly plunged, narrowing to $26.0 billion from a $36.2 billion shortfall the month before. Exports actually rebounded 1.6 percent. However, the big news was a plummet in imports of 5.1 percent. Importantly, the drop was not that much related to oil. The improvement in the overall deficit was due primarily to a fall in nonoil imports. The February nonoil deficit fell to $22.2 billion from $31.3 billion in January. The oil deficit also shrank but not as much to $13.7 billion from $14.8 billion in January.
What the fall in imports is telling us is that businesses have downgraded their forecasts for consumer spending and business investment. In turn, U.S. producers also have cut back on crude materials imported for inputs. We see these trends in the component declines in imports. While the drop was widespread, it was led by declines in industrial supplies and capital goods excluding autos. Consumer goods and autos also fell. The rise in exports was led by increases for consumer goods and automotive.
The sharp narrowing in the trade deficit in February will lead to economists revising their estimates for net exports (less negative) for the first quarter. This will add to GDP but we also are likely to see lower estimates for consumer spending and business investment in equipment.
 Adding to the view that consumers are retrenching, consumer credit outstanding fell $7.4 billion in February, almost offsetting an $8.1 billion rebound in January. Consumer credit has fallen in five of the last seven months. Revolving credit, down $7.8 billion, was behind the February's decline. This reflects consumers choosing to pay down credit card debt and pull out debit cards more often instead of credit cards. Also, outstanding credit has been constrained by many card companies lowering credit availability. Nonrevolving credit edged up a modest $0.3 billion. Nonrevolving credit has been soft due to weak auto sales. But overall, the numbers point to slow growth in consumer spending in coming months.
 Higher oil prices have started to boost overall import prices, but excluding petroleum, import prices are still soft. Headline import prices rose 0.5 percent in March to end a very long string of declines. Prices for imported petroleum products jumped 10.5 percent in March, following a 5.2 percent rise in February. These followed a long string of monthly decreases. Excluding petroleum, import prices fell 0.7 percent after slipping 0.6 percent the month before.
A big percentage of the import price index (even after excluding petroleum) is for commodities. But if we look at just the finished goods components, import prices are still quite sluggish. For the latest month, prices for imported capital goods fell 0.3 percent in the month with prices for imported consumer goods (ex-auto) down a steep 0.5 percent. However, auto prices rose 0.2 percent. While price weakness is due to a drop in demand, the good news is that import prices are going to help keep core consumer price inflation soft for while.
Initial jobless claims for the April 4 week fell 20,000 to a lower-than-expected level of 654,000. However, continuing claims, in data for the March 28 week, jumped 95,000 to a record level of 5.840 million. Growth in continuing claims confirms that jobseekers are having a very hard time finding work, indicating that the unemployment rate is continuing to rise. This will likely keep consumer spending subdued for some time.
The bottom line is that the Fed governors and District Bank presidents saw an economy over the past six weeks that was worse than they expected at the end of January. The minutes had a very different look on policy discussion than in the past as participants agreed that further easing was needed beyond the fed funds target range of zero to one-quarter percent already established this past December. Discussion focused on how much to expand the Fed's balance sheet—so-called quantitative easing.
Not only were the FOMC participants less optimistic about the economy in the near terms, but the same was true for the Board’s staff economists. The Fed's staff lowered their projections for 2009 and put recovery off until early 2010. As a result, unemployment projections were raised significantly. Inflation was expected to remain "subdued."
Turning to comments by participants, what particularly stood out to them was the unexpectedly sharp drop off in exports. This sector was no longer seen as supporting growth in the U.S. Participants were not so optimistic about housing despite some modestly positive news prior to the meeting.
You can pretty much sum up the discussion of potential changes in monetary policy as just like Dorothy telling Toto that it looks like we aren't in Kansas anymore. It wasn't about interest rates-it was about expanding the Fed's balance sheet. Discussion was on several issues-how much to expand, the timing, and what securities to purchase. In the end, participants compromised on a rather large boost in the Fed's balance sheet but also agreed to give the Trading Desk discretion on how fast to make the purchases. FOMC participants did want the pace of purchases tempered by the likely impact of new expansion of TALF facilities. This was a key reason the Desk was given a lot of flexibility. The expansion of TALF will likely add substantial liquidity to the markets.
The bottom line is that the economy in the Fed's view has worsened more than expected since the end of January and the Fed now expects positive growth for the economy to start early in 2010.
The economic news this past week painted a picture of further weakening in consumer and business demand. Basically, the latest reports confirm the Fed’s dreary assessment of the economy—flat growth is about the best we can hope for late this year, followed by recovery early in 2010.
This coming week is jam packed with market moving indicators. There are inflation updates with the PPI and CPI. There is news on the consumer sector with retail sales. And we get two important updates on the goods-producing sector with industrial production and housing starts. Markets also with be paying close attention to the Wednesday release of the Fed’s Beige Book.
The producer price index in February rose a modest 0.1 percent, following a 0.8 percent boost in January. Meanwhile, the core PPI rate eased to 0.2 percent rise after a 0.4 percent increase the prior month. For the headline number, the slowing was primarily due to a 1.6 percent drop in food prices. Energy increased 1.3 percent after a 3.7 percent boost in January. Looking ahead, a rebound in oil prices is likely to boost the headline PPI in March.
PPI Consensus Forecast for March 09, m/m: +0.1 percent
Range: -0.5 to +0.4 percent
PPI ex food & energy Consensus Forecast for March 09, m/m: +0.2 percent
Range: +0.1 to +0.2 percent
Retail sales in February fell back 0.1 percent after a 1.8 percent rebound in January. But weakness was largely in motor vehicles. Excluding this component, 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. Looking ahead, the headline number for March likely will get help from higher gasoline prices and from a bump up in motor vehicle sales.
Retail sales Consensus Forecast for March 09: +0.3 percent
Range: -0.2 to +0.9 percent
Retail sales excluding motor vehicles Consensus Forecast for March 09: 0.0 percent
Range: -0.2 to +0.4 percent
Business inventories fell 1.1 percent in January, surprisingly in line with sales which fell 1.0 percent. Pulling inventories lower was destocking at retailers where inventories fell 1.7 percent, and particularly at auto dealers who cut inventories by 4.4 percent. We will likely see a decline in inventories in February as retail sales spiked 1.8 percent for the month and manufacturing inventories dropped 1.2 percent.
Business inventories Consensus Forecast for February 09: -1.0 percent
Range: -1.5 to -0.3 percent
The consumer price index rose 0.4 percent in February, following a 0.3 percent boost the month before. Meanwhile, core CPI inflation came in at 0.2 percent, unchanged from January and matching the consensus. The headline number was boosted by higher oil prices as seen in the 3.3 percent jump in energy costs, including an 8.3 percent spike in gasoline prices. Food actually slipped 0.1 percent. Looking ahead, the headline number is likely to be on the high side as oil prices have been firming.
CPI Consensus Forecast for March 09, m/m: +0.2 percent
Range: -0.1 to +0.3 percent
CPI ex food & energy Consensus Forecast for March 09, m/m: +0.2 percent
Range: -0.1 to +0.2 percent
The Empire State manufacturing index fell 3-1/2 points in March to a very low and contractionary minus 38.2. New orders were even weaker at minus 44.8, down nearly 15 points. A positive in the report was improvement in the 6-month outlook where readings generally edged into positive ground. But that optimism is for further down the road—the deeply depressed and negative new orders number suggests another decline in the overall index for April.
Empire State Manufacturing Survey Consensus Forecast for April 09: -34.0
Range: -37.4 to -25.0
Industrial production posted its fourth consecutive decline in February, dropping 1.4 percent in February, following a 1.9 percent fall in January. But the headline number for February was pulled down heavily by a massive 7.7 percent drop in utilities output due to above average winter temperatures. The manufacturing component fell 0.7 percent after a 2.7 percent drop in January. But manufacturing was bolstered by the return of auto assemblies. Looking ahead, outside of a likely rebound in utilities output, industrial production is likely to post another drop in March. More recent manufacturing surveys have been deeply negative and production worker hours in manufacturing fell 2.1 percent in March.
Industrial production Consensus Forecast for March 09: -0.8 percent
Range: -1.5 to -0.5 percent
Capacity utilization Consensus Forecast for March 09: 70.0 percent
Range: 69.2 to 70.3 percent
The Beige Book is in preparation for the April 28-29 meeting. The most recent Beige Book and FOMC minutes painted quite gloomy conditions, especially for exports and consumer spending with housing still depressed. While the Obama Administration and Fed officials have indicated the more bad news is coming, markets will be looking for glimmers of recovery, including any improvement in the credit markets.
Housing starts in February made a significant comeback but it likely was mostly a technical rebound after January's very low number. Starts jumped 22.2 percent, following a 14.5 percent drop in January. The improvement in starts was led by the multifamily component which made an 82.3 percent monthly surge while the single-family component edged up 1.1 percent. It strongly appears that worse-than-average weather in January in the South contributed to the decline in January and better-than-average weather boosted starts in February. Although there are signs of improved home sales, there is not yet reason to expect any real pick up on construction as supply remains quite elevated-- 9.7 months for existing homes and 12.2 months for new homes on the market.
Housing starts Consensus Forecast for March 09: 0.570 million-unit rate
Range: 0.500 million to 0.645 million-unit rate
The general business conditions component of the Philadelphia Fed's business outlook survey index rose 6 points in March but remained at a still severely depressed minus 35.0 level that indicates a great many more manufacturers in the region are reporting month-to-month contraction in business conditions than those reporting a gain. Looking ahead, the new orders index suggests a worsening in conditions. The new orders index plunged more than 10 points to minus 40.7.
Philadelphia Fed survey Consensus Forecast for April 09: -30.2
Range: -37.5 to -28.0
The Reuter's/University of Michigan's Consumer sentiment index edged slightly higher in March to 57.3. 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.
Consumer sentiment Consensus Forecast for preliminary April 09: 58.5
Range: 58.0 to 61.0
Econoday Senior Writer Mark Pender contributed to this article.
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