|
Markets have steadily adopted the green shoots view of the economy. But this past week a major hurdle stood in the way of keeping that belief — the Fed’s stress test of 19 major U.S. banks for capital adequacy. A finding that any of the major banks were still severely distressed would have set back apparent progress for the economy. There were leaks to the media on Wednesday about the test findings but the actual report on Thursday gave the markets what they wanted — banks that were either adequately capitalized to endure the possibility of a worsening recession or not needing too much additional capital to get there. And during the week, economic news also added to the view that the recession is easing, albeit slowly. Equities responded with a sigh of relief and a broad-based jump in stock prices for the week. Bond yields and oil prices also took notice of more evidence of green shoots.
 Two broad factors led to significant gains for most indexes this past week — more evidence of the recession easing and banks (using school grade analogies) passing the Fed’s stress test or not needing much extra credit to get there.
The week got off to a good start with pending home sales and construction outlays unexpectedly posting gains. Given the importance of housing for recovery, the pending home sales report was well received by equities. Also, supporting the boost in stocks was a report from China that manufacturing there was improving. Market chatter on Tuesday focused on the possibility that the Fed’s stress test of 19 major U.S. banks would find that many banks were severely undercapitalized — and stocks dipped despite the lack of news to back up the concern. But adding to the view of an easing recession was a better-than-expected ISM non-manufacturing index.
At mid-week, the ADP employment report showed a slower decline in private employment for April — more evidence of green shoots. And leaks to the media about bank stress test results indicated that overall banks were in better-than-expected shape, boosting financial stocks and markets in general. But on Thursday, the bond market actually took center stage as investors waited on the official release of stress test results at 5:00 p.m. ET Thursday. The 30-year T-bond auction was a flop as investors worried more about pending supply than about the Fed’s ability to maintain purchases without fueling inflation. Yields on 30-year T-bonds jumped and equities swooned. After the close, relatively favorable news on the Fed’s stress tests put investors in a good mood heading into Friday despite a sharp drop in consumer credit outstanding, indicating a sluggish consumer sector.
On Friday, the April jobs report showed another month of heavy payroll losses but fewer than expected and at a slower rate of decline than in recent months. Relief from getting past the bank stress tests and more evidence of green shoots led to a sharp gain in equities for the day and week net.
Equities were up this past week. The Dow was up 4.4 percent; the S&P 500, up 5.9 percent; the Nasdaq, up 1.2 percent; and the Russell 2000, up 5.1 percent.
For the year-to-date, major indexes are mixed as follows: the Dow, down 2.3 percent; the S&P 500, up 2.9 percent; the Nasdaq, up 10.3 percent; and the Russell 2000, up 2.5 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 The Treasury market was mostly quiet except on Thursday. A rash of better-than-expected economic news for the week finally spilled over into the 30-year T-bond auction. Demand was much weaker than anticipated and yields on the long bond spiked 18 basis points for the day. In sympathy, rates for the 10-year and 5-year Treasuries also jumped 16 and 11 basis points, respectively.
 Over the week, economic news added to concern that yields were too low. These included better-than-expected reports on pending home sales, construction outlays, ISM non-manufacturing, ADP employment, and the employment situation. Also boosting yields during the week was a flow of funds out of fixed income into equities.
For this past week Treasury rates were up as follows: 3-month T-bill, up 2 basis points, the 2-year note, up 6 basis points; the 5-year note, up 12 basis points; the 10-year bond, up 13 basis points; and the 30-year bond, up 19 basis points.
The yield curve has been gradually steepening due to a firming in long rates. This has been the result of concern over bulging supply pending and fears of higher inflation in coming quarters. Meanwhile, short yields have been kept near zero by the Fed.
 While many have been focusing on the green shoots as seen in the real economy based on economic reports, there has been progress in the stabilization of the financial markets. This has been seen in a continued drop in the TED spread – the difference in the 3-month LIBOR rate and 3-month T-bill. The 3-month LIBOR reflects the willingness of banks to lend to each other and the LIBOR dropped below 1 percent for the first time this past Tuesdays. The lower the TED spread, the less risk lenders see in the credit market for banks. This is good news for the world economy moving forward.
 Spot prices for West Texas Intermediate jumped significantly this past week. There were three basic reasons. As already noted, economic news has been better than expected and is seen as boosting oil demand. Next, the government reported a small-than-expected rise in crude stockpiles. Finally, oil is now following equities. Traders in the oil pits see equities as anticipating easing out of recession and starting recovery.
Net for the week, spot prices for West Texas Intermediate rose $5.43 per barrel to settle at $58.63 — and coming in $86.66 below the record settle of $145.29 per barrel set on July 3, 2008.
The economy is still in recession but there are additional signs that the rate of contraction is slowing. This increases the likelihood of an actual upturn coming sooner.
 Once again, better-than-expected is good news – even if quite negative by nearly any other standard. Non-farm payrolls fell a very steep 539,000 in April, following a 699,000 plunge in March. The good news is that markets are interpreting the lesser decline as the first step toward recovery. That is, before you actually have an increase in jobs, you have to have slower declines. That is what we got — less of a fall.
But there are caveats to the markets’ view of easing in the rate of decline. First, markets largely ignored the fact that both February and March were revised down by a net 66,000 — indicating greater-than-believed weakness in the labor market. Even more ignored was the fact that we already saw a deceleration in job decline in February only to see an even larger fall in employment in March. The bottom line is that we need several months of easier losses to start anticipating a real recovery sometime soon.
 By major categories, goods-producing jobs dropped 270,000 in April, led by a 149,000 fall in manufacturing employment. Construction declined 110,000 while natural resources & mining slipped 11,000 in the latest month. Service-providing payrolls fell 269,000 in April. This included a 126,000 drop in trade & transportation and a 122,000 decline in professional business services. The only area of strength was in government jobs, up 72,000 and reflecting a 63,000 rise at the federal level. This was largely a boost for temporary Census jobs.
 Not only are consumers worrying about keeping a job, but pay increases are slowing. Average hourly earnings were very weak in April, rising only 0.1 percent in what will hurt consumer spending power. On a year-ago basis, average hourly earnings rose 3.2 percent, down from 3.4percent in March. The average workweek was unchanged at 33.2 hours.
Turning to the household survey, the unemployment rate jumped 4 tenths to 8.9 percent, increasing chatter that the rate will top 10 percent. The civilian unemployment rate is at its highest since 9.2 percent for September 1983.
 While much economic news is pointing toward a green shoots scenario, that was not the case with consumer credit for March. In the steepest contraction since early in World War II, consumer credit outstanding fell $11.1 billion, following an $8.1 billion contraction in February ($7.4 billion first reported). The contraction for March was split evenly between revolving credit (largely credit cards) and non-revolving credit (primarily car loans). Consumers are retrenching, paying down their debts and trying to rebuild retirement savings. Also, many credit card companies have lowered credit lines to consumers. Finally, weakness in auto sales has pulled down consumer credit growth. Overall, there are not many green shoots in the consumer sector according to the consumer credit outstanding report.
 The recession began with the housing crunch and many economists believe a rebound in housing is needed before the economy truly can recover. And we may be seeing the very, very early signs of improvement in housing. The National Association of Realtors’ pending home sales index rose 3.2 percent to 84.6 in March. Pending home sales are existing homes that have been put under contract but not closed. This index points to improvement in existing sales for April and May, which are based upon actual closings. Gains were centered in the Midwest and South, but a decline in the West, where the housing collapse is centered, does pose the only bad news in the report.
Most likely, pending home sales have been boosted by government efforts to push mortgage rates lower in combination with financing incentives for first time home buyers and falling home prices. The rise in pending home sales is good news but it is just the first step toward full recovery for housing. Sales will not fully recover until jobs turn positive and unemployment comes down. Home prices will not rise significantly until sales have firmed and inventories have been worked off. And new construction will not rebound until inventories are down.
 Construction spending in March rebounded unexpectedly but housing outlays are still on a downtrend. Construction outlays posted a 0.3 percent gain in March, following a 1.0 percent decrease the month before. The rebound was led by private nonresidential spending which jumped 2.7 percent after a 0.7 increase in February. The public component also advanced 1.1 percent, following a 1.3 percent boost the month before. However, the private residential component continued its downward trend, falling 4.2 percent after a 5.9 percent plunge in February.
On a year-on-year basis, overall construction outlays weakened to down11.1 percent in March, from down 10.1 percent in February.
 Another sign that the recession is easing came from the ISM non-manufacturing index which rose nearly 3 points in April to 43.7. Yes, the non-manufacturing index rose from March, but it remained in negative territory as the April reading was below the breakeven point of 50.
Individual series also were less negative. New orders were especially strong, jumping more than 8 points to 47.0 and almost reaching the breakeven point. Employment also improved, up nearly 5 points to 37.0. Prices paid were little changed at 40.0 indicating month-to-month contraction at a steady rate.
On balance, the economic news this past week was both better-than-expected and reflected a slower rate of decline. Most likely, the end of the recession may arrive a little sooner than believed a few months ago. But the detail on the consumer sector — such as for consumer credit and continuing unemployment — suggests that when recovery does arrive, it will be sluggish.
The week ahead has quite a few market moving indicators. The week starts out with the international trade report on Tuesday. We get an important update on the consumer sector with retail sales on Wednesday. The Fed will be looking over its collective shoulder to see if its call for subdued inflation is confirmed with producer prices on Thursday and consumer prices on Friday. Also, on the last day of the trading week, we will get new numbers for industrial production — a key indicator on the status of the current economy.
The U.S. international trade gap 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. The improvement in the overall deficit was due primarily to a fall in nonoil imports. Looking ahead, the trade gap is expected to widen with higher import prices playing a key role. A 10.5 percent increase in petroleum prices for the month led to a 0.5 percent boost in overall import prices. But exports may partially offset with a rebound as Boeing reported a sharp increase in foreign deliveries of aircraft.
International trade balance Consensus Forecast for March 09: -$27.5 billion
Range: -$31.0 billion to -$25.3 billion
The March U.S. Treasury monthly budget report showed a deficit of $192.3 billion. Fiscal stimulus and various bailout plans have pushed federal spending up sharply. Half way through the fiscal year the deficit stands at $956.8 billion, about double the deficit at this time last year. Looking ahead, the month of April typically shows a sizeable surplus. Over the past 10 years, the average April surplus has been $107.7 billion and $84.6 billion over the past 5 years. The April 2008 surplus was $159.3 billion. But in today’s economy, past news is only useful for portraying the stark reality of how much federal spending is supporting the economy.
Treasury Statement Consensus Forecast for April 09: -$28.0 billion
Range: -$60.0 billion to -$20.0 billion
Retail sales dropped 1.1 percent in March after a 0.3 percent gain in February. Sales were weak across the board. But the strongest declines were seen in electronics & appliance stores, motor vehicles, and miscellaneous store retailers. Excluding motor vehicles, retail sales decreased 0.9 percent, after a 1.0 percent boost the month before. Our first glimpse at consumer spending for April was not good, hinting retail sales could decline further for the month. Unit new motor vehicle sales fell back to a 9.32 million unit annualized pace for the month after a 9.86 million unit rate in March – a 5.5 percent monthly decline.
Retail sales Consensus Forecast for April 09: +0.1 percent
Range: -0.6 to +0.6 percent
Retail sales excluding motor vehicles Consensus Forecast for April 09: +0.3 percent
Range: -0.2 to +0.8 percent
Business inventories have been shedding their inventories rapidly — but more slashing may still be ahead. Business inventories fell 1.3 percent in February against a 0.2 percent rise in business sales to shave two tenths off the stock-to-sales ratio to 1.43. Looking ahead, retail sales were negative in March, indicating that consumers were not helping to pare down inventories. But progress in bringing inventories in line may still be taking place. Manufacturers are producing less as reflected in a 0.8 percent drop in inventories at this level. Wholesalers also cut stocks by 1.6 percent for the same month. Retailers also may get help from cutbacks in imports.
Business inventories Consensus Forecast for March 09: -0.8 percent
Range: -1.1 to -0.1 percent
The producer price index dropped a sizeable 1.2 percent in March after firming 0.1 percent in February. Pushing the headline number down was a 5.5 percent drop in energy costs along with a 0.7 percent fall in food costs. Meanwhile, the core PPI rate eased to no change after a 0.2 percent boost in February. Looking ahead, a firming in oil prices likely will boost the headline PPI for April although discounting by producers may cut into the core rate.
PPI Consensus Forecast for April 09: +0.1 percent
Range: -0.4 to +0.4 percent
PPI ex food & energy Consensus Forecast for April 09: +0.1 percent
Range: +0.1 to +0.2 percent
Initial jobless claims fell a sizable 34,000 in the May 2 week to 601,000 for the lowest rate since late January. The drop pulled down the four-week average by 14,750 to 623,500 for the lowest level since mid-February. But continuing claims rose for a fourteenth straight week, spiking 56,000 to a new record 6.351 million.
Jobless Claims Consensus Forecast for 5/9/09: 609,000
Range: 590,000 to 625,000
The consumer price index declined 0.1 percent in March, following a 0.4 percent gain the month before. The deceleration in the headline CPI was led by a 3.0 percent dip in energy costs, following a 3.3 percent jump the month before. Gasoline fell 4.0 percent in the latest month. Meanwhile, core CPI inflation remained steady at 0.2 percent. Looking ahead, we will likely see a rebound in the headline number but a softer core rate for April. Higher energy costs probably will boost overall CPI inflation. For March, the core index was softened by declines in lodging away from home, used cars and trucks, and in apparel prices. These are likely to continue in April due to weak demand. Finally, in March there was a monthly 11.0 percent surge in prices for tobacco & smoking products due to higher taxes and this will not be repeated in April.
CPI Consensus Forecast for April 09: 0.0 percent
Range: -0.1 to +0.2 percent
CPI ex food & energy Consensus Forecast for April 09: +0.1 percent
Range: +0.1 to +0.2 percent
The Empire State manufacturing index showed a huge improvement in April, with the general business conditions index jumping nearly 25 points to a still contractionary minus 14.7. We may see further improvement in May as Empire’s new orders improved sharply in April, moving from March's very negative minus 44.8 to almost breakeven at minus 3.9 in April.
Empire State Manufacturing Survey Consensus Forecast for May 09: -12.0
Range: -23.2 to -10.0
Industrial production continued its downward spiral in March, falling 1.5 percent, matching the decline the previous month. But the manufacturing component was even more negative, falling 1.7 percent, following a 0.6 percent decrease the month before. Declines were broad-based with the exception of motor vehicles, which advanced slightly. However, there are signs that the contraction in manufacturing may be slowing. The ISM manufacturing index for April rose to 40.1 from 36.3 in March. The April rate was still in negative territory. Markets likely need to start paying attention to manufacturing excluding autos as Chrysler and GM have both been shuttering plants. According to the employment report for April, aggregate production hours in manufacturing dropped 0.9 percent, indicating a likely sharp drop in manufacturing output for the month. Capacity utilization hit a record low of 69.3 in March and likely will slip even further in April.
Industrial production Consensus Forecast for April 09: -0.6 percent
Range: -0.8 to -0.4 percent
Capacity utilization Consensus Forecast for April 09: 68.8 percent
Range: 68.7 to 69.3 percent
The Reuter's/University of Michigan's Consumer sentiment index picked up in the final April reading, continuing a run of less negative consumer confidence readings. The Reuters/University of Michigan index rose to 65.1 from a mid-month reading of 61.9 and a March reading of 57.3. But it has been a duel between current conditions and expectations. Consumers have grown more optimistic about future economic conditions than about the current situation. The latest report showed strength in expectations, rising to 63.1 from 58.9 at mid-month. However, if job market conditions continue to worsen, expectations could ease. Both current conditions and expectations indexes remain at very low levels.
Consumer sentiment Consensus Forecast for preliminary May 09: 67.0
Range: 64.9 to 70.0
Econoday Senior Writer Mark Pender contributed to this article.
|
![[Econoday]](images/econoday_logo_slim.gif){kind=logo}
![[Econoday]](images/logo.gif){kind=logo}