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Markets are continuing to adjust to the likelihood that the economy is in recovery. Equities rebounded further from lows earlier this year and there are signs of strengthening in the consumer sector and in international trade.
 Equities had a nice week despite a modest pullback at week end. Major indexes slipped on profit taking on Friday after posting five consecutive daily gains and reaching their highest levels in almost a year.
Gains were steady the first three days of this Labor Day shortened week. An upgrade for General Electric boosted equities on Tuesday while higher oil prices lifted the energy patch. Another upgrade—this time by Goldman Sachs—for various multi-industry companies led to stock gains on Wednesday. However, the Fed’s Beige Book was not quite as optimistic as hoped for and equities pulled off highs for the day. Economic news boosted stocks on Thursday as a bigger-than-expected drop in initial jobless claims led to more optimism by investors. Energy, tech, and consumer sectors were notably strong as major indexes set 11-month-plus highs.
Equities slipped on Friday despite a strong-than-expected consumer sentiment number for mid-September as lower oil prices undercut the energy sector and modest profit taking set in. Since the March 9, 2009 low (after billionaire investor Warren Buffett said the economy “has fallen off a cliff” and the World Bank predicted a global recession), stocks have rebounded significantly. Since the March 9 bottom, the Dow at week end was up 46.7 percent; the S&P 500, up 54.1 percent; the Nasdaq up 64.0 percent; and the Russell 2000, up 72.9 percent.
Equities were up this past week. The Dow was up 1.7 percent; the S&P 500, up 2.6 percent; the Nasdaq, up 3.1 percent; and the Russell 2000, up 4.0 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 9.4 percent; the S&P 500, up 15.4 percent; the Nasdaq, up 32.0 percent; and the Russell 2000, up 18.8 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 The traditional rules do not always apply in the context of a very international market—that certainly was the case this past week for Treasuries. Equities were up, but there was no reversal of flight-to-quality—or at least you could not see it. And economic data, net, were positive and there was no jump in rates. In fact, the biggest dip in rates this past week was after a larger-than-expected drop in jobless claims on Thursday. The 30-year T-bond auction on Thursday was particularly strong.
But international investors are coming into play—literally. The dollar has fallen significantly in recent weeks and that has made U.S. dollar denominated securities look cheap. For now, inflation is not a worry but that could change in coming months.
For this past week Treasury rates were mixed but mostly down as follows: 3-month T-bill, up 1 basis point; the 2-year note, down 3 basis points; the 5-year note, down 6 basis points; the 7-year note, down 10 basis points; the 10-year bond, down 10 basis points; and the 30-year bond, down 10 basis points.
 Crude oil prices made a partial rebound this past week. Even though the bond market for now has retreated slightly from inflation worries, that is not the case for commodities markets. The dollar declined significantly on Monday, boosting the spot price for West Texas Intermediate significantly, topping the $71 per barrel mark. Oil and other commodities—notably gold and silver—have been pushed up on inflation concerns and on signs that the world economy is improving. This past week, oil largely followed gold up as this precious metal jumped almost $12 an ounce for the week to close at $1,007.60. However, oil slipped the last day of the week, bringing the price back below the $70 level. Oil dropped after not breaking through the month’s high of $72.90, leading many traders to sell futures.
Net for the week, spot prices for West Texas Intermediate rose $1.27 per barrel to settle at $69.29.
We had limited economic news this past week. But there is a thawing in global trade and the consumer is showing a little more optimism. Still, the latest news points to a recovery that is sluggish.
 Curiously, a negative trade number is indicating greater optimism on the part of U.S. businesses. The U.S. trade deficit in July worsened significantly and oil had only a little to do with it. Businesses appear to be gambling on recovery actually happening as non-oil imports spiked. The overall U.S. trade gap worsened to $32.0 billion from a revised $27.5 billion gap in June. But in the detail, there is good news for U.S. manufacturers as exports posted a gain of 2.2 percent after a 2.1 percent increase in June. Imports jumped 4.7 percent after a 2.5 percent rise in June.
 The worsening in the trade deficit was due to a wider nonpetroleum goods deficit which grew to $23.5 billion from $19.8 billion the previous month. Import gains were widespread but led by autos and consumer goods. The jump in auto imports likely was related to the cash-for-clunkers program. Imports of capital equipment also rose sharply, indicating that businesses are starting to look ahead for upgrading production facilities as the economy rebounds.
Meanwhile, the petroleum gap grew to $17.9 billion from $17.3 billion the previous month. The wider petroleum deficit was due to both higher oil prices and more barrels imported. Crude oil prices jumped to $62.48 per barrel from $59.17 in June. The number of barrels that was imported in July rose 5.7 percent. Nonetheless, the widening in the oil deficit was far less than that for the non-oil gap.
Even though imports were boosted temporarily by the cash-for-clunkers program, the July import numbers reflect increased business optimism as they still anticipate demand to be up for consumer goods excluding autos and for capital equipment. And manufacturing is getting a boost from exports. Overall, global trade is warming up a bit and that is good news.
On a technical note, the inflation-adjusted trade deficit widened to $38.8 billion in July from $35.8 billion the month before. This will likely trim many economists’ forecast for third quarter GDP growth (yes, growth, not decline).
 A weaker dollar and higher prices for oil and other commodities are boosting import price inflation. Import prices rose 2.0 percent in August reflecting a 10.5 percent jump in prices for imported petroleum products mostly crude. Excluding petroleum products, imported prices rose a sharp 0.4 percent. Prices of imported manufactured goods rose a steep 0.6 percent from both industrialized and non-industrialized countries. Prices of all imports from China rose 0.2 percent which is a sizable rise for this category.
 But by end-use categories, a different picture breaks out. Most of the inflation is for oil and other commodities. Industrial supplies & materials spiked 6.1 percent in the latest month—but this category includes petroleum. Excluding petroleum, it was up 1.4 percent.
Businesses are paying only a little more for capital equipment, which edged up 0.1 percent.
Consumers generally are not seeing import price inflation yet. Consumer goods excluding autos actually fell 0.2 percent while autos edged up 0.2 percent. The one area where consumers are seeing higher import prices is for eating and drinking. The food, feeds & beverages component jumped 2.1 percent.
Price inflation currently is limited to food, energy, and various industrial supplies & materials. Worldwide demand at the consumer level is still soft. But in coming months, higher oil and other input prices could lead to inflation at the consumer level unless there is restraint in monetary and fiscal policy.
 The consumer sector may finally be joining the recovery as consumer sentiment rose in September. Still, no one is accusing the consumer of starting a raucous spending party. Consumer sentiment picked up nicely in the first half of the month, extending last month's second half gain. Reuters/University of Michigan's consumer sentiment index rose 4-1/2 points to 70.2 with gains split evenly between expectations, now at 69.2, and the assessment of current conditions, at 71.8.
The overall index number was still below the recent high of 70.8 for June but September’s level was significantly above the recession low 55.3 for November 2008.
 While consumers are starting to have a little more confidence in the economic outlook, they are continuing to improve their balance sheets by paying down debt. Also, banks are trying to limit their lending exposure by lowering credit availability. Consumer credit contracted $21.6 billion in July, a very severe reading and the largest on record. Credit declines have been sharp for six months in a row—also setting the longest streak of decreases since the credit squeeze of 1991. For the latest month, nonrevolving credit led the decline, at minus $15.4 billion in a surprise given cash-for-clunkers which kicked off late that month. Given that unit new motor vehicle purchases spiked a monthly 25.4 percent in August, it would be a big surprise if there was another deep contraction in non-revolving credit during August. Revolving credit in July fell $6.1 billion.
The bottom line is that after the cash-for-clunkers effect is over, the consumer is still in defensive mode and will be cautious about boosting spending. The engine of economic growth for recovery will have to be sectors other than the consumer, although the consumer likely will not be a negative.
The Fed’s latest Beige Book, containing up-to-date anecdotal economic news from 12 District Banks, indicated that economic activity continued to stabilize in July and August. Some Banks even reported "signs of improvement." The outlook for economic activity among Fed business contacts remained "cautiously positive."
For the consumer sector, most Districts reported flat retail sales while most indicated that the "cash-for-clunkers" program boosted auto sales. Importantly, residential real estate is improving in most markets but downward pressure on home prices continued in most Districts. The market for commercial real estate is weak and nonresidential construction continued to decline.
Credit markets remain tight and this is still a concern for the Fed as some Districts indicated a weakening in loan demand while others reported scattered improvement. Mortgage activity was mixed in direction. Lack of available credit is said to be holding back residential and commercial construction.
Wage pressures were described as "minimal," reflecting "weak" labor markets. However, some Districts report an uptick in temporary hiring and a decline in the pace of layoffs. The gain in temporary workers is good news as it often is a leading indicator for overall hiring over the business cycle. Retail prices were generally steady.
A notable positive from the Beige Book is that most Districts reported modest improvements in the manufacturing sector with many Districts reporting slight-to-moderate increases in new orders. A majority of Districts indicated that manufacturers see the near-term outlook as "cautiously optimistic."
The bottom line is that the latest Beige Book reports that the economy is on track for recovery, although a slow one. The Fed still has ample room for continuing to keep liquidity in markets as both wage and price pressures are minimal. Equities eased somewhat from earlier gains for the day.
There are more signs that the recovery is underway or about to begin. The consumer is a little more positive but it's going to take other sectors to strengthen the recovery. This coming week gives us updates on those possible engines of growth—manufacturing and housing. And we get to see just how much consumers are opening up their wallets and purses.
This week is loaded with market moving indicators. We get inflation updates with the PPI on Tuesday and CPI on Wednesday. The health of the consumer is checked with Tuesday’s retail sales. And the goods-producing sector is highlighted with industrial production on Wednesday and housing starts on Thursday.
The producer price index in July fell sharply on both declines in food and energy, dropping 0.9 percent after spiking 1.8 percent in June. Meanwhile the core PPI rate eased sharply to 0.1 percent dip, following a 0.5 percent surge in June. The core rate in July eased largely on a 0.7 percent drop in prices for light trucks. Looking ahead, a seasonally strong gain in oil prices (West Texas Intermediate, up about 14 percent seasonally adjusted) is likely to boost the headline PPI in August.
PPI Consensus Forecast for August 09: +0.8 percent
Range: -0.3 to +2.0 percent
PPI ex food & energy Consensus Forecast for August 09: +0.1 percent
Range: -0.1 to +0.3 percent
Retail sales slipped 0.1 percent in July, following a revised 0.8 percent boost the month before. Excluding motor vehicles, retail sales dropped 0.6 percent, following a revised 0.5 percent rise in June. Weakness was led by gasoline and sales excluding motor vehicles and gasoline, retail sales fell 0.4 percent. Looking ahead, sales should get a boost from autos and gasoline. Already, we have seen a 25.4 percent monthly surge in unit new motor vehicle sales for August and gasoline prices also firmed for the month.
Retail sales Consensus Forecast for August 09: +2.0 percent
Range: +0.8 to +2.9 percent
Retail sales excluding motor vehicles Consensus Forecast for August 09: +0.4 percent
Range: +0.1 to +0.8 percent
The Empire State manufacturing index returned to positive growth territory in August, jumping to 12.08 from July's minus 0.55 for its best reading since the start of the U.S. recession. Odds are the index will stay positive in September as August’s new orders index showed a second month of actual month-to-month growth at 13.43—up sharply from July's 5.89.
Empire State Manufacturing Survey Consensus Forecast for September 09: 14.0
Range: 8.0 to 18.0
Business inventories fell 1.1 percent in June to extend a long string of declines and reflecting businesses adjusting stocks to match the drop in demand over the recession. For July, early numbers on manufacturing inventories showed a 0.9 percent drop while wholesale inventories declined 1.4 percent. Both will be tugging down on total business inventories for the month with retail inventories being the missing piece of the puzzle.
Business inventories Consensus Forecast for July 09: -0.9 percent
Range: -1.1 to -0.5 percent
The consumer price index was flat in July after surging 0.7 percent the month before. Core CPI inflation slowed to a 0.1 percent uptick in July after rising 0.2 percent in June. Helping to soften the July headline number was a decline in energy costs. Helping both the headline and core rates to ease were unchanged rent and owners’ equivalent rent along with a drop in lodging away from home, which includes hotels. Looking ahead, a seasonally strong gain in oil prices (West Texas Intermediate, up about 14 percent seasonally adjusted) is likely to boost the headline CPI in August.
CPI Consensus Forecast for August 09: +0.4 percent
Range: -0.1 to +0.5 percent
CPI ex food & energy Consensus Forecast for August 09: +0.1 percent
Range: -0.1 to +0.1 percent
Industrial production in July jumped 0.5 percent, following a 0.4 percent decline the month before. The manufacturing component was even stronger, posting a 1.0 percent increase after contracting 0.6 percent in June. Overall capacity utilization in July improved to 68.5 percent, rising from a record low of 68.1 percent in June. Looking ahead, the typical prognosticating numbers for industrial production are mixed. The ISM, Philly Fed, and New York Fed manufacturing indexes all jumped into positive territory in August. However, production worker hours for manufacturing fell 0.5 percent for the month. Nonetheless, an almost certain boost in motor vehicle assemblies will lead to another gain in industrial production.
Industrial production Consensus Forecast for August 09: +0.7 percent
Range: -0.2 to +1.5 percent
Capacity utilization Consensus Forecast for August 09: 69.0 percent
Range: 68.3 to 69.7 percent
Housing starts in July slipped from June's gain but the important single-family component continued its uptrend. Overall housing starts in July edged down 1.0 percent to an annualized pace of 0.581 million units. But single-family starts have risen five months in a row with this component rising 1.7 percent in the latest month. Single-family starts were up 37.3 percent from the recession low. The recent uptrend in single-family starts is good news but the rate of improvement is not likely to continue given that supply of unsold homes on the market remains high.
Housing starts Consensus Forecast for August 09: 0.600 million-unit rate
Range: 0.580 million to 0.625 million-unit rate
Initial jobless claims fell a substantial 26,000 in the week ending September 5 to 550,000. Aside from adjustment-related volatility during the summer auto shutdowns, the latest level is the lowest since the very beginning of the year.
Jobless Claims Consensus Forecast for 9/12/09: 575,000
Range: 550,000 to 590,000
The general business conditions component of the Philadelphia Fed's business outlook survey index climbed sharply in the latest report from minus 7.5 in July to plus 4.2 in August. And there likely is further improvement ahead as the new orders index also pulled up and over breakeven—rising to plus 4.2 from minus 2.2 in July.
Philadelphia Fed survey Consensus Forecast for September 09: +8.0
Range: +5.0 to +14.4
Quadruple Witching
Econoday Senior Writer Mark Pender contributed to this article.
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