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The economic indicator news was somewhat scarce this past week but net positive. Overall, company news and the start of earnings season generally were better than expected, giving equities solid gains for the week.
 Most major indexes rebounded significantly this past week with small and mid-caps leading the way. Economic news was primarily positive with the key exception being a sharp drop in consumer credit. But on the plus side, the ISM non-manufacturing index lifted equities on Monday as the September number rose into positive territory. On Tuesday, stocks got an unexpected bump up from overseas as the Reserve Bank of Australia raised its key lending rate by 25 basis points. This led investors to raise their views on the strength of the world economy. The rate hike also led to a surge in the price of gold and equities followed. Despite a sharp drop in consumer credit on Wednesday, stocks were little changed for the day, waiting for Alcoa’s after close earnings report. On Thursday, an unexpectedly strong drop in initial jobless claims pushed stocks up. Relatively strong chain store sales for September also supported equity gains. Finally, a narrowing in the U.S trade deficit helped stock gains at week end.
Key company news included upgrades on major banks by Goldman Sachs, news that boosted financials early in the week. Also early in the week, traders ramped up their expectations for the quarter earnings—notably for Alcoa’s Wednesday report. Alcoa beat expectations significantly on Wednesday after close but was a key factor in Thursday’s rise in stocks. The Alcoa numbers’ impact continued into Friday as traders continued to upgrade their views on third quarter earnings. The Dow ended the week near a 52 week high.
Equities were up this past week. The Dow was up 4.0 percent; the S&P 500, up 4.5 percent; the Nasdaq, up 4.5 percent; and the Russell 2000, up 6.0 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 12.4 percent; the S&P 500, up 18.6 percent; the Nasdaq, up 35.7 percent; and the Russell 2000, up 23.1 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields swung significantly during the week but ended the week notably higher. Yields eased on Wednesday as the 10-year auction went better than expected with indirect bids—which include foreign central banks—sizeable, making 47.4 percent of the purchases. But the easing in rates was short-lived. The 30-year auction on Thursday did not go well and rates rose. A sharp decline in initial unemployment claims also bumped yields up. Finally, Fed Chairman Ben Bernanke spoke Thursday evening and stated that the Fed would make sure that balance sheet expansion would not get out of hand and run up inflation expectations. His comments that the Fed would unwind its balance sheet expansion when needed was seen as implying that rate hikes could come sooner than many had believed, boosting Treasury yields sharply on Friday. Throughout the week, equity and commodity gains also led funds out of Treasuries.
For this past week Treasury rates were mostly up as follows: 3-month T-bill, down 3 basis points; the 2-year note, up 10 basis points; the 5-year note, up 13 basis points; the 7-year note, up 14 basis points; the 10-year bond, up 16 basis points; and the 30-year bond, up 22 basis points.
 Crude oil prices continued to firm this past week. Throughout most of the week, a weaker dollar helped boost the spot price of West Texas Intermediate. Causing significant daily price gains were an unexpectedly strong ISM non-manufacturing report on Monday and strong retail sales and a drop in jobless claims on Thursday. In between, however, on Wednesday an unexpected rise in inventories of gasoline and distillate fuel bumped the price of crude down.
Net for the week, spot prices for West Texas Intermediate rose $1.82 per barrel to settle at $71.77 – and coming in 50.6 percent below the record settle of $145.29 per barrel set on July 3, 2008.
Although economic news was somewhat sparse this past week, it certainly was diverse. The consumer sector is still struggling but the trade sector is slowly improving. Also, a nonmanufacturing survey adds to the argument that the recession is over—but it is still hard to tell.
 The U.S. trade gap narrowed in August as oil imports slipped. The overall U.S. trade gap unexpectedly narrowed to $30.7 billion from a revised $31.9 billion shortfall in July. In the latest month, exports improved by 0.2 percent while imports declined 0.6 percent. The shrinking of the trade deficit was due to a narrower petroleum shortfall which came in at $16.5 billion compared to $17.8 billion the previous month. The nonpetroleum gap expanded to $24.3 billion from $23.6 billion in July.
 While exports were up 0.2 percent, there were divergent trends in components. Goods exports actually declined 1.6 percent but would have been up were it not for a sharp decline in civilian aircraft exports. Nonetheless, exports of industrial supplies and autos were up significantly. Also, services exports were up on the “other transportation” component which includes items such as business, professional, and technical services, insurance services, and financial services.
Imports fell on lower imports of crude oil and consumer goods. The narrowing in the petroleum deficit was due to fewer barrels brought in as the price of imported oil rose to $64.75 per barrel from $62.48 in July. However, auto imports were up notably on cars being brought in from Canadian plants to help meet demand from the cash-for-clunkers program.
Year-on-year, overall exports rose to minus 20.7 percent from minus 22.2 percent in July while imports improved to down 28.6 percent from minus 30.3 percent the prior month.
Overall, the August trade data show modest improvement in real terms and will add slightly to third quarter growth, partially offsetting the worsening in balance in July.
 The consumer sector is still showing signs of ill health as consumer credit outstanding contracted a steep $12.0 billion in August after a giant $19.0 billion drop in July. The decline reflects consumer retrenchment from credit card based spending, consumers paying down credit card debt, lower credit limits imposed by credit card companies, and write offs on bad debt on credit cards. Revolving credit outstanding fell $9.9 billion, following a $2.4 billion decline in July. The average credit card rate rose to 13.71 percent in August from a second-quarter average of 13.31 percent, likely due to more accounts being placed at the default interest rate. Non-revolving credit got support from cash-for-clunker sales, helping to limit the decrease in August to only $2.1 billion—much less severe than July's $16.6 billion contraction. The bottom line is that the consumer sector is still quite constrained over debt issues. While some retailers are reporting improvement in sales, it is unlikely that consumer spending is going to be robust anytime soon.
 Another sign of recovery was the ISM's non-manufacturing index finally pushing beyond the breakeven mark of 50, rising to 50.9 in September for a solid 2-1/2 point gain. And there appears to be improving forward momentum as the new orders index rose more than 4 points to 54.2. Also, the backlogs index spiked 10-1/2 points to 51.5 to underscore the strength. While overall business is improving, that is not yet translating into new jobs. Businesses in ISM's sample more often than not were still cutting employees, with the employment index little changed and still in negative territory at 44.3. Prices, at 48.8, dipped slightly in the month following the prior month's surge. Overall, the report is consistent with a modest recovery for the non-manufacturing sector.
Get used to it. You are going to hear dozens of Fed speeches in coming months on the status of the Fed’s balance sheet. And Fed Chairman Ben Bernanke just contributed his own update speech this past week. The Fed has a tough balancing act—making sure the recovery progresses and making sure that inflation does not flair up further down the road. For now and many months in the future, it’s all about the Fed’s balance sheet and the Fed trying to get markets to believe that it will withdraw liquidity at the right time.
Bernanke stated, "When the economic outlook has improved sufficiently, we will be prepared to tighten the stance of monetary policy and eventually return our balance sheet to a more normal configuration."
Bernanke commented that the Fed’s quantitative easing has improved credit markets—notably for the mortgage market.
"The principal goals of our recent security purchases are to lower the cost and improve the availability of credit for households and businesses. As best we can tell, the programs appear to be having their intended effect. Most notably, 30-year fixed mortgage rates, which responded very little to our cuts in the target federal funds rate, have declined about 1-1/2 percentage points since we first announced MBS purchases in November, helping to support the housing market."
The Fed chief sees some of its credit programs unwinding on their own as the economy improves. But he indicates that the Fed has a plan to ensure a return to an anti-inflation stance when needed and implied where markets should be looking for signs of Fed tightening—an increase in the rate the Fed pays on reserves on deposit at the Fed for banks and a decline in reserves.
"However, even if our balance sheet stays large for a while, we have two broad means of tightening monetary policy at the appropriate time--paying interest on reserve balances and taking various actions that reduce the stock of reserves. In principle, we could use either of these approaches alone; however, to ensure effectiveness, we likely would use both in combination."
The bottom line is that the Fed wants to both make sure the recovery takes hold and that inflation does not resurge. This will be a tricky balancing act but at least the Fed knows it.
The economy is slowly improving but with the consumer sector much softer at this point in recovery than is typical. Investors, nonetheless, have been pleasantly surprised by initial news on third quarter earnings being stronger than expected. But the economic data continue to suggest that one has to be choosy about which sectors are going to improve significantly—and the consumer sector likely is not one of them.
This week, market moving indicators cover a variety of sectors. With unexpected strength in some department store sales recently, September retail sales will get heightened market attention on Wednesday. We get an inflation update on Thursday with the consumer price index. And the industrial production report on Friday will provide more ammunition for the debate on whether the recession has ended.
Columbus Day holiday, stocks and futures markets open, banks closed.
The U.S. Treasury monthly budget report showed a deficit in August of $111.4 billion—little changed from $111.9 billion in August last year. But when adjusting for shifts in the timing of stimulus payments, the Congressional Budget Office estimates that August's deficit rose by $50 billion versus a year ago. The fiscal year-to-date deficit is at $1.378 trillion versus $500.5 billion a year ago. Looking ahead, the month of September typically shows a large surplus due to quarterly filings and the extended due date for corporate returns. Over the past 10 years, the average surplus for the month of September has been $107.7 billion and $84.6 billion over the past 5 years.
Treasury Statement Consensus Forecast for September 09: -$31.0 billion
Range: -$98.0 billion to -$30.0 billion.
Retail sales were stronger than expected in August—boosted by cash-for-clunkers and higher gasoline prices. Overall retail sales jumped 2.7 percent in August, following a 0.2 percent drop the previous month. Government incentives jacked up auto sales a huge 10.6 percent for the latest month. Excluding motor vehicles, retail sales were still strong, rebounding 1.1 percent, following a 0.5 percent fall in July. But the news will likely be mixed for September as motor vehicle sales plunged sharply in September. But department store sales were up for the month and could lead the ex-auto number up.
Retail sales Consensus Forecast for September 09: -2.1 percent
Range: -2.6 to -1.3 percent
Retail sales excluding motor vehicles Consensus Forecast for September 09: +0.3 percent
Range: -0.2 to +0.5 percent
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, import prices rose a sharp 0.4 percent. Looking ahead, oil prices are likely to have only a modest impact on the September headline number for import prices—spot prices for West Texas Intermediate were up only 1.7 percent for the month. Also, commodity prices have dipped since August.
Import prices Consensus Forecast for September 09: NA percent
Range: NA to NA percent
Business inventories fell 1.0 percent in July following a 1.4 percent draw in June. In contrast to inventories, business sales were up, 0.1 percent higher in July and adding incrementally to June's major 1.1 percent jump. Looking ahead, we are likely to see sizeable decline in business inventories for August. Factory inventories fell 0.8 percent in August while wholesale inventories dropped 1.3 percent.
Business inventories Consensus Forecast for August 09: -0.9 percent
Range: -1.3 to -0.5 percent
The Minutes of the September 22-23 FOMC meeting are scheduled for release at 2:00 p.m. ET. Fed officials—including Chairman Bernanke—have been saying both that interest rates will remain low for some time and also that the Fed will unwind balance sheet expansion quickly when needed. Traders will be looking for more information on the Fed’s exit strategy and on the Fed’s view of the economy. Signs of internal disagreement on pending policy changes could move markets.
The consumer price index jumped 0.4 percent in August after no change in July. In the latest month, energy costs spiked 4.6 percent after a 0.1 percent dip in July while food inflation firmed to up 0.1 percent from down 0.3 percent in July. However, core CPI inflation remained steady with a 0.1 percent gain. The cash-for-clunkers tax credits helped push prices for new vehicles down by 1.3 percent. Apparel slipped 0.1 percent. Looking ahead, the September headline CPI should be relatively tame as gasoline prices have eased.
CPI Consensus Forecast for September 09: +0.1 percent
Range: 0.0 to +0.3 percent
CPI ex food & energy Consensus Forecast for September 09: +0.1 percent
Range: +0.1 to +0.2 percent
Initial jobless claims fell a sharp 33,000 in the October 3 week to a 521,000 level. The four-week average came in at 539,750, down 9,000 in the week. Continuing claims also fell, down 72,000 in data for the September 26 week to 6.040 million.
Jobless Claims Consensus Forecast for 10/10/09: 520,000
Range: 500,000 to 530,000
The Empire State manufacturing index rose nearly 7 points in September to 18.88. This was the highest since November 2007 when the index hit 25.02. Prospects look good for October as the September new orders index advanced nearly 6-1/2 points to 19.84
Empire State Manufacturing Survey Consensus Forecast for October 09: 17.5
Range: 11.0 to 20.0
The general business conditions component of the Philadelphia Fed's business outlook survey index rose solidly to 14.1 for September from 4.2 in August. But we could get some slippage in October as the new orders index eased to 3.3 from 4.2 in August.
Philadelphia Fed survey Consensus Forecast for October 09: 12.5
Range: 10.0 to 15.0
Industrial production in August increased a hefty 0.8 percent, following a revised 1.0 percent boost in July. For the latest month, the manufacturing component rose 0.6 percent after surging 1.4 percent in July. A big boost came from restocking auto inventories as the motor vehicle component jumped a monthly 5.5 percent in August after ramping up an enormous 20.1 percent the month before. But the really good news is that overall production excluding motor vehicles was still up a healthy 0.6 percent for August—for manufacturing ex-autos was up 0.4 percent. Overall capacity utilization in August improved to 69.6 percent in August from 69.0 percent the month before. Looking ahead, industrial production could decline in September as auto assemblies are likely to ease. Also, production hours in manufacturing fell 0.5 percent for the month. Nonetheless, the consensus anticipates a modest gain for industrial production.
Industrial production Consensus Forecast for September 09: +0.2 percent
Range: -0.1 to +0.5 percent
Capacity utilization Consensus Forecast for September 09: 69.6 percent
Range: 69.4 to 70.0 percent
The Reuter's/University of Michigan's Consumer sentiment index rose more than 3 points from mid-month to 73.5. The advance from the final August reading was nearly 8 points. Gains were split roughly evenly between the assessment of current conditions and the assessment of the outlook.
Consumer sentiment Consensus Forecast for preliminary October 09: 74.0
Range: 71.0 to 76.0
R. Mark Rogers is the author of The Complete Idiot’s Guide to Economic Indicators, Penguin Books.
Econoday Senior Writer Mark Pender contributed to this article.
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