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Equities rose for the second week in a row despite a sharp retrenchment in consumer sentiment. Also, there were hints of rising inflation pressures. The good news was an expansion in global trade.
 Equities got limited guidance this past week from U.S. economic indicators. And even when economic news did come out on Friday on international trade and consumer sentiment, equities focused on relatively positive company news. The week got off to a good start with a nice gain for equities on Monday, led by comments by G-20 leaders that economic stimulus would remain in place. The dollar dropped as stocks jumped. After a choppy and mixed Tuesday, equities got a boost from overseas on news of a surge in China’s industrial production. The boost is expected to lead to Chinese demand for goods from other countries—including the U.S.
Equities fell back on Thursday despite an unexpected dip in initial jobless claims as investors rethought whether gains were sustainable given the fundamentals of the economy—including a very soft consumer sector. But stocks made a comeback at week end even though consumer sentiment dropped sharply in a report released Friday morning. The positive news surprisingly came from the consumer sector as Walt Disney, Abercrombie & Fitch, and J.C. Penney topped expectations. But the good news was more from the bottom line than the top line as retailers have done a good job of cutting costs as revenues stay sluggish. Also supporting equities on Friday was the export component of the international trade report. The deficit widened but a gain in exports was favorable to companies reliant on overseas demand. Net for the week, the remaining key question is how strong or weak is the consumer sector' Currently, the evidence weighs on the negative side despite stock gains.
Equities were up this past week. The Dow was up 2.5 percent; the S&P 500, up 2.3 percent; the Nasdaq, up 2.6 percent; and the Russell 2000, up 1.0 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 17.0 percent; the S&P 500, up 21.1 percent; the Nasdaq, up 37.5 percent; and the Russell 2000, up 17.4 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields eased this past week despite heavy auction offerings by the Treasury. During the Veterans Day shortened trading week, the Treasury auctioned $40 billion in 3-year notes Monday, $25 billion in 10-year notes on Tuesday, and $16 billion in 30-year bonds on Thursday. Foreign demand was strong and the Treasury got some help on Thursday with the day’s selloff in equities as funds flowed into safe havens. Bond yields were mostly weak on Friday despite a surge in equities as bond traders were sobered by the day’s news of a drop in consumer sentiment. Overall, bond traders are seeing the economy as softer than as seen by equities investors. Due to heavy demand and a still mostly benign inflation outlook in the near-term, yields remain soft. The big question is how long can this market last with looming supply and inflation nowhere to go but up'
For this past week Treasury rates were mostly down as follows: 3-month T-bill, up 1 basis point; the 2-year note, down 4 basis points; the 5-year note, down 5 basis points; the 7-year note, down 6 basis points; the 10-year bond, down 8 basis points; and the 30-year bond, down 5 basis points.
 Crude oil prices fell significantly this past week on unexpectedly high inventories. According to the Energy Department, supplies of crude oil rose 1.76 million barrels to 337.7 million last week, reflecting soft demand. Spot prices for West Texas Intermediate fell by more than $2 per barrel on the news on Thursday (inventory numbers were a day late due to Veterans Day). Refinery operating rates were reported at the lowest level in over a year. Also, helping to bump prices lower at week end was a report by the International Energy Agency that OPEC’s production in October rose substantially.
 Net for the week, spot prices for West Texas Intermediate fell $1.08 per barrel to settle at 76.35. This is the lowest settle price since $73.75 per barrel seen for October 13, 2009.
While prices have softened over the last month, current prices are still significantly higher than below $40 per barrel during early this year.
The economic news was mixed this past week. The consumer was in hunker down mode as sentiment dropped sharply. The international trade deficit widened sharply but a gain in exports was encouraging. Import prices jumped on a rise in crude oil but manufacturers liked the rise in export prices.
 The headline number clearly was not good, but the details in the September international trade deficit were encouraging. The good news is that the freeze up in global trade appears to be thawing as U.S. export rose significantly. The overall U.S. trade deficit widened to $36.5 billion from a revised $30.7 billion worth of red ink in August. Exports rose 2.9 percent while imports jumped 5.8 percent. The worsening of the trade deficit was led by a wider petroleum shortfall which came in at $20.5 billion compared to $16.6 billion the previous month. The nonpetroleum gap increased to $25.9 billion from $24.3 billion in August.
 The widening in the petroleum deficit was due to both more barrels imported and higher prices. Physical barrels imported increased 6.6 percent in September after dropping 9.4 percent the month before. The price of imported oil rose to $68.17 per barrel from $64.75 in August.
The widening in the September deficit is going to shave some of the growth off of the initial estimate of third quarter GDP. In real dollars, the growth in the trade gap was significant—expanding from $37.0 billion in August to $41.7 billion in September. Although other data will come into play, the trade data have raised the odds of a notable downward revision to third quarter GDP growth.
But looking ahead, the rise in exports appears to be more real than the boost in imports in the latest monthly numbers. Imports were up on higher oil prices, more barrels of oil, and more automotive imports from Canada. The gain in autos was to replenish auto inventories after cash-for-clunkers. Non-auto imports were up moderately. But manufacturers are benefitting from a lower dollar and healthy gains were seen in capital goods, autos, and consumer goods.
 Although the Fed’s latest FOMC announcement claimed that inflation is subdued for now, the October import prices report likely has the Fed a little more worried about potential future inflation. Import prices jumped 0.7 percent in October driven by a jump in natural gas prices which soared 24 percent but are since on the retreat. Petroleum prices also contributed with a 0.9 percent boost.
 Industrial supplies, which include metals, are extending their run of increases.
Commodity prices—including oil—are notoriously volatile. But the latest report is disconcerting in that price pressures have spread to finished goods. There was an atypical rise for imported capital goods, up 0.2 percent and following a long run of no-change readings. Prices for imported consumer goods rose 0.3 percent following a run of mostly negative readings.
The year-on-year rate for import prices looks benign at minus 5.7 percent. But that figure goes back a few months too far and obscures the recent trend. The Bureau of Labor Statistics noted that the index is up 8.1 percent since February.
The bottom line is that weakness in the dollar, higher commodity prices, and demand overseas are likely creating the first source of inflation pressure this cycle in the U.S. economy. The Fed cannot ignore this for long.
 Rising unemployment and no improvement in sight for hiring have the consumer worried. And it clearly showed in the latest reading on consumer sentiment. The Reuters/University of Michigan's reading on confidence, the consumer sentiment index, fell back a very steep 4.6 points to a very weak 66.0 for November. Weakness was split between current conditions and the outlook. The fall in confidence bodes ill for holiday spending. Also, the drop in the expectations index will weigh on the Conference Board’s index of leading indicators as it is one of the components.
We still have divergent trends in sector growth for the current recovery. Manufacturing is getting a boost from exports while the consumer sector is still weak.
We make up for last week’s light schedule with a boat load of market moving indicators this week. We get an important update on the consumer sector with retail sales on Monday. We get a double dose of data on the goods-producing sector as the Fed posts its industrial production report on Tuesday and housing starts are released Wednesday. And there are two inflation reports out—the PPI on Tuesday and the CPI on Wednesday.
Retail sales in September dropped 1.5 percent after a 2.2 percent spike the month before. The decline was led by a 10.4 percent plunge in auto sales after a 7.8 percent boost in August. But outside of autos, sales were mostly healthy. Excluding motor vehicles, retail sales advanced 0.5 percent, following a 1.0 percent jump in August. Looking ahead, an October rebound in unit new motor vehicle sales points to a headline gain for retail sales for the month with higher gasoline prices also coming into play. But outside of autos and gasoline, retail sales are likely to be sluggish.
Retail sales Consensus Forecast for October 09: +0.9 percent
Range: +0.2 to +1.8 percent
Retail sales excluding motor vehicles Consensus Forecast for October 09: +0.4 percent
Range: 0.0 to +0.6 percent
The Empire State manufacturing index jumped to 34.57 in October from 18.88 in the previous month. The Empire State headline index has been above breakeven since August and has been steadily rising. We are likely to see another healthy positive number for November as the new order index for October came in at 30.82 and the unfilled orders index is back into positive territory.
Empire State Manufacturing Survey Consensus Forecast for November 09: 29.0
Range: 26.0 to 35.0
Business inventories in August fell 1.5 percent, following a 1.1 percent decline in July. For the latest month, retailer inventories dropped a clunker-skewed 2.3 percent but excluding autos slipped only 0.3 percent. Manufacturers’ inventories declined 1.0 percent in August while wholesalers fell 0.9 percent. More recently, manufacturers’ inventories dropped 1.0 percent again in September and wholesale inventories declined 0.9 percent, indicating a likely decrease in overall business inventories, pending retail inventories.
Business inventories Consensus Forecast for September 09: -0.8 percent
Range: -1.0 to +0.5 percent
The producer price index fell back 0.6 percent in September after rebounding 1.7 percent the month before. The decrease in the latest month was led by a 2.4 percent fall in energy costs with food price inflation dipping 0.1 percent. The PPI core rate slipped 0.1 percent, following a 0.2 percent increase in August. The decline was due in part to a drop in prices for light trucks. Looking ahead, higher import prices for oil suggest a rise in the headline PPI for October.
PPI Consensus Forecast for October 09: +0.5 percent
Range: -0.2 to +1.0 percent
PPI ex food & energy Consensus Forecast for October 09: +0.1 percent
Range: -0.1 to +1.8 percent
Industrial production in September posted a 0.7 percent gain, following a 1.2 percent jump the month before. For the latest month, the manufacturing component continued a recent, healthy uptrend, rising 0.9 percent after a 1.2 percent boost in August. For September, utilities fell 0.7 percent while mining output increased 0.7 percent. Although motor vehicles and parts output gained 8.1 percent for September from cash-for-clunkers, strength was widespread outside of autos. Overall capacity utilization in September rose for the third month in a row, reaching 70.5 percent. Looking ahead, the data are mixed for October. Production worker hours in manufacturing fell 0.4 percent. However, the ISM manufacturing composite index jumped to 55.7 from 52.6 in September as the Empire State index also spurted to 34.57 from 18.88. In contrast, the Philly Fed manufacturing index slipped to 11.5 in October from 14.1 the month before.
Industrial production Consensus Forecast for October 09: +0.4 percent
Range: -0.1 to +0.7 percent
Capacity utilization Consensus Forecast for October 09: 70.7 percent
Range: 70.5 to 71.0 percent
The consumer price index at the headline level in September eased to a 0.2 percent gain after jumping 0.4 percent in August. The slowing was due to a dip in food prices and a dramatically slower gain in energy costs. Core CPI inflation firmed slightly, rising 0.2 percent after a 0.1 percent increase in August. Higher oil prices indicate that the headline CPI will be firm in October.
CPI Consensus Forecast for October 09: +0.2 percent
Range: +0.1 to +0.3 percent
CPI ex food & energy Consensus Forecast for October 09: +0.1 percent
Range: +0.0 to +0.2 percent
Housing starts in September rose 0.5 percent, following a revised 1.0 percent decline in August. But the September pace of 0.590 million units was below initial August estimate of 0.598 million units. The September pace of overall starts was down 28.2 percent year-on-year. Housing permits point toward a pause or temporary leveling in the housing recovery, slipping 1.2 percent, following a 2.8 percent rise in August. Permits in the latest month stood at an annualized 0.573 million units and were down 28.9 percent on a year-ago basis.
Housing starts Consensus Forecast for October 09: 0.600 million-unit rate
Range: 0.580 million to 0.630 million-unit rate
Initial jobless claims fell 12,000 in the November 7 week to a level of 502,000. The four-week average showed the progress that's underway, down 4,500 to 519,750 for the lowest level since last November. Continuing claims extended their long downward trend, falling a very large 139,000 to 5.631 million. Though some of this improvement may reflect new hiring, much of it unfortunately reflects the expiration of benefits. The number receiving extended benefits fell 28,243 to a level of 523,061, while those receiving emergency compensation rose more than 20,000 to 3.52 million.
Jobless Claims Consensus Forecast for 11/14/09: 504,000
Range: 500,000 to 520,000
The Conference Board's index of leading indicators jumped 1.0 percent in September for the sixth gain in a row. Eight of the ten components of the leading index rose in the latest month. The largest contributor in September was the rate spread between the federal funds rate, which is very low, and the 10-year Treasury note. The second biggest contributor was consumer expectations. On the debate about when recovery began, July is still the statistical favorite based on the coincident index. This index, which weighs heavily in the decisions on business cycle peaks and troughs, was unchanged in September. This index first showed an increase in July then in August, both at 0.1 percent gains.
Leading indicators Consensus Forecast for October 09: +0.4 percent
Range: +0.2 to +0.5 percent
The general business conditions component of the Philadelphia Fed's business outlook survey index slipped to 11.5 in October from 14.1 the month before. Although still well above breakeven, the latest number reflected a modest slowing in month-to-month growth of manufacturing activity. Looking ahead, activity is likely to improve as the new orders index did accelerate slightly, to 6.2 from 3.3 in September.
Philadelphia Fed survey Consensus Forecast for November 09: 12.0
Range: 3.5 to 17.0
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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