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Off and on believed progress (emphasis on believed) on Greek sovereign debt has been the market focus for some time. However, economic news in the U.S. has been favorable once special factors are taken into account. And this past week’s economic detail clearly points to economic gains.
 Equities posted moderate gains for the week on net positive economic news, some positive news on resolution of Greek debt, and extension of payroll tax cuts. The first trading day was up notably after the Greek parliament early Monday (local time) approved a package of financial reforms that are needed to obtain its bailout. The package still awaited approval by EU partners.
Stocks were mostly lower Tuesday as retail sales were less robust than expected with some believing that discounting of autos softened the January gain. Also, Europe was risk off for the day on uncertainty over Greek debt.
Equities were the softest at mid-week as European Union sources said finance officials were examining ways of delaying parts or even all of a second bailout for Greece, while still avoiding a disorderly default. This was offset in part by a pledge by China to step up its participation in a Eurozone bailout of Greece. Disappointing U.S. markets in the afternoon were Fed minutes of the latest FOMC meeting that showed Fed officials being divided on buying more assets—meaning lower likelihood for QE3. A healthy Empire State report was positive but was largely lost in the other news.
Stocks surged Thursday on an unexpectedly sharp decline in initial jobless claims, improved housing starts, and a positive Philly Fed report. For once, positive economic news outweighed the water torture from off and on progress on Greek debt. For the day, there was essentially no progress on resolving Greek debt. At week’s end, stocks were mixed ahead of a three day weekend. A favorable leading indicators report on Friday provided some support for equities as did passage of an extension of payroll tax cuts with President Barack Obama promising to sign the legislation promptly.
Equities were up this past week. The Dow was up 1.2 percent; the S&P 500, up 1.4 percent; the Nasdaq, up 1.6 percent; and the Russell 2000, up 1.9 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 6.0 percent; the S&P 500, up 8.2 percent; the Nasdaq, up 13.3 percent; and the Russell 2000, up 11.8 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields ended the week slightly higher with modest daily movement except on Thursday which still only had moderate change. Risk was basically on or off for progress on Greece various days but with modest impact. The “big” move in rates was Thursday with strong economic data lifting rates by up to a “whopping” (tongue in cheek) 7 basis points for some maturities for the day. The favorable news was for initial jobless claims, housing starts, and Philly Fed.
For this past week Treasury rates were up as follows: the 2-year note, up 2 basis points; the 5-year note, up 5 basis points; the 7-year note, up 4 basis points; the 10-year note, up 3 basis points; and the 30-year bond, up 1 basis point. The 3-month T-bill edged down 1 basis point.
 The price of crude rose significantly this past week with gains each day. The biggest moves were Monday, Wednesday, and Friday. Spot West Texas Intermediate rose a buck and three-quarters Monday on news or approval of a Greek austerity plan by that country’s parliament. Crude advanced a little over a dollar a barrel at mid-week on news that U.S. inventories had declined and on reports from Iranian officials that Iran has halted shipments to Europe.
At week’s end, crude rose just under a buck on a healthy leading indicators report and on progress for a bailout for Greece.
Net for the week, the spot price for West Texas Intermediate jumped $4.57 per barrel to settle at $103.24. This was the highest settle since $103.69 seen on May 10, 2011.
The latest indicators required a little extra attention to separate the noise from actual strength. This was especially true for retail sales and industrial production.
 You would not know it from the market reaction but retail sales were robust in January. Headline retail sales grew less than expected but core numbers were strong in January. Notably, the auto component looks odd. Nonetheless, overall December was revised down. Retail sales in January jumped 0.4 percent after no change the month before.
But equities dipped on the news as the January boost posted lower than the consensus forecast for 0.7 percent.
Weakness was largely in the auto component which dropped 1.1 percent, following a 2.5 percent jump in December. This heavily conflicted with unit new motor vehicle sales which rose a sharp 4.6 percent for the month. You rarely can explain such a divergence (down 1.1 percent versus up 4.6 percent) with price discounting—especially since the new motor vehicle’s CPI was unchanged in January and within the PPI the passenger car index slipped only 0.8 percent and light trucks actually increased 0.9 percent. The auto component in retail sales is known for having problems with a small sample of auto dealers.
Excluding autos, retail sales surged 0.7 percent in January after decreasing 0.5 percent in December. Gasoline sales increased 1.4 percent after a 2.6 percent drop in December. Sales excluding autos and gasoline in January rebounded 0.6 percent, following a 0.2 percent dip the prior month. Gains were broad based.
Net, January is actually good after discounting very odd auto numbers. Sales were healthy for most subcomponents. However, GDP for the fourth quarter is likely to be nudged down on a small downward revision to December. But look forward to robust PCE spending in January. The Commerce Department will substitute industry data for the auto component (standard procedure) but it also will allocate unit new auto sales between personal sales and business sales based on registration data. But either PCEs durables will be strong or equipment investment will be strong for the month or both. And this points to forward momentum in manufacturing—especially autos.
 The retail sales report was not the only indicator this week to disappoint at the headline level but show strength within detail. Industrial production in January was unexpectedly soft but due to weakness in mining and utilities. The manufacturing component was robust.
Overall industrial production was unchanged in January after a 1.0 percent jump the month before. The January figure was well below the consensus forecast for a 0.7 percent gain. By major components, manufacturing jumped 0.7 percent, following a 1.5 percent comeback in December. In January, utilities dropped 2.5 percent while mining output declined 1.8 percent.
 Within manufacturing, durable goods advanced 1.8 percent in January. The output of motor vehicles and parts surged 6.8 percent following an upwardly revised increase of 3.8 percent in December. Nondurable manufacturing declined 0.2 percent in January after having advanced 1.5 percent in December. Manufacturing excluding motor vehicles advanced 0.3 percent, following a 1.3 percent boost in December.
It has been a quiet story but motor vehicle production has been making a solid comeback since the recession. The annualized assembly rate for autos and light trucks rose to 9.94 million in January from 9.14 million the month before. The latest number is up significantly from the recession low of 3.62 million units in January 2009. The Fed’s domestic assembly rate numbers tend to be lower than domestic unit new motor vehicle sales numbers because production is for the U.S. while sales are North American originating.
 The latest regional Fed surveys on manufacturing point to healthy momentum in the near term but raise questions about further out.
The Empire State headline index for February rose 6.05 points to 19.53 for the best reading in more than a year and a half. But details show less strength with new orders down 4 points to 9.73, a level that's comfortably above zero to indicate a month-to-month increase in orders but still lower than January to indicate a monthly slowing in the rate of increase.
 However, the six-month outlook for general business conditions eased to 50.38 from 54.87 in January.
The Philly Fed index, up 2.9 points to 10.2, indicates healthy activity this month in the Mid-Atlantic manufacturing sector. But readings on expectations point to possible slowing ahead with the Philly's 6-month outlook taking a particularly steep dive of nearly 16 points.
But most details in the Philly report are positive including acceleration for new orders, a build in backlog orders, acceleration in shipments, and a draw in inventories that points to the need for replenishment. A negative is a flat reading on employment which indicates no substantial change in the sample's workforce.
An important caveat with both surveys’ outlook numbers is that they generally are negatively correlated with current indexes. So, what does that mean in plain English' Generally, when current activity picks up, the outlook indexes soften because the base level for future activity has risen. When current activity declines, the base level for future expectations is lower, making it more likely that future activity will be higher.
 For manufacturing and businesses in general there is good news on the inventories front. The nation's inventories are lean and well managed—meaning there are no headwinds from excess inventories. Business inventories rose a moderate 0.4 percent in December, below the 0.7 percent rise for sales and pulling down the stock-to-sales ratio by 1 tenth to 1.26.
Retail inventories rose a modest 0.2 percent while sales were unchanged. The stock-to-sales ratio for retail is unchanged at 1.32.
When including the other two components -- factories and wholesalers -- and looking at a quarter-to-quarter basis, the fourth quarter's rate of inventory build was 0.9 percent versus a plus 1.3 percent rate in the third quarter. Slow growth relative to sales points to the need to add to inventories and is a definite plus for production and jobs and for the economic outlook.
 Housing appears to be oscillating upward as starts rebounded 1.5 percent in January after a 1.9 dip the month before. January’s 0.699 million unit pace was up 9.9 percent on a year-ago basis. For the latest month, the rebound was led by the multifamily component.
By region, the gain in starts was led by an 18.3 percent boost in the South with the West rising 11.9 percent and the Northeast rebounding 7.9 percent. The Midwest saw a 40.7 percent drop.
Housing permits also are oscillating slowly upward with a 0.7 percent rise, following a 1.3 percent dip in December. The latest number of 0.676 million units was a little under the consensus projection of 0.684 million.
While the latest numbers are positive, it should be remembered that seasonal factors are strong this time of year and it is difficult to know the true trend a given month.
 In January, CPI inflation picked up at both the headline and core levels but trends are still moderate. The consumer price index rose 0.2 percent, following no change in each of the prior two months. Excluding food and energy, the CPI firmed to a 0.2 percent increase from December’s 0.1 percent increase.
Turning to major components, energy rose only 0.2 percent, following a 1.3 percent decrease in December. Gasoline rebounded 0.9 percent in January after falling 2.1 percent the month before. But household energy fell 0.6 percent (largely natural gas) for the latest month. Food price inflation held steady at 0.2 percent.
Within the core, upward pressure came from apparel (up 0.9 percent), recreation (up 0.6 percent), tobacco (up 0.5 percent), and medical care (up 0.3 percent). In contrast to these increases, the index for used cars and trucks declined for the fifth month in a row, falling 1.0 percent, and the index for airline fares fell 0.9 percent. The new vehicles index was unchanged in January after declining in each of the prior four months.
 Year-on-year, overall CPI inflation came in at 2.9 percent, compared to 3.0 percent in December (seasonally adjusted). The core rate firmed to 2.3 percent from 2.2 percent on a year-ago basis. The year-ago rates are above the Fed’s long-term goal of 2 percent PCE inflation but not so much after comparing to relative differences between PCE price indexes. CPI inflation numbers have been running about four tenths higher than the headline PCE price index and about three tenths higher than the core. This is due to methodology differences and the Fed prefers the PCE price index for its 2 percent goal.
The January CPI report overall came in marginally better than expected—but only marginally. The bottom line is that there is no sign of deflation. The latest report gives no ammunition to those hoping for QE3 from the Fed. For Fed officials, the numbers overall fall in between the worries of the inflation hawks and the hoped for numbers of the doves. The January CPI report leaves Fed policy on hold.
 Producer price inflation was subdued at the headline level but hotter than forecast at the core. The PPI rebounded 0.1 percent in January, following a 0.1 percent dip the prior month. The core PPI jumped 0.4 percent, following a 0.3 percent rise in December.
 By major components, energy declined 0.5 percent in January, following a 0.4 percent decrease. January weakness in energy was led by a 1.7 percent drop in residential electric power with natural gas also dipping. Gasoline was up 2.0 percent in January after decreasing 1.4 percent. Food decreased 0.3 percent in the latest month.
Upward pressure in the core came from pharmaceuticals (up 2.0 percent), light trucks (up 0.9 percent), and tobacco products (up 0.6 percent).
For the overall PPI, the year-ago rate in January was 4.1 percent, compared to 4.8 in December (seasonally adjusted). The core rate in January held steady at 3.0 percent.
 Stimulative monetary policy, momentum in the manufacturing sector and a bullish stock market are three central strengths for the economic outlook. These factors led the index of leading economic indicators to a solid 0.4 percent gain in January following upwardly revised gains of 0.5 and 0.3 percent in the prior two months. Other areas showing strength in January include credit activity and building permits, gains that underscore the improving outlook for the housing and construction sectors. Interestingly, jobless claims pulled the index down in January but, given significant declines so far this month, look to return to the positive column in this report for next month. This report offers a summation of economic news which has been convincingly positive for this economy, especially striking at a time when Europe is stumbling.
The Federal Reserve released minutes of its January 24th and 25th meeting. At that meeting, the FOMC kept its federal funds interest rate range at zero to 0.25 percent. The minutes indicate that the Fed is squarely in the middle of a debate about the direction of the economy and policy. Importantly, most FOMC participants noted improved economic data but still saw growth risks to the downside. Most saw inflation risks as balanced. There was a wide range of views about where policy should head. Some were open to expanding the balance sheet (QE3) while others proposed dropping or simplifying forward guidance. The Fed's staff economists see a gradual acceleration in GDP growth with the unemployment rate remaining high at the end of 2013.
There was disagreement over the likelihood of QE3. Some participants were receptive to the possibility while one member strongly suggested that tightening is more likely than further easing.
“A few members observed that, in their judgment, current and prospective economic conditions--including elevated unemployment and inflation at or below the Committee's objective--could warrant the initiation of additional securities purchases before long. Other members indicated that such policy action could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run. In contrast, one member judged that maintaining the current degree of policy accommodation beyond the near term would likely be inappropriate; that member anticipated that a preemptive tightening of monetary policy would be necessary before the end of 2014 to keep inflation close to 2 percent.”
The QE debate likely was nothing more than that—a debate. Given that the Fed considers the costs and benefits of policy changes, more likely than not the benefits of QE3 are extremely small with costs likely higher.
There was some more detail about the decision to focus more on a long term inflation goal. The Fed now has a long term "goal" of 2 percent inflation as measured by the personal consumption expenditure price index. This is as close as the Fed can get to an explicit inflation target, given that there still is a dual mandate for low inflation AND healthy employment growth. That is, the Fed cannot make pronouncements (targets) that ignore legislative mandates. But for all practical purposes, the Fed is now inflation targeting with the belief that low inflation best encourages employment growth.
Underlying trends for consumer spending and manufacturing look good while that for housing appears marginally positive. We will get more updates on housing in the coming week.
Focus is on the housing sector, starting with existing home sales Wednesday, FHFA home prices Thursday, and new home sales Friday. Consumer sentiment also will garner trader attention at week’s end.
U.S. Holiday: Presidents’ Day. Bond, Equity Markets Closed.
Existing home sales in December rose 5.0 percent to a 4.610 million unit rate in December, a third straight month of improvement that has drawn down supply on the market to 6.2 months. This is the lowest reading on supply since 2006. Still, sales activity was soft compared to prior to the recent recession as the expansion peak was 7.250 million annualized for September 2005.
Existing home sales Consensus Forecast for January 12: 4.69 million-unit rate
Range: 4.50 to 4.82 million-unit rate
Initial jobless claims fell 13,000 in the February 11 week to 348,000. And for the 10th time in 11 weeks, the 4-week average was down, falling 1,750 to 365,250. Continuing claims were also lower, down a very sizable 100,000 in data for the February 4 week to 3.426 million. The 4-week average was down 8,000 to 3.493 million.
Jobless Claims Consensus Forecast for 2/18/11: 355,000
Range: 330,000 to 363,000
The FHFA purchase only house price index in November rebounded 1.0 percent after declining 0.7 percent in October. Eight of the 9 Census Divisions posted gains in November, led by a 2.1 percent rise for the West South Central region. On the downside, the only decrease was for a 0.2 percent dip in the Middle Atlantic region. On a year-on-year basis, the FHFA HPI was down 1.8 percent versus down 3.3 percent in October. Compared to the peak for this house price index in April 2007, prices are still down 14.5 percent nationally.
FHFA purchase only house price index Consensus Forecast for December 11: +0.2 percent
Range: -0.1 to +1.3 percent
The Kansas City Fed manufacturing index rose to 7 in January from minus 2 in December and 4 in November. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. The production and shipments indexes jumped to their highest levels since June, and the new orders index climbed from minus 2 to 8. The future composite index was unchanged at 12 for the third straight month, while the future production index rose considerably.
Kansas City Fed manufacturing index Consensus Forecast for February 12: 9
Range: 8 to 11
The Reuters/University of Michigan's consumer sentiment index for early February unexpectedly slipped 2.5 points to 72.5. The current conditions component fell 4.6 points in the mid-February reading to 79.6, down 5.5 percent to completely reverse January’s gain and take the level back to December. Yet the December level was not so bad compared to softer readings in November and October of 77.6 and 75.1.
Consumer sentiment index Consensus Forecast for final February 12: 73.0
Range: 71.0 to 76.5
New home sales in December fell 2.2 percent to a disappointingly soft annual rate of 307,000. While the number fell short of expectations, the dip did follow three consecutive gains—4.1 percent in September, 1.7 percent in October, and 2.3 percent in November. Sales are not particularly strong but the trend may still be up.
New home sales Consensus Forecast for January 12: 315 thousand-unit annual rate
Range: 310 thousand to 355 thousand-unit annual rate
R. Mark Rogers is the author of The Complete Idiot’s Guide to Economic Indicators, Penguin Books, 2009.
Econoday Senior Writer Mark Pender contributed to this article.
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