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The Fed was the key focus this past week and the FOMC did make another small step in loosening policy. Economic news for the U.S. was mixed and European sovereign debt problems remain a concern. And growth in Europe and Asia seemed to be softening.
 Stocks were mixed for the latest week. However, equities were mostly up in the U.S. at the start of the week after relatively favorable Greek elections as pro-euro candidates led. A rise in the National Association of Home Builders’ housing market index added some lift. However, concern about Italy and Spain (higher yields) weighed on stocks. Indexes jumped Tuesday on speculation that the Fed would announce a notable loosening in monetary policy the next day after close of its two day FOMC meeting. A boost in building permits offset a dip in housing starts on Tuesday.
But equities declined modestly at mid-week on disappointment that the Fed “only” extended Operation Twist to year end (otherwise ending at the end of June) and did not implement another round of quantitative easing (the hoped for QE3). Also, the Fed lowered its growth estimates for GDP but that was not a surprise. During Chairman Ben Bernanke’s post-announcement press conference, he stated only the possibility of QE3 but no sign of inclination for it.
The big moves came Thursday with indexes dropping sharply. Traders continued to reflect on the Fed’s lack of significant policy change. More importantly, news from overseas was negative. China’s manufacturing sector contracted for the eighth month in a row and the latest report on German manufacturing showed a decline. Initial jobless claims in the U.S. were stuck at little changed, existing home sales declined, and the Philly Fed manufacturing index fell further into negative territory. A modestly positive Markit PMI for U.S. manufacturing and a rise in leading indicators provided little comfort for the day. Global engines of growth were seen as deteriorating significantly.
At week’s close, U.S. equities made notable but partial recoveries from Thursday’s selloff. With no U.S. economic news, Thursday’s selloff was seen as overdone. Also, after close Thursday, Moody’s downgraded a number of U.S. banks but there was relief that the downgrades were no worse than earlier warned. Bank stocks were one of the leaders of Friday’s rally. Health care was up on expectations of a ruling by the Supreme Court on so-called “Obama Care” possibly as soon as Monday.
Equities were mixed this past week with blue chips down, techs up, and small caps up. The Dow was down 1.0 percent; the S&P 500, down 0.6 percent; the Nasdaq, up 0.7 percent; the Russell 2000, up 0.5 percent; and the Wilshire 5000, down 0.3 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 3.5 percent; the S&P 500, up 6.2 percent; the Nasdaq, up 11.0 percent; the Russell 2000, up 4.6 percent; and the Wilshire 5000, up 5.9 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields rose moderately this past week. After a quiet Monday, rates firmed Tuesday on speculation that the Fed would engage in further monetary stimulus to boost the economy—with the decision scheduled the next day. Also, comments from euro area leaders in defense of the union reduced flight to safety. A rise in housing permits also added to upward pressure on yields.
Rates rose moderately at mid-week as traders interpreted Fed Chairman Bernanke’s comments as either laying the groundwork or leaving the door open for QE3. Disappointing economic data bumped rates down Thursday, notably existing home sales, Philly Fed, and manufacturing data from China and Germany.
 On Friday, Treasury yields firmed on favorable news from Europe on sovereign debt problems. The European Central Bank eased collateral rules to improve access to its funds. And a number of European leaders agreed to cooperate on a growth plan for the Eurozone.
For this past week Treasury rates were up as follows: the 2-year note, up 3 basis points; the 5-year note, up 8 basis points; the 7-year note, up 10 basis points; the 10-year note, up 9 basis points; and the 30-year bond, up 7 basis points. The 3-month T-bill slipped 1 basis point.
 The price of crude oil fell sharply this past week. After little change Monday, the spot price of West Texas Intermediate dipped about a dollar a barrel on worries about Europe as Spanish borrowing costs rose. But this was offset Tuesday with an equal rise in expectations of Fed easing on Wednesday.
Crude declined a little more than $2 per barrel at mid-week on an unexpectedly large climb in crude inventories. But it was twice as worse Thursday with WTI down $4 per barrel due to disappointing economic news in the U.S., China, and Germany. At week’s close, WTI rose a buck and a half in tandem with the rebound in equities.
Net for the week, the spot price for West Texas Intermediate dropped a sharp $4.67 per barrel to settle at $79.36. Crude is at an eight month low.
The big news in the week came from the Fed. A modest new policy move was made which met most economists’ expectations but not the expectations of the markets. Other economic news was mixed with housing showing divergent signals as did manufacturing. But both sectors likely could be considered slightly net positive for the week.
 This past week, the Fed decided to make a modest move on policy—but it may have largely been to appease markets rather than to have much real effect.
The Fed left policy rates unchanged at the end of its June 19-20 FOMC meeting and only made a modest move by extending Operation Twist. The Fed kept the fed funds target at a range of zero to 0.25 percent. Guidance was left unchanged with policy rates expected to be exceptionally low through 2014. The meeting statement downgraded the status of the economy—notably for the labor market and consumer sector. Again, Richmond Fed President Jeffrey M. Lacker dissented. The vote for the statement was 11-1.
The Fed acknowledged that the economy has slowed. Nonetheless, the FOMC participants expect modest improvement in the economy in coming quarters, but with the usual risks continuing, notably problems in Europe related to sovereign debt and contagion, including impact on banks. The unemployment rate is expected to decline but slowly.
 The Fed sees the inflation picture as favorable due to lower prices for crude oil and with longer-term inflation expectations remaining stable.
The only policy move was to extend the Maturity Extension Program—commonly called Operation Twist. So, instead of getting QE3—which few economists expected, though some traders did—the Fed gave the markets OT2.
“The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.”
The Fed will continue to keep downward pressure on long-term rates. Specifics were given in a separate release by the New York Fed.
In updated economic forecasts, the Fed cut its expectations for GDP growth in 2012 and 2013, lowered headline inflation, and bumped up the projections for unemployment.
 Regarding the timing of the next firming in policy, 3 participants indicated it should be in 2012 (versus 3 at the April meeting), 3 in 2013 (was 3), 7 in 2014 (was 7), 6 in 2015 (was 4). The FOMC has 2 additional members with 2 newly installed Fed governors. Though not stated which FOMC participant voted for what timing, it is likely the two new governors voted for the 2015 period for the next rate move up.
The bottom line is that the Fed has essentially run out of options that have impact. Operation Twist 2 was more of a bone being thrown to the markets than having real impact. Nonetheless, monetary policy is still very loose and that point should not be forgotten. However, during his post-FOMC decision press conference, Chairman Ben Bernanke stated that the Fed is concerned about the impact of not addressing the pending fiscal cliff problem (implicitly required to be addressed by Congress and the Administration). He essentially said that it is technically obvious that there will be negative income effects if current law is not changed.
 The latest housing starts report was complicated--no one number explained it. But overall, there appears to be progress. The headline was down but there were upward revisions and permits were up in May. And starts weakness was in the volatile multifamily component. Housing starts declined in May by 4.8 percent after rebounding 5.4 percent in April. The May pace of 0.708 million units was up 28.5 percent on a year-ago basis. April was revised up to 0.744 million from 0.717 million.
For the latest month the single-family component gained 3.2 percent after a 4.0 percent rise in April. The multifamily component—which is volatile—fell 21.3 percent, following an 8.4 percent boost in April.
By region, the fall in starts reflected a 20.3 percent decrease in the Northeast with the Midwest declining 13.3 percent and the South falling 6.1 percent. The West rose 2.6 percent.
The biggest positive in the report was for permits. Housing permits showed notable improvement in May, suggesting growth in construction in coming months. Permits rebounded 7.9 percent, following a decline of 6.0 percent in April. The May rate of 0.780 million units was up 25.0 on a year-ago basis.
Both single-family and multifamily components rose in May.
Despite the dip in the May headline number for starts, housing appears to be muddling upward but hardly at a robust pace. But until demand is notably stronger, modest growth in construction is good as it hold down unwanted inventory.
Homebuilders are slightly more optimistic in their latest report. The National Association of Home Builders’ housing market index nudged up in June to its highest level in five years, rising to 29 from 28 in May. The index, however, was still below 50, indicating that more builders see market conditions as poor instead of favorable.
 With seasonal adjustment issues and monthly volatility this year, the bottom line is that existing home sales have been flat for several months. But at least the sales pace is up from 2010 and 2011.
Existing home sales fell 1.5 percent in May to a 4.55 million annual rate. This followed a 3.4 percent boost the prior month. However, the rate opened the year at 4.63 million in January but has not netted any gain. The unseasonably warm weather at the beginning of the year, when sales were at their highest, likely pulled sales into the winter from the spring.
Details show monthly contraction in three of four regions including the South which is by far the largest region.
Good news in the report included a strong firming in prices to a median $182,600 for a year-on-year gain of 7.9 percent. A dip in the share of distressed likely lifted the median price.
Supply was also a positive, rising only slightly at the current sales rate to 6.6 months.
 The housing sector is showing signs of stabilizing-at least on the price side. The FHFA home price index advanced 0.8 percent, following a 1.6 percent boost in March. The year-on-year rate is up 3.0 percent, compared to up 2.4 percent in March.
Six of the 9 Census Divisions posted gains in December, led by a 2.2 percent rise for the Pacific region. Declines were led by a 1.2 percent decrease in the New England region.
A key point about the FHFA house price index is that it is based on repeat transactions. So, it is more reliable than data from reports on existing and new home sales. But it is limited to sales tied to federal agency funding or bundling. More comprehensive numbers from Case-Shiller are released this coming week.
Regional manufacturing reports have been mixed recently. But the first data out for the overall U.S. on manufacturing still shows growth—though slower growth. The flash reading on manufacturing for June from Markit Economics posted safely above 50 (breakeven) at 52.9, signaling a continuation of meaningful monthly growth in overall activity. The pace of activity may be a bit slower compared to the year-to-date average of 54.5, but individual readings on output and on new orders showed very little monthly change while employment growth, though slowing slightly, is still a big positive. The new orders index came in moderately positive at 54.1 versus 54.6 in May.
One area of concern is the export side with new export orders falling nearly 3 points to 48.9, a sub-50 reading that indicates monthly contraction and offers new evidence that trouble in Europe and slowing in China are beginning to be felt over here.
 The Philly Fed’s general business conditions index showed contraction for a second month and, at a minus 16.6 level, much more severe contraction than May's minus 5.8. High mid-teen negative readings swept the details including new orders, unfilled orders, shipments, deliveries, and the workweek. The new orders index fell to minus 18.8 in June from minus 1.2 in May.
Employment showed very slight growth but followed slight contraction in the prior month.
 The recovery still has forward momentum according to the index of leading indicators. This index posted a better-than-expected 0.3 percent gain for May after 0.1 percent dip in April and 0.2 percent gain in March. Strength in the latest month was in building permits (+0.21 percent contribution), the Treasury/fed funds spread (+0.18 percent contribution), and in the ISM new orders index (+0.10 percent contribution). The key negatives were the factory workweek (-0.13 percentage contribution) and stock prices (-0.13 percentage contribution).
The coincident index rose 0.2 percent, matching the pace in April, indicating that current economic activity is moderately positive. Overall, the economy has been sluggish but it is continuing to grow.
The Fed has done just about all it can do that has additional impact. Still, monetary policy is extremely loose and is supporting the recovery. Economic news has been mixed but more on the positive side than negative. Improvement in the economy is likely but slow. Factors that could speed up growth would be less uncertainty about Europe and less uncertainty about the pending fiscal cliff for the U.S.
Is housing improving' Housing updates continue with pending and new home sales and Case-Shiller. Recent reports on manufacturing have been mixed. Clarification could come from the regional Dallas, Richmond, and Kansas City Feds, as well as the durables orders report. Consumer spending has slowed and this week’s consumer confidence and sentiment numbers could clarify where spending is headed. Also honing in on the consumer will be the personal income report.
Also, the Supreme Court could rule on so-called “Obama Care” as soon as Monday as the Court wraps up its current session. This could impact the health care provider sector.
New home sales in April rebounded 3.3 percent, following a 7.3 percent drop in March and a 5.6 percent gain in February. The April annualized pace of 343,000 was still a little below the recent high of 358,000 in February but was up 9.9 percent on a year-ago basis, suggesting upward lift over a longer period. Months’ supply in April slipped to 5.1 months from 5.2 the month before. The latest number was down substantially from the recent recession high of 11.6 in October 2008. Homebuilders’ efforts to bring supply in line (by sharply reducing new construction) have paid off.
New home sales Consensus Forecast for May 12: 350 thousand-unit annual rate
Range: 320 thousand to 362 thousand-unit annual rate
The Dallas Fed general business activity index slipped to minus 5.1 in May from minus 3.4 the month before. However, production held steady at 5.5 versus 5.6 in April, reflecting modest growth. However, forward momentum appears to have turned negative for the near term. The new orders index declined to minus 3.7 from minus 2.6 in April. Unfilled orders improved to minus 4.0 from minus 8.3. However, plant managers must be somewhat optimistic about future activity as the number of employees index remains moderately positive at 8.5 in May, compared to 11.8 the month before. For the six-month outlook, the numbers are more favorable. The general business activity slowed to 4.3 in May from 15.7 but remained positive.
Dallas Fed general business activity index Consensus Forecast for June 12: 0.0
Range: -11.5 to 2.0
The S&P/Case-Shiller 20-city home price index (SA) was up 0.1 percent in March for the adjusted composite 20 index and up 0.2 percent in February. This is the first back-to-back monthly gain since the spring of 2010. The year-on-year rate of minus 2.6 percent was the best reading since December 2010.
The S&P/Case-Shiller 20-city HPI (SA, m/m) Consensus Forecast for April 12: +0.4 percent
Range: +0.2 to +1.0 percent
The S&P/Case-Shiller 20-city HPI (NSA, y/y) Consensus Forecast for April 12: -2.3 percent
Range: -3.1 to -1.6 percent
The Conference Board's consumer confidence index in May fell 3.8 points to 64.9 from a downwardly revised 68.7 in April. The expectations component of consumer confidence declined to 77.6 from April's 80.4, showing the least optimism since January. The assessment of the present situation index also dropped, to 45.9 from 51.2.
Consumer confidence Consensus Forecast for June 12: 63.5
Range: 58.0 to 66.3
The Richmond Fed manufacturing index for May fell 10 points to 4 to indicate a slowing to only a slight rate of monthly growth. Shipments were flat and new orders showed only minimal growth.
Richmond Fed manufacturing index Consensus Forecast for June 12: 5
Range: -2 to 5
Durable goods orders were unchanged in April, following a 3.7 percent decrease the month before. Excluding transportation, durables declined 0.9 percent after a 0.8 percent drop in March. The transportation component posted a 2.1 percent boost. Subcomponent strength was in nondefense aircraft and motor vehicles. Weakness was widespread outside of transportation. Numbers reflect revisions from the more recent total factory orders report.
New orders for durable goods Consensus Forecast for May 12: +0.4 percent
Range: -1.0 percent to +1.0 percent
New orders for durable goods, ex-trans., Consensus Forecast for May 12: +0.8 percent
Range: -0.5 percent to +1.5 percent
The pending home sales index in April showed a surprising and sharp 5.5 percent monthly drop. April's drop ended three prior months of gains.
Pending home sales Consensus Forecast for May 11: +1.2 percent
Range: -1.6 to +4.0 percent
GDP growth for the first quarter was downgraded with the Commerce Department's second estimate. Real GDP grew a modest 1.9 percent, compared to the initial estimate of 2.2 percent and fourth quarter pace of 3.0 percent, annualized. Demand numbers actually improved marginally. Both final sales of domestic product and final sales to domestic purchasers were bumped up to 1.7 percent from 1.6 percent for the first quarter. The first came in at 1.1 percent in the fourth quarter while the latter posted at 1.3 percent in the same period. Economy-wide inflation according to the GDP price index was a little warmer than originally believed, rising a revised 1.7 percent versus the original figure of 1.5 percent for the first quarter.
Real GDP Consensus Forecast for third estimate Q1 12: +1.9 percent annual rate
Range: +1.7 to +2.3 percent annual rate
GDP price index Consensus Forecast for third estimate Q1 12: +1.7 percent annual rate
Range: +1.7 to +1.9 percent annual rate
Initial jobless claims in the June 16 week came in at 387,000 with the prior week revised 3,000 higher to 389,000. Underscoring the lack of improvement was the 4-week average which showed a fourth straight increase with a 3,500 gain to 386,250. Continuing claims for the June 9 week were unchanged at 3.299 million with the 4-week average up 5,000 to 3.294 million.
Jobless Claims Consensus Forecast for 6/23/12: 385,000
Range: 378,000 to 390,000
The Kansas City Fed manufacturing index in May rebounded to its March level of 9 from April's reading of 3. According to the Bank, producers were more optimistic than in previous months. The majority of producers reported stable or increasing capital spending plans in the next six to twelve months, with very few 12 anticipating a decrease. The new orders index moved higher into positive territory, rising to plus 10 from minus 8 in April. Backlogs improved marginally, moving up to minus 3 from minus 5. The production index jumped to 17 from 0 in April.
Kansas City Fed manufacturing index Consensus Forecast for June 12: 4
Range: -2 to 11
Personal income growth in April was modest, rising 0.2 percent, following a 0.4 percent increase the month before. The important wages & salaries also slowed to a 0.2 percent rise from a 0.3 percent boost in March. However spending is outpacing income. Consumer spending in April picked up the pace with a 0.3 percent gain after a 0.2 percent rise in March. The headline PCE price came in flat versus a 0.2 percent rise in March. The core rate rose 0.1 percent after a 0.2 percent boost in March. Looking ahead, the private wages & salaries component in personal income for May is likely to be soft as aggregate private earnings declined 0.1 percent. Personal spending is likely to be soft for May as unit new motor vehicle sales fell 4.4 percent while retail sales excluding autos dipped 0.4 percent. PCE inflation is likely to be mixed as the headline CPI fell 0.3 and the core CPI rose 0.2 percent.
Personal income Consensus Forecast for May 12: +0.3 percent
Range: -0.2 to +0.3 percent
Personal consumption expenditures Consensus Forecast for May 12: 0.0 percent
Range: -0.3 to +0.3 percent
PCE price index Consensus Forecast for May 12: -0.1 percent
Range: -0.2 to -0.1 percent
Core PCE price index Consensus Forecast for May 12: +0.2 percent
Range: +0.1 to +0.2 percent
The Chicago PMI in May decelerated to 52.7 from 56.2 the month before, reaching its lowest point since September 2009. New orders eased to 52.9 from 57.4, showing the slowest monthly growth since September 2009 but still remaining in positive territory.
Chicago PMI Consensus Forecast for June 12: 53.1
Range: 50.0 to 55.1
The Reuter's/University of Michigan's consumer sentiment index in June fell 5.2 points to 74.1, putting the index at a 2012 low. The latest sentiment report was for the first two weeks of this month and it showed sharp weakness in expectations, down 5.4 points to 68.9 and another 2012 low, and nearly as sharp weakness in current conditions, down 5.1 points to 82.1 which is yet another low for this year.
Consumer sentiment Consensus Forecast for final June 12: 74.1
Range: 73.5 to 79.0
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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