With limited news this week, the focus turned to earnings season which at the start appears to be lackluster on average.  Economic news continued to point to a recovery with modest growth, although the consumer sector may be improving a bit.  But global growth is slowing.

Recap of US Markets

STOCKS

At the start of the week, stocks declined in quiet holiday trading (equities open on Columbus Day) as investors awaited the start of earnings season with expectations of a decline in earnings from the year ago quarter. Also, on Monday, the World Bank downgraded its outlook for economic growth in Asia.  Equities dipped Tuesday as another international agency, the International Monetary Fund, cut its global economy growth forecasts for this year and the next.  After close, Dow component Alcoa started the earnings season beating on adjusted earnings (less net loss) but lowered forecasts. 

Stocks declined further at mid-week on Alcoa’s lowered forecasts and on a warning by Chevron of substantially lower profits for the third quarter.  Despite an unexpectedly sharp drop in initial jobless claims on Thursday, major indexes were mixed and generally little changed.  An early morning boost from claims reversed in the afternoon on worries about earnings.

The week closed with a down day despite an unexpected boost in consumer sentiment for early October.  Traders basically headed to the sidelines ahead of an onslaught of earnings reports the upcoming week.

Equities were down this past week. The Dow was down 2.1 percent; the S&P 500, down 2.2 percent; the Nasdaq, down 2.9 percent; the Russell 2000, down 2.3 percent; and the Wilshire 5000, down 2.2 percent.

For the year-to-date, major indexes are up as follows: the Dow, up 9.1 percent; the S&P 500, up 13.6 percent; the Nasdaq, up 16.8 percent; the Russell 2000, up 11.1 percent; and the Wilshire 5000, up 13.1 percent.

Markets at a Glance

Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.

BONDS

Treasury rates on the short end were flat for the week.  Longer-term maturities eased.  In the holiday shortened week, yields nudged down Tuesday on strong demand in the 3-year note auction and on news of the IMF’s downgrade to global economic growth.  Longer rates dipped further Wednesday on a healthy 10-year note auction and on a Beige Book that characterized the economy as only growing modestly.  Rates nudged down Thursday despite a sharp drop in initial jobless claims.  Detail in that report indicated that it may have been an anomaly.  Later in the day, the 30-year bond auction did not go well.  Longer rates eased marginally Friday as the Fed made purchases related to its Maturity Extension Program also known as Operation Twist.

For this past week Treasury rates were down as follows: the 7-year note, down 4 basis points; the 10-year note, down 7 basis points; and the 30-year bond, down 13 basis points. The 3-month T-bill, the 2-year note, and the 5-year note were unchanged for the week.

OIL PRICES

Despite worries about global economic growth, the spot price of crude oil rose moderately this past week.  On the week’s open on Tuesday, the spot price of West Texas Intermediate jumped almost $3 per barrel as Turkey retaliated against Syria after a Syrian shell killed five people in Turkish territory.  This more than offset the downgrade by the IMF to its forecasts for the global economy.  Crude dipped just over a dollar a barrel on Wednesday on belief that U.S. inventories would be up.  Also, traders took notice of Alcoa cutting its projection of aluminum consumption due to slowing growth in Asia.

Crude rose moderately Thursday on news of the sharp decline in jobless claims but the gain was kept subdued by a rise in supply.  The last day of trading showed prices little changed for the day.

Net for the week, the spot price for West Texas Intermediate gained $2.30 per barrel to settle at $91.86 per barrel.

The Economy

This week’s economic news was relatively light.  The good news was that the consumer mood appears to be improving.  The bad news was that global trade likely is contracting.

Consumer sentiment improves in early October

There is still a ways to go before returning to pre-recession status, but the consumer sector is showing improvement—at least in terms of mood. A jump in early October consumer sentiment was a big surprise. The mid-month reading of 83.1 was up 4.8 points from September which is a very big move for this report.

The gain was centered in the expectations component which jumped 6.0 points to 79.5 which is by far the best reading of the recovery.  This jump hints at confidence in future income prospects which belies the bulk of data coming out of the jobs market though it does underscore the latest drop in jobless claims and recent drop in the unemployment rate.

The sentiment report also included a sizable 2.9 point gain for the current conditions component, which at 88.6 is retesting its best level of the recovery which is August's 88.7.

Gasoline and food prices do not seem to be disturbing the consumer with inflation expectations down sizably, to 3.1 percent versus 3.3 percent in September for the one-year outlook and to 2.6 percent versus September's 2.8 percent for the five-year outlook. This was a very positive report, corroborating improvement in the consumer sector.

International trade deficit worsens as exports decline

While the U.S. economy is holding its own, though at a soft pace, the global news is not so good. In August, the U.S. trade balance worsened and partially for the worst reason—exports declined, likely reflecting economic weakness in Europe and slower growth in Asia.  Also, oil and petroleum product imports jumped on higher prices.  The trade deficit expanded to $44.2 billion from $42.5 billion in July.  Exports fell 1.0 percent, following a 1.1 percent decrease in July.  Imports slipped 0.1 percent after a 0.6 percent dip the prior month.

The widening in the trade gap was led by the petroleum deficit which increased to $23.5 billion in August from $21.0 billion the month before.  The non-petroleum goods shortfall narrowed to $35.3 billion from $36.3 billion in July.  The services surplus slipped to $15.1 billion from $15.4 billion in July.

The decline in exports was again was led by a decline in industrial supplies but exports of nonmonetary gold rose modestly.   Foods, feeds & beverages also posted a notable decrease with minor slippage seen in autos and consumer goods.  Capital goods excluding autos posted a modest gain.

Higher oil prices led the boost in imports but businesses appear to be concerned about consumer demand later this year as consumer goods declined.  Industrial supplies jumped $1.5 billion with oil and petroleum products playing a key role.  Businesses are remaining cautious about equipment investment as capital goods excluding autos slipped again.  But a key concern likely is that imports of consumer goods declined, possibly indicating that businesses continue to worry about demand.

The latest report continues to suggest that global trade is shrinking somewhat.  This suggests soft economic growth ahead for the U.S. and other countries.

Producer price inflation mixed in September

In September, high oil prices still kept headline inflation up while the core rate actually eased. Overall PPI inflation posted at 1.1 percent, following a 1.7 percent jump in August.  The core rate, which excludes both food and energy, was unchanged after rising 0.2 percent the month before.

Food inflation eased to a 0.2 percent increase after a 0.9 percent boost in August.  Energy remained robust with a monthly 4.7 percent jump, following a surge of 6.4 percent the prior month.  Gasoline increased 9.8 percent, following a 13.6 percent spike in August.

Within the core, higher prices for light motor trucks were offset by declining prices for communication and related equipment.

For the overall PPI, the year-ago rate in September came in at 2.2 percent versus 2.0 percent in August (seasonally adjusted).  The core rate in September stood at 2.3 percent, compared to a year-ago 2.6 percent the prior month.  On a not seasonally adjusted basis for September, the year-ago headline PPI was up 2.1 percent, while the core was up 2.3 percent.

The latest PPI report clearly was mixed with energy still strong but the core soft.   Equity futures were little changed on the news.

Beige Book—more of the same

The latest Beige Book confirms recent trends in economic indicators.   Economic activity “generally expanded modestly” since the last Beige Book.  The pace of activity somewhat varied by sector.  Consumer spending was generally reported to be flat to up slightly.  Sales of new vehicles were steady to stronger and running ahead of comparable 2011 levels.

A highlight was reports that residential real estate conditions have improved.  Prices are steady or increasing by District.  Existing home sales generally are up with home supply dipping in a number of Districts.  However, commercial real estate markets were mixed since the last report. 

Conditions in the manufacturing sector were mixed but, on balance, somewhat improved.  Significant gains in manufacturing related to the construction, energy, and transportation sectors were reported across several Districts, with particularly robust gains tied to the automotive industry.

Overall loan demand was steady to stronger in most Districts. Credit standards were little changed since the last report, and a number of Districts noted improvements in loan quality or steady to declining delinquency rates.

Employment conditions were little changed since the last report. As for some time, there were reports of shortages of highly skilled workers, but otherwise wage pressures remained modest.  Beige Book contacts indicated that demand for labor was stagnant due to uncertainty related to the upcoming presidential election, U.S. fiscal policy, and European debt issues cited by some as restraining hiring.

Overall, the latest Beige Book paints the same picture as recent economic news.

The bottom line

The U.S. economy remains sluggish but there are glimmers of hope that the consumer sector is regaining confidence.  Meanwhile, global growth is slowing.

Looking Ahead: Week of October 15 through 19 

Will higher consumer confidence translate into higher retail sales' Expect the manufacturing component of industrial production to be weak though, as it reflects a drop in production worker hours. There are other data for manufacturing on the week’s calendar plus new clues on the health of the housing sector.  The consumer price index will tell us the toll gasoline prices are taking on inflation.

Monday 

Retail sales in August gained 0.9 percent after a 0.6 percent boost the prior month.  Motor vehicle sales jumped 1.3 percent after a 0.1 percent rise in July.  Ex-auto sales increased 0.8 percent, following a 0.8 percent advance in July.  Gasoline prices played a big role in lifting retail sales.  Gasoline station sales surged 5.5 percent in August, following a 0.4 percent rise in July.  However, excluding both autos and gasoline components, sales edged up only 0.1 percent, following a 0.8 percent spike in July (originally up 0.9 percent).  Core components were mixed with strength in building materials and food services & drinking places.  Weakness was led by electronics & appliance stories and general merchandise.

Retail sales Consensus Forecast for September 12: +0.7 percent

Range: +0.4 to +1.3 percent

Retail sales excluding motor vehicles Consensus Forecast for September 12: +0.5 percent

Range: 0.0 to +1.1 percent

Less motor vehicles & gasoline Consensus Forecast for September 12: +0.5 percent

Range: +0.3 to +0.5 percent

The Empire State manufacturing index fell more deeply into negative territory to minus 10.41 for a second straight negative reading versus minus 5.85 in August. The new orders component was at minus 14.03 to signal significantly greater monthly contraction than August's minus 5.50.

Empire State Manufacturing Survey Consensus Forecast for September 12: -3.0

Range: -6.5 to -1.0

Business inventories rose 0.8 in July versus a 0.9 percent rise for business sales which was the strongest rise of the year. The mix is slightly favorable for the stock-to-sales ratio which is down one tenth to a bit leaner level of 1.28.

Business inventories Consensus Forecast for August 12: +0.5 percent

Range: +0.2 to +0.6 percent

Tuesday

The consumer price index in August jumped 0.6 percent, following no change the prior month.     Excluding food and energy, the CPI gained a more modest 0.1 percent, matching a 0.1 percent rise in July.  By major components, energy jumped a monthly 5.6 percent after declining 0.3 percent in July.   Gasoline on a seasonally adjusted basis jumped 9.0 percent, following a 0.3 percent increase the prior month.  Food prices rose 0.2 percent after edging up 0.1 percent in July.

CPI Consensus Forecast for September 12: +0.5 percent

Range: +0.3 to +0.6 percent

CPI ex food & energy Consensus Forecast for September 12: +0.2 percent

Range: +0.1 to +0.2 percent

Industrial production fell 1.2 percent, following a 0.5 percent jump in July.  By major components, manufacturing declined 0.7 percent, following an increase of 0.4 percent in July.  Motor vehicles production tugged down on manufacturing, decreasing 4.0 percent in August, following a 2.7 percent rebound in July.   But other components were soft as manufacturing excluding motor vehicles dipped 0.4 percent, following a 0.2 percent gain the prior month.  In August, mining output fell 1.8 percent after a 1.0 percent gain in July.  The August drop was partially tied to hurricane related shutdowns in the oil industry.   Utilities output decreased 3.6 percent after a 1.3 percent gain in July.  Overall capacity utilization slipped to 78.2 percent from 79.2 percent in July.  For the September report the manufacturing component of industrial production is likely to be weak again as production worker hours in manufacturing declined 0.4 percent.

Industrial production Consensus Forecast for September 12: +0.2 percent

Range: 0.0 to +1.0 percent

Manufacturing production component Consensus Forecast for September 12: +0.1 percent

Range: -0.3 to +0.5 percent

Capacity utilization Consensus Forecast for September 12: 78.3 percent

Range: 78.0 to 79.2 percent

NAHB housing market index rose three points in August to 40 on the housing market index for September. This is the fifth straight gain and lifts the index to a five-year high. An optimistic outlook is now the dominant factor lifting the index as six-month sales expectations are up a big eight points to 51. The component for current sales, at 42, is up a solid four points in the month. Lagging is traffic, up only one point to 31 in a hint that buyers who are looking are serious. Top concerns among builders include tight conditions in the credit market and a lack of building lots.

NAHB housing market index Consensus Forecast for September 12: 41

Range: 40 to 43

Wednesday

Housing starts in August advanced 2.3 percent following a 2.8 percent slip in July.    The August starts pace of 0.750 million units was up 29.1 percent on a year-ago basis.  For the latest month, the increase in starts was led by the single-family component which gained 5.5 percent after a 4.5 percent decline in July. Housing permits eased in August after a moderately healthy July.  Permits fell back 1.0 percent after a 6.7 percent rebound in July.

Housing starts Consensus Forecast for September 12: 0.765 million-unit rate

Range: 0.745 million to 0.785 million-unit rate

Housing permits Consensus Forecast for September 12: 0.810 million-unit rate

Range: 0.799 million to 0.843 million-unit rate

Thursday

Initial jobless claims fell to 339,000 in the October 6 week for a 30,000 decline that is the biggest since July. The 339,000 level is the best reading of the recovery. The four-week average was down 11,500 to 364,000 and is now trending more than 10,000 below the month-ago comparison in what points to improvement for both payroll growth and the unemployment rate. A possible issue skewing the number is the adjustment which expected a big swing for the first week of the quarter that did not happen. This week's report will help clear up this issue.

Jobless Claims Consensus Forecast for 10/13/12: 365,000

Range: 360,000 to 385,000

The general business conditions index of the Philadelphia Fed's Business Outlook Survey improved but remained negative in September at minus 1.9, compared to minus 7.1 the month before.  A very notable negative was a drop in shipments to minus 21.2 from minus 11.3 in August.  But a gain for new orders was a positive signal from a downbeat report. New orders in the Mid-Atlantic manufacturing sector rose a sharp 6.5 points to plus 1.0 from minus 5.5 in August for the first positive reading since way back in May.

Philadelphia Fed survey Consensus Forecast for October 12: 0.5

Range: -2.0 to 5.8

The Conference Board's index of leading indicators in August dipped 0.1 percent for the third contraction in the last five months. The decline for the ISM new orders index weighed most heavily on the August LEI. Consumer expectations were the second biggest negative.  A sustained positive was and will be the interest rate spread although the decline underway in long rates has reduced this component’s contribution to the leading index. This is counter intuitive as lower long rates will help economic growth.  Other data include a small 0.1 percent rise in the coincident index, down from 0.3 percent July but up from June's 0.2 percent decline.

Leading indicators Consensus Forecast for September 12: +0.2 percent

Range: 0.0 to +0.5 percent

Friday

Existing home sales rose strongly for a second straight month, up 7.8 percent in August to an annual unit rate of 4.82 million. This was the largest monthly percentage gain since last August and the highest rate since May 2010. All regions showed high single digit gains in the month.  Supply on the market, at 6.1 months at the current sales rate, remains tight and may be limiting sales.

Existing home sales Consensus Forecast for September 12: 4.75 million-unit rate

Range: 4.53 to 4.82 million-unit 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.