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Economic data were mixed last week but mostly negative. This past week equities defied the current economic data for the most part and posted moderate gains. While current economic data show the economy either in a brief contraction or actual recession, equities appear to be looking toward the future when the credit crunch will be history, when the housing sector starts a comeback and the consumer is healthy again. But is it wishful thinking too soon? Is the economy going to be sluggish for longer than equities have built in?
 Equities netted moderate gains this past week with techs leading the way. The week started with investors in a mood for bargain hunting after the prior week’s selloff that was largely caused by high oil prices and renewed concern over the financial sector. A dip in oil prices also supported equities. But that lift was short-lived as oil prices spiked on Tuesday, nudging the Dow and S&P 500 down. The Nasdaq was boosted by reports that investor Carl Icahn is planning a proxy fight takeover of Yahoo! A mostly favorable retail sales report lifted the small caps. Stocks were mixed on Wednesday with the blue chips and techs posting modest gains. Gains had been stronger early in the day on an easing in consumer price inflation but markets later concluded that the price numbers were too good to really be a trend. Also supporting stocks was a smaller-than-expected loss by Freddie Mac, indicating that the worst of credit market losses may be past.
Thursday was the biggest gainer last week with techs posting the largest advances. Markets essentially shrugged off news of a sharp drop in industrial production in April. This was partially due to comments from Fed Chairman Ben Bernanke that were interpreted to mean the credit markets have improved. Techs got a boost as CBS announced it is buying Internet company CNet. Intel rallied on an analyst’s report that demand for personal computers is stronger than many had forecast. But a surge in oil prices and a fall in consumer sentiment damped most equities the last day of the week – the key exception being the S&P 500 which got a modest boost from the energy sector. For the week, the best performers were techs, materials, energy, and consumer discretionary.
Last week, major indexes were up as follows: the Dow, up 1.8 percent; the S&P 500, up 2.6 percent; the Nasdaq, up 3.4 percent; and the Russell 2000, up 2.9 percent.
For the year-to-date, major indexes are still down from year end as follows: the Dow, down 2.2 percent; the S&P 500, down 3.0 percent; the Nasdaq, down 4.7 percent; and the Russell 2000, down 3.3 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury rates were up moderately this past week despite mostly soft economic indicators. Rates firmed on Monday as funds flowed into equities on stock market gains. And rates rose the most during the week on Tuesday on better-than-expected retail sales ex autos – the one indicator that actually showed underlying strength. After a mixed Wednesday, rates slipped on Thursday on a sharper-than-expected drop in industrial production. That was reversed the last day of the week despite a 28 year low in consumer sentiment as record high intraday prices for oil raised inflation fears. Last week, an attractive stock market and higher oil prices trumped a sluggish economy to nudge rates up.
 On the week rates were up as follows: 3-month T-bill, up 16 basis points, the 2-year note, up 20 basis points; the 5-year note, up 15 basis points; the 10-year bond, up 8 basis points; and the 30-year bond, up 6 basis points.
Even though there have been signs of sluggishness in the economy, higher oil prices have boosted inflation fears and raised inflation premiums in interest rates.
 Crude oil prices were under upward pressure last week, with intraday trading at new record highs. Although the spot price of crude was little changed net, there was moderate volatility during the week. An apparent softening in demand overseas led to a drop in prices on Monday as China reported fewer oil imports and India reported slower growth in its industrial sectors. Prices rebounded Tuesday on comments by Iranian officials that oil production might be cut back by that country. Prices dipped Wednesday on news that U.S. distillate stocks had risen more than expected. After little change on Thursday, the spot price of West Texas Intermediate traded near $128 per barrel during much of Friday on the increased belief that the earthquake damage in China would lead to greater use of diesel fuel. Prices edged down from intraday highs after the U.S. Energy Department said it will not be adding to the Strategic Petroleum Reserve from July through December.
Net for the week, the spot price for West Texas Intermediate was little changed at $125.82 per barrel, down 14 cents from the prior Friday’s record high of $125.96 per barrel.
This past week was mixed in terms of direction for economic indicators. We did get some good news on consumer price inflation – but that may just be temporary. Manufacturing continues to weaken and housing fell further in the single-family component.
 Retail sales in April showed surprising strength. Sales were strong across the board with the key exceptions of autos and gasoline. Overall retail sales fell back 0.2 percent in April, following a 0.2 percent rebound in March. Excluding motor vehicles, however, retail sales jumped 0.5 percent after rising 0.4 percent the month before. When excluding both motor vehicles and gasoline, sales actually surged 0.6 percent, after increasing 0.2 percent in March.
 For overall retail sales in April, weakness was led by drops in motor vehicle sales and in gasoline sales. But strength was widespread outside of these categories. The strongest gains were in building materials and in electronics. Other notable increases were in food services & drinking places, food & beverage stores, and in general merchandise. Whether or not the consumer is relying on actual income or more on credit cards, the consumer in April was still spending. But with ever further increases in oil prices not factored in yet and a drop in consumer sentiment, the spending spree may not be continuing as strong in coming months.
The University of Michigan's preliminary report for May showed the consumer sentiment index dropping from an already very low 62.6 in April to a stil lower 59.5 – the weakest reading since the recession of 1980. Weakness in the latest report was centered in the current conditions component which sank more than 6 points to 71.7. The expectations component slipped a less dramatic 1.6 points but at 51.7 is at a low last seen in 1979. The really bad news, however, was a surge in inflation expectations which jumped 4 tenths to 5.2 percent for the one-year outlook. Using Fedspeak, inflation expectations may be becoming unanchored – bad news for anyone expecting additional interest rate cuts in coming months. While consumer spending was still fairly healthy in April, the sentiment numbers suggest that the consumer may be battening down the hatches a bit, trying to figure out how to meet the budget with rising food and gasoline costs.
 Consumer price inflation in April came in better than expected but that may be short lived. The April CPI moderated with a 0.2 percent increase, after a 0.3 percent boost the month before, with April’s easing due to flat energy costs. The core rate also eased to a 0.1 percent rise, after a 0.2 percent advance the prior month before.
Core weakness was in motor vehicles, lodging away from home, airline fares, and household furnishings. Strong price gains were seen in food and apparel.
But some components were strong, notably in food & beverages, apparel, and education & communication.
There were some quirky movements in the special category for energy. The special expenditure category for energy was flat in April after a 1.9 percent spike in March. April's weakness was led by the earlier mentioned drop in motor fuel. However, heating oil rose 3.6 percent and piped gas & electricity increased 2.5 percent. In coming months, motor fuel is likely to rise in response to higher oil prices.
 Year-on-year, the overall CPI slipped to up 3.9 percent in March from up 4.0 percent in March. The core rate was eased to up 2.3 percent from up 2.4 percent the prior month.
The big question is whether April’s deceleration is real. Overall, the April CPI report reflects a variety of factors that include softening demand for some goods (such as autos), temporary lagged effects on monthly swings in energy (that is, the energy trend is still up), and higher commodity prices underlying higher costs for others. Current economic sluggishness is damping some component gains and those are likely to be reversed as the economy improves in the second half of the year while underlying commodity costs are likely to remain.
Another factor keeping upward pressure on consumer prices is the uptrend in import prices.
 Import price gains continue at a record pace for this data series. Import prices surged in April, jumping a stinging 1.8 percent in the month for a year-on-year gain of 15.4 percent. This is the highest year-on-year pace since the series began in September 1982.
Price increases, a result of the weak dollar and spillover from oil prices, were widespread, showing a resounding 1.1 percent rise excluding petroleum. The year-on-year gain in this category was 6.2 percent -- the worst reading since the 6.7 percent pace for December 1988. Petroleum continued to jump, up 4.4 percent in the month for a 57.2 percent year-on-year spike.
Prices on the export side also showed increases, up 0.3 percent in the month for a 7.7 percent year-on-year rise, down slightly from last month's record pace. The boost in export prices, however, is not being felt as much overseas given that the lower dollar cut into the effective inflation rate for U.S. goods purchased in other currencies such as the euro.
But the bottom line for the U.S. consumer is that not only are energy and food cost boosting inflation but “core” prices are rising – at least from the import side.
 The headline number for April housing starts can best be described as misinformation – at least for what really counts currently for the economy. Starts rebounded 8.2 percent, following a sharp 13.8 percent drop in March. But the improvement may actually reflect the fact that it is more difficult to get into single-family housing or at least merely volatility in multifamily starts. April’s 1.032 million units annualized were still down 30.6 percent year-on-year. The April boost was led by a 36.0 percent rebound in multifamily starts as single-family starts slipped another 1.7 percent. Single-family starts were down 42.2 pecent on a year-on-year basis. While the starts numbers are good news in terms of coming in better than expected, the details suggest that there is no improvement in the single-family sector and actually further decline. In fact, multifamily starts may have improved because it is more difficult to qualify for home loans and renters cannot get out of apartments. Or it may be nothing more complicated than the fact that multifamily starts are more volatile than single-family starts.
The bottom line is that the April starts report showed no improvement in the single-family sector. Many economists – including Federal Reserve FOMC members – have indicated that the economy is not going to turn around until the single-family housing sector improves. Given that this segment needs to improve before the consumer sector can strengthen and the economy overall, there really is no basis for euphoria as implied by the headline number.
 Outside of housing, one of the most cyclical sectors in the economy is manufacturing and the latest numbers for April suggest that sector is in a cyclical downturn – though hopefully a mild and short one. Overall industrial production dropped 0.7 percent in April, following a 0.2 percent gain the prior month. The manufacturing component also dropped – by 0.8 percent after no change in March. Manufacturing declines were widespread by industry. For other broad categories, utilities output fell in April while mining output advanced 0.3 percent.
A special factor did make the April figure a sharp decline. The overall April decrease was led by an 8.2 percent drop in motor vehicles & parts and was due in large part to a strike and parts shortages. But excluding motor vehicles & parts, output dropped 0.4 percent, following a gain of the same magnitude the prior month.
The manufacturing component decline of 0.8 percent was based on broad-based weakness – not just in the auto industry. Declines were also seen in wood products, nonmetallic minerals, fabricated metals, machinery, electrical equipment, furniture, textiles, paper, printing, chemicals, and rubber & plastics. Gains were seen in primary metals, computers & electronics, aircraft, and petroleum products.
The latest industrial production report shows the manufacturing sector in a mild contraction – although one can expect a post-strike rebound in motor vehicles to temporarily put production in positive territory. But the trend appears to be down as overall production has fallen two of the last three months.
 The Phily Fed manufacturing index improved in May but the key point is that it remained well in negative territory. The Philly Fed index rose to minus 15.6 reading from minus 24.9 in April. For the mid-Atlantic region, there have been six consecutive months in which more manufacturers reported contraction in general activity than those reporting expansion. But the new orders index almost reached back up to the break even point, rising to minus 3.7 in May to indicate only marginal decline from April’s minus 18.8.
But an ongoing problem is the worsening in input prices. The prices paid index rose more than 2 points to 53.8. Output prices have been showing less pressure but did rise, to 31.6 for a 7 tenth gain. Manufacturers are starting to be able to pass along more costs as the prices received index is at its highest level since late 2005.
It is now apparent that manufacturing is in a contraction but there is optimism. Producers in the mid-Atlantic region see improvement in coming months. The six-month outlook index jumped to 28.2 from 13.7 in April indicating that manufacturers are upbeat and do not see current conditions worsening. Manufacturers see the current contraction as mild and short-lived.
 While the New York State manufacturing sector does not appear to be as weak as that in the mid-Atlantic region, it still showed a very modest contraction in May, essentially leaving activity flat over the last two months. The New York Fed's general business conditions index fell nearly 4 points in May to minus 3.2, indicating a marginal month-to-month decline. But this reading along with others are too close to the breakeven number of zero to make any greater assumption than simply that conditions are flat. New orders slipped fractionally to minus 0.5 while backlog orders improved slightly to minus 4.4. The employment and workweek indexes were also at about zero to indicate no significant change in either employment levels or the workweek.
But the pressure on input costs is definitely significant as the prices paid index jumped more than 12 points to 69.6 – a record in seven years of data that easily passes a 60.6 reading in November 2005 when Katrina-related shortages were driving up prices. But prices received showed less pressure, falling more than 5 points to 15.2 to indicate that fewer manufacturers in the region are passing costs through.
The bottom line from the two latest manufacturing surveys is that manufacturing is somewhere between flat and a mild contraction with input price pressures still firm.
Economic data were mixed last week with the biggest positive coming out of retail sales ex autos and gasoline. But with consumer sentiment plummeting, it is hard to see strong sales numbers coming out over the next few months. Plus, higher oil prices are crimping both household budgets and corporate profits. There has been no real improvement in housing and manufacturing is on a mild downtrend. Despite the latest CPI numbers, there is upward pressure on inflation for now. Certainly, it is the job of the financial markets – including equities – to be forward looking. Indeed, the Dow Jones industrials average is even part of the index of leading indicators. But a key question is whether the stock market is anticipating recovery too soon and too strong. Currently, the latest economic numbers point to only a very mild recovery in the second half – somewhat above flat. If that holds true, equities currently may be too optimistic, too soon.
The week ahead is relatively light with the only market moving indicator being the producer price index which comes out on Tuesday. The other notable release is the FOMC minutes on Wednesday afternoon for the April 29-30 FOMC meeting. Many traders will be heading out early toward the end of the week to make an even more extended Memorial Day weekend.
The Conference Board's index of leading indicators may be pointing more to a flat economy than an outright recession. The index rebounded 0.1 percent in March after declining 0.3 percent in February and dropping 0.4 percent in January. A zigzag pattern may be emerging, making it difficult to forecast a full-fledged recession. The index of coincident indicators also rebounded, gaining 0.1 percent after a 0.2 percent fall in February. But the latest declines in payroll employment and industrial production point toward an April decline in the coincident indicators, raising the probability of contraction in the second quarter.
Leading indicators Consensus Forecast for April 08: -0.1 percent
Range: -0.2 to +0.1 percent
The producer price index is under upward price pressure from recent surges in oil and other commodity prices. Overall producer price inflation in March came in red hot although the core rate remained moderate in the latest monthly number. The overall PPI jumped a sharp 1.1 percent, due largely to spikes in food and energy costs. The core PPI rate eased to 0.2 percent, primarily on declines in passenger car and light truck prices.
PPI Consensus Forecast for April 08: +0.4 percent
Range: 0.0 to +0.8 percent
PPI ex food & energy Consensus Forecast for April 08: +0.2 percent
Range: +0.1 to +0.4 percent
The Minutes of the April 29-30 FOMC meeting are scheduled for release at 2:15 p.m. ET. The latest FOMC announcement strongly hinted that the Fed is pausing in making further rate cuts. Markets will be poring over the more detailed minutes of the latest FOMC decision to see if that interpretation is correct.
Initial jobless claims continue to show softening conditions in the labor market. Initial claims rose 6,000 in the week ending May 10 to a 371,000 level that is a bit above the four-week average of 365,750. Continuing claims also moved higher, up 28,000 in the week ending May 3 – to 3.060 million and a new four-year high.
Jobless Claims Consensus Forecast for 5/17/08: 370,000
Range: 360,000 to 380,000
Existing home sales remain depressed, dropping 2.0 percent in March to a 4.93 million annual rate. Excess supply remains an unwelcome albatross hanging around the industry’s neck and even worsened to 9.9 months from 9.6 months in February. Bloated supply continues to keep home prices depressed, although prices did edge up 2.5 percent in the latest month to a median $200,700 for a year-on-year decline 7.7 percent.
Existing home sales Consensus Forecast for April 08: 4.85 million-unit rate
Range: 4.75 to 4.93 million-unit rate
SIFMA recommended early close 2:00 ET
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