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Simply Economics:

Recap of US Markets

STOCKS

Improved optimism boosted equities for the week. But it was a slow start as stocks were mixed and mostly little changed on Monday, following a disappointing jobs report the prior Friday and heightened anxiety over Spain and Greece. A somewhat disappointing factory orders report and below expectations results on Chinese non-manufacturing were offset by the belief that stocks had been oversold.

Tuesday, equities were boosted by a gain in the ISM non-manufacturing index with the new orders component notably positive. News of the Group of Seven's emergency meeting to discuss the European debt situation also bolstered stocks. Stocks were higher Wednesday as talk of a rescue of Spain's troubled banks and hopes for more monetary stimulus sparked a rebound. However, the Fed's Beige Book release did not contribute to this view. But after market close, dovish commentary from Fed Vice Chair Janet Yellen boosted hopes for additional stimulus with Fed Chairman Ben Bernanke scheduled to testify before Congress the next day.

Equities were mixed but mostly down Thursday despite a moderate decline in initial jobless claims. While economists were divided on whether Bernanke's testimony before Congress suggested modest easing or not, traders clearly decided that he offered little or no suggestion of further ease, resulting in a decline in most indexes. However, helping to support stocks were surprise cuts in the lending and deposit rates by the People's Bank of China by 25 basis points.

Equities jumped significantly at week's end. First, the international trade report showed improvement in the U.S. deficit as imports dropped notably, but followed a sizeable import gain the month before, resulting in little market reaction. However, stocks were lifted by rumors that Spain would ask for emergency assistance to shore up its banks. European Union officials appeared to be eager to resolve the issue before a key election in Greece that could affect the euro. The belief in a Spanish bailout boosted stocks the last trading day of the week. Gains were healthy even as a drop in German exports provided downward momentum.

Overall, many equity indexes had their best week of 2012.

Equities were up sharply this past week. The Dow was up 3.6 percent; the S&P 500, up 3.7 percent; the Nasdaq, up 4.0 percent; the Russell 2000, up 4.3 percent; and the Wilshire 5000, up 3.7 percent.

For the year-to-date, major indexes are up as follows: the Dow, up 2.8 percent; the S&P 500, up 5.4 percent; the Nasdaq, up 9.7 percent; the Russell 2000, up 3.8 percent; and the Wilshire 5000, up 5.2 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 yields rebounded this week after the prior week's declines.

Rates rose Monday essentially on the view that they had been overbought on the prior week's economic data, notably the jobs report. Such low rates were seen as unsustainable. Yields firmed Tuesday on a better-than-expected ISM non-manufacturing report.

Rates rose moderately at mid-week on hopes of improvement in the European sovereign debt crisis after European Central Bank President Mario Draghi said his policy makers are "ready to act." Rates eased marginally Thursday after Fed Chairman Ben Bernanke was seen as neutral on further policy actions for the upcoming FOMC meeting. Rates were little changed on Friday.

For this past week Treasury rates were up as follows: 3-month T-bill, up 1 basis point; the 2-year note, up 2 basis points; the 5-year note, up 9 basis points; the 7-year note, up 16 basis points; the 10-year note, up 18 basis points; and the 30-year bond, up 23 basis points.

OIL PRICES

The spot price of West Texas Intermediate was essentially unchanged for the week. Daily prices were relatively stable and quiet except for moderate downward movement on Friday.

Slight increases occurred Monday through Thursday. A modest increase on Monday was led by a decline in the euro and with a nudge up Tuesday coming from a favorable ISM non-manufacturing report. Oil firmed Wednesday on hopes of further monetary stimulus in the U.S. and in Europe. On Thursday, a rate cut by China lifted oil but was later undercut by dashed hopes on Fed Chairman Bernanke's Congressional testimony being neutral according to many traders.

On Friday, the price of crude fell somewhat under $2 per barrel on continued disappointment in Bernanke's testimony but later in the day was partially offset by expectations of a bailout for Spain.

Net for the week, the spot price for West Texas Intermediate edged up 3 cents per barrel to settle at $83.26.

The Economy

Indicator data were mixed but mostly positive although modestly so. The non-manufacturing sector is showing improvement and the Fed's Beige Book suggests a mild upgrade for the economy.

International trade gap improves on sharp swing in imports

The trade balance in April improved but on a drop in imports. In April, the U.S. trade gap shrank to $50.1 billion from $52.6 billion in March (originally $51.8.0 billion). Exports dipped 0.8 percent after a 2.5 percent boost in March. Imports fell 1.7 percent after a 5.2 percent jump the prior month.

The revisions to March were largely due to annual revisions included in this report.

The improvement in the trade gap was led by the non-petroleum goods deficit which narrowed to $36.5 billion from $338.0 billion in March. The petroleum goods gap also shrank-to $28.0 billion from $28.6 billion. The services surplus decreased marginally to $14.8 billion from $14.9 billion.

The April decline in goods exports was led by capital goods excluding autos which fell $1.5 billion after a $1.3 billion gain in March. Also declining in April were industrial supplies. Increases were seen in autos, consumer goods, and in foods, feeds & beverages.

The drop in goods imports in April was led by a $2.0 billion decrease in capital goods excluding autos, following a $3.2 billion jump the month before. Also declining were foods, feeds & beverages, capital goods excluding autos, automotive, industrial supplies, and consumer goods. No major import category gained.

Overall, it is difficult to make much of the latest trade report given the sharp gains in exports and imports in March. The April declines in both exports and imports may be nothing more than monthly volatility coming off March. Or you could say-but with little certainty-that businesses are cutting back on imports due to worries about demand and exports are down on weak global demand. But that is not the story over the two month period. Over two months, the export and import trends are moderately good.

Beige Book is modestly optimistic

The just released Beige Book prepared for the June 19-20 FOMC meeting found that overall economic activity expanded at a "moderate" pace during the period from early April to late May. Notably, manufacturing continued to expand in most Districts. Production and new orders were up except in Philadelphia, Richmond and St. Louis Districts, where factory activity was mixed or had softened slightly. Standout industries included autos, steel, semiconductors & high-tech equipment, and aircraft.

Consumer spending was unchanged or up modestly. Some Districts reported that unseasonably warm weather and an earlier Easter holiday had shifted sales into the previous reporting period. New vehicle sales remained strong. Auto inventories continue to be tight.

Improvement was seen in residential and commercial real estate with construction picking up in many sections of the U.S. Most Districts reported improvement in loan demand and credit conditions.

Wage pressures overall were modest. Hiring was steady or increased slightly, and contacts in a number of Districts reported difficulties in finding qualified workers, particularly those with specialized skills. Reports of hiring were most prevalent in the manufacturing, construction, information technology, and professional services sectors. Price inflation remained modest across Districts, and overall cost pressures eased as the price of energy inputs declined. Economic outlooks remain positive, but contacts were slightly more guarded in their optimism.

The latest Beige Book essentially indicates that the recovery continues at a moderate pace and the anecdotal evidence is a little more positive than some recent indicator news. There was little in the report to move the FOMC closer to additional monetary ease.

Bernanke testimony-more ease or not?

In testimony to the Joint Economic Committee of Congress this past week, Fed Chairman Ben Bernanke said U.S. economic growth likely to continue at a moderate pace. He sees inflation at or just below 2 percent with recent declines in energy improving consumer purchasing power. He sees unemployment improving only gradually. He noted that European debt and bank concerns are straining the economy. Bernanke stated that the Fed is ready to adjust its balance sheet if needed to promote the recovery.

He called for European leaders to calm market fears and to take more action to stabilize EMU banks. Bernanke stated that consumers and businesses are still cautious. The Fed chief noted that the pending fiscal cliff poses a significant threat to the recovery. He had mixed remarks on housing. He sees some encouraging signs while at the same time he believes that a substantial foreclosure backlog is likely to add to vacant home supply. He confirmed the Fed's policy of keeping rates exceptionally low through 2014.

Economists had differing view on whether he was laying the groundwork for a modest policy move or was neutral in his leaning. Nonetheless, markets expected more and his remarks dented financial markets' expectations for new action from the Fed.

His comments stood in contrast to those of Fed Vice Chair Janet Yellen, who late on Wednesday made the case for further monetary stimulus to insure against the risk of a downturn. The upcoming FOMC meeting likely will have a lively debate on further easing or not. It is boiling down to "insurance" on the economy issues, the costs and benefits of additional ease, and whether any move will improve confidence.

Consumer credit up on student loans

Student loans were once again behind a rise in consumer credit which is up $6.5 billion in the April report. The series includes benchmark revisions and a sizable $9 billion downward revision to March where credit still rose a very sharp $12.4 billion.

The Federal government component of this report continued to post large gains as demand for student loans was very strong. For indications on the consumer, the April report shows softness with non-revolving credit down $3.4 billion.

The April consumer credit report-and recent earlier reports-point to weakness in the labor market as student loan demand has been rising. This can reflect greater need for financial aid due to weakness in parents' income and/or college graduates, faced by a tough jobs market, going to grad school to improve their chances.

ISM non-manufacturing shows improvement

The latest ISM non-manufacturing report showed slightly stronger growth as the composite index in May rose to 53.7 from 53.5 the month before.

What was a pleasant surprise in the ISM report was strength through most categories especially orders. New orders rose 2 points to 55.5 to indicate accelerating monthly growth. Monthly growth in backlogs is the same as in April, at 53.0 which is a solid rate for this reading.

Business activity also picked up further in May while price pressures, primarily reflecting fuel, have evaporated. The supply chain may be getting a little congested with activity as deliveries slowed and inventories rose.

However, employment growth decelerated in the non-manufacturing sector-slowing but remaining positive. Another negative in the report was slowing in export orders, down 5 points though the rate of monthly growth is still respectable at 53.0.

Overall, the ISM non-manufacturing report was slightly encouraging. Apparently, business activity is improving although businesses are still cautious about hiring. And exports are softening but not enough to hold down overall economic growth.

The bottom line

Getting past seasonality issues from an atypically warm winter, late spring numbers are showing moderately positive momentum. A key issue is how do the figures play into Fed policy? Most likely, the Fed will only make a minor move at the most (possibly extending Operation Twist), but not anything major (QE3).

Looking Ahead: Week of June 11 through 15

The consumer, manufacturing, and inflation news are highlighted this week. With sluggish employment, retail sales on Wednesday will get extra attention along with sentiment on Friday. Durables orders have been soft, so traders will closely parse industrial production and Empire State. Lower oil prices may be boosting discretionary income so the PPI and CPI reports will be closely watched.

Tuesday

The NFIB Small Business Optimism Index jumped two points in April to 94.5 for the best reading in a year. Job creation plans and job openings both increased and capital spending plans were up. Small businesses also reported the best sales trends of the recovery and they see big improvement in profit trends.

NFIB Small Business Optimism Index Consensus Forecast for May 12: 94.2

Range: 92.5 to 96.0

Import prices in April fell a sizable 0.5 percent, following a 1.5 percent boost the prior month. The price of imported crude, often volatile month-to-month, fell 3.2 percent to pull back prices of oil-based products including petroleum and industrial supplies. Non-petroleum import prices show no pressure, unchanged in the month following a 0.3 percent gain the prior month.

Import prices Consensus Forecast for May 12: -1.1 percent

Range: -1.9 to -0.4 percent

Export prices Consensus Forecast for May 12: +0.1 percent

Range: -0.2 to +0.1 percent

The U.S. Treasury monthly budget report showed a surplus of $59.1 billion in April, marking the first monthly surplus in more than 3-1/2 years and taking the government's year-to-date deficit, half way through the government's fiscal year, down to $719.9 billion which was sizably below the year-ago period deficit of $869.8 billion. Special factors did move $30 billion of outlays into March, yet even without these factors April still would show a $19 billion surplus. April, the month of course when annual income taxes are due, is historically a surplus month showing surpluses in 44 of the last 58 fiscal years.

Looking ahead, the month of May typically shows a moderate deficit for the month. Over the past 10 years, the average deficit for the month of May has been $90.0 billion and $120.4 billion over the past 5 years. The May 2011 deficit came in at $57.6 billion.

Treasury Statement Consensus Forecast for May 12: -$125.0 billion

Range: -$125.0 billion to -$68.0 billion.

Wednesday

The producer price index in April fell 0.2 percent after a flat reading in March. The core PPI, however, rose 0.2 percent following a 0.3 percent boost in March. By major components, energy dropped 1.4 percent after declining 1.0 percent in March. Gasoline prices declined 1.7 percent after a 2.0 percent dip the month before. Food cost inflation was steady at 0.2 percent. Within the core, nearly a quarter of the April rise was attributable to a 0.4-percent advance in the index for pharmaceutical preparations. Higher prices for civilian aircraft also were a factor in the increase in the finished core index.

PPI Consensus Forecast for May 12: -0.6 percent

Range: -1.2 to -0.2 percent

PPI ex food & energy Consensus Forecast for May 12: +0.2 percent

Range: +0.1 to +0.3 percent

Retail sales in April rose 0.1 percent, following a 0.7 percent increase the month before.
Motor vehicle sales lifted the broad number, gaining 0.5 percent in April after a 0.2 percent gain the month before. Excluding motor vehicles, retail sales increased 0.1, following a 0.8 percent boost in March (originally up 0.8 percent). Gasoline sales tugged down, declining 0.3 percent, following a 1.0 percent jump in March. Sales excluding autos and gasoline in April edged up 0.1 percent, following a 0.8 percent boost the prior month.

Retail sales Consensus Forecast for May 12: -0.2 percent

Range: -0.7 to +0.1 percent

Retail sales excluding motor vehicles Consensus Forecast for May 12: -0.1 percent

Range: -0.4 to +0.2 percent

Less motor vehicles & gasoline Consensus Forecast for May 12: +0.4 percent

Range: +0.2 to +0.4 percent

Business inventories rose 0.3 percent in March versus a 0.6 percent rise in sales, a mix that trimmed the stock-to-sales ratio slightly to an even leaner 1.27. All three components-manufacturers, retailers, wholesalers-showed similar results with sales gains slightly leading inventory gains.

Business inventories Consensus Forecast for April 11: +0.3 percent

Range: +0.1 to +0.5 percent

Thursday

The consumer price index posted at unchanged in April after a 0.3 percent boost the prior month. Excluding food and energy, the CPI rose 0.2 percent, matching the March pace. By major components, energy fell 1.7 percent after jumping 0.9 percent in March. Gasoline dropped 2.6 percent, following a 1.7 percent rise the prior month. Food price inflation held steady at 0.2 percent. Within the core, apparel prices posted a notable gain while recreation declined. New and used vehicles saw notable increases in prices.

CPI Consensus Forecast for May 12: -0.2 percent

Range: -0.3 to +0.1 percent

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

Range: +0.1 to +0.2 percent

Initial jobless claims for the holiday shortened June 2 saw initial jobless claims falling 12,000 to a slightly better-than-expected level of 377,000. Despite the decline, the four-week average was up for a second straight week. The average, at 377,750 for a 1,750 rise, was no lower than it was a month ago. Another offset was a rise for continuing claims, up a sizable 34,000 in data for the May 26 week to 3.293 million. This reading hit its recovery low at 3.247 million back in late April and has since been trending higher with the four-week average up 12,000 at 3.280 million.

Jobless Claims Consensus Forecast for 6/9/12: 375,000

Range: 370,000 to 385,000

The U.S. current account deficit totaled $124.1 billion in the fourth quarter, up from a revised $107.6 billion in the third quarter. The goods & services deficit deepened in the quarter while the surplus on investment income fell back. For 2011 as a whole, the current account deficit increased but only slightly to $473.3 billion from $470.9 billion in 2010.

Current account Consensus Forecast for Q1 12: -$132.3 billion

Range: -$139.3 billion to -$130.0 billion

Friday

The Empire State manufacturing index in May rose 10.53 points to 17.09. New orders showed mild acceleration, rising from 6.48 to 8.32. Shipments also showed heavy month-to-month acceleration.

Empire State Manufacturing Survey Consensus Forecast for June 12: 13.8

Range: 5.0 to 16.1

Industrial production in April jumped 1.1 percent, following a decline of 0.6 percent in March. By major components, manufacturing rebounded 0.6 percent, following a 0.5 percent decrease in March. Motor vehicles led manufacturing with a 3.9 percent monthly surge after a 1.2 percent rise in March. Still, manufacturing excluding motor vehicles gained 0.3 percent, following a 0.6 percent dip the month before. In April, utilities output jumped 4.5 percent. Atypically warm weather held down utilities output in the first quarter and April's number reflects a return to a normal trend. Mining output increased 1.6 percent. Overall capacity utilization improved to 79.2 percent from 78.4 percent in March. Looking ahead, the manufacturing component in industrial production is likely to be negative as production worker hours in manufacturing fell 0.5 percent.

Industrial production Consensus Forecast for May 12: 0.0 percent

Range: -0.2 to +0.3 percent

Manufacturing production component Consensus Forecast for May 12: -0.3 percent

Range: -0.3 to +0.1 percent

Capacity utilization Consensus Forecast for May 12: 79.2 percent

Range: 78.7 to 79.4 percent

The Reuter's/University of Michigan's consumer sentiment index got a sizeable upgrade for May in the final reading for May, indicating a notably more optimistic second half of the month. The consumer sentiment index jumped to 79.3, up nearly 3 points from April and up 1.5 points from the mid-month reading. This last comparison, which put the index at an implied 80.8 over the past two weeks, indicates that the rise in optimism has picked up intensity. Other readings include month-end recovery bests for both current conditions, at 87.2, and expectations at 74.3.

Consumer sentiment Consensus Forecast for preliminary June 12: 77.5

Range: 75.0 to 78.0

ECONODAY