Minor deflation takes pressure off the Fed.
The Consumer Price Index retreated 0.2% for May, following a 0.1% decline in April. Energy prices fell 2.9% last month, leading the CPI downward. (Core CPI did advance 0.1% in May.) Across the last 12 months, the CPI has risen 2.0%, with core CPI up 0.9% – the smallest annual gains since 1966. While May’s wholesale prices were 5.3% above levels of a year ago, the Labor Department said that PPI fell 0.3% on the month, which was less than the 0.5% reduction forecast by economists polled by Reuters. Translation: the Federal Reserve has no compulsion to raise interest rates.^1,2

Will gold hit $1,300 this summer?
The precious metal got a little closer to that psychologically significant benchmark on Friday. Gold settled at a new record close – $1,258.30 an ounce. Since the end of 2009, gold prices have gained almost 15%.³

As tax credits expire, housing starts decelerate.
In real estate, the year-over-year numbers often tell the real story, rather than the “weather” indicated by the month-to-month statistics. So we should be encouraged by the fact that May’s housing starts were 7.8% above May 2009 levels. Still, they were down 10.0% from April to their lowest level in five months. The Commerce Department also reported 17.2% fewer permits for single-family home construction in May.⁴

Industrial output & leading indicators rise.
Factory production went north by 1.2% for May. The Conference Board’s leading indicators index gained 0.4% for May after a flat April. Across the last six months, the CB index has seen 3.9% growth.^2,5

Stocks move back into positive territory.
The S&P 500 closed the week at 1,117.51, the DJIA at 10,450.64 and the NASDAQ at 2,309.80. All three marquee U.S. indices went back to being positive YTD last week.⁶

Last week’s riddle: Four cars approach an intersection with four-way stop signs simultaneously, each car coming from a different direction. After stopping, the drivers all accelerate at the same time. However, there is no accident. How is this possible?

Last week’s riddle answer: All four cars make right turns.

Attention on Europe (and the Senate). The euro thankfully rose for three straight days last week, after hitting a four-year low after German chancellor Angela Merkel commented that the EU/IMF debt bailout had “done no more than buy time” to fix the crisis. Thursday evening, the Senate passed its version of the financial industry reform bill; the next step is reconciliation with the House version. Stocks were hit hard early in the week, but managed Friday gains; a late rally took the Dow north 125 points.^1,2,3

Consumer, producer prices retreat. This was surprising: the CPI declined 0.1% in April as energy prices fell by 1.4%. The PPI also decreased 0.1%. The Commerce Department reported a 0.9% year-over-year increase in the CPI, well below the Federal Reserve’s annual inflation target of 1.5-2.0%.^4,5

Indicators streak ends. The Conference Board’s index of leading indicators slipped 0.1% last month, the first dip since March 2009. Economists surveyed by Thomson Reuters had forecast a 0.2% increase.⁶

Housing starts rise, permits fall. Overall housing starts increased by 5.8% in April to the highest level since October 2008, with a 10.0% rise in single-family construction. However, the Commerce Department had building permits down by 11.5% – an effect of expiring federal tax credits.⁷

Bulls try to hold their ground. All three major U.S. indices slipped between 4-5% last week. However, the S&P rose 1.50% Friday to end the week at 1,087.69. At Friday’s close, the Dow was at 10,193.39 and the NASDAQ at 2,229.04.⁸

Riddle of the week. The railings on a 60-yard-long walkway have ornamental sculptures every 12 yards on both sides, starting at the east and west ends of the walkway. How many total sculptures are there on the walkway?

Contact my office or see next week’s Update for the answer.

Last week’s riddle: What number logically comes next in this series: 2, 3, 5, 9, 17, __.

Last week’s riddle answer: 33. (The difference between the two numbers is progressively multiplied by 2 and added to the next number.

Quote of the month. “When you are aspiring to the highest place, it is honorable to reach the second or even the third rank.” – Cicero

The month in brief. Stocks rocketed north in March. The DJIA, NASDAQ and S&P 500 all advanced between 5.2-7.2% for the month.¹ Whispers about a double-dip recession, a possible correction and prolonged malaise in the real estate sector were not loud enough to take the market out of rally mode. Shouts of victory and shouts of anger accompanied the passage of the President’s long-envisioned health care reforms. Economically, slow and reasonably assured growth seemed the order of the day.

Domestic economic health. First the indicators, then over to Congress. March’s ISM manufacturing index came in at a very strong 59.6, and the ISM service sector index read 55.4.² Durable goods orders rose by 0.6% in February, the tenth advance in the last 11 months.³ Data showed personal spending up 0.3% for February, even as personal wages were flat.⁴ It was hard to get a fix on consumer confidence. The Conference Board’s index soared from 46.5 in February to 52.5 in March, even as the IBD and University of Michigan indexes fell.⁵

How about inflation? Was it still minimal? Yes. CPI was flat in February; core CPI inched up 0.1%. Core CPI rose just 1.3% from February 2009-February 2010, which marked the tamest core inflation in six years.⁶ Wholesale inflation (PPI) decreased 0.6% in February.⁷

The Federal Reserve reiterated that interest rates would remain low for an extended period. The end of March did mark the end of its purchases of mortgage-backed securities, with everyone wondering what that would mean for the real estate sector.⁹

The jobless rate wouldn’t budge. It stayed at 9.7% for March – the same as it had been for the previous two months.⁹

Major health care reforms finally passed as the House of Representatives approved the Senate version of the long-contested legislation. Not one Republican voted for the bill. As a result of its passage, some big changes are poised to happen in 2014 – just about every American will be required to have health insurance or pay a penalty, and businesses with 50 or more employees will pay a penalty for not sponsoring health insurance plans. Insurers will not be able to deny coverage due to preexisting conditions, and individuals and firms may shop for (theoretically cheaper) insurance through state-run exchanges. The public option? It fell by the wayside.^10,11

Global economic health. Japan’s industrial output posted a gain for the eleventh straight month in February, a month in which its exports increased by the most in any month in 30 years. In March, small business confidence in Japan hit its highest level in two years. Purchasing manufacturers indices showed strong growth in March in China, Japan, Taiwan and South Korea.^12,13

The European Union began to outline a bailout for Greece’s troubled economy, which helped preserve its credit rating with Standard & Poor’s (Greece’s rating remained at BBB+ and it lost the “creditwatch negative” label). Investor confidence beat expectations in Germany last month, and jobless claims in the U.K. had fallen at the fastest pace in 13 years in February. Manufacturing expanded in the Eurozone, as the key PMI index went from 54.2 in February to 56.6 in March. Last month, Germany’s PMI stood at an impressive 60.2.^13,14

World financial markets. You have to look hard to find a benchmark index of consequence that had a bad March. (For the record, Chile’s stock index lost 1.7% last month.) Ireland’s ISEQ and Russia’s RTSI gained 10.6% and 10.0% last month. On the Nikkei 225, it was like old times – a remarkable 9.5% March gain. Other indices performed as follows last month: CAC 40, + 7.2%; DAX, +9.9%: FTSE 100, +6.1%; TSX Composite, +3.5%; Shanghai Composite, +0.2%; Hang Seng, +3.1%; Bovespa, +5.8%; Australian All Ordinaries, +5.2%; Sensex, +6.7%. The MSCI Emerging Markets Index advanced 5.9%; the MSCI World Index gained 7.9%.¹⁵

Commodities markets. Looking at metals, we saw mostly gains. Gold futures did lose 0.45% in March, with prices dipping to $1,113.30 at month’s end. Silver gained 6.1% for the month; platinum prices were up 6.9% for March. Oil gained 5.15% for March and 5.54% for the quarter, settling at $83.76 a barrel on March 31. Natural gas prices had another bad month, losing 19.61%. The U.S. Dollar Index advanced 0.89% in March.^16,17,18

Housing & interest rates. At the end of March, the Fed stopped its 15-month campaign to buy up mortgage-backed securities. So everyone was watching interest rates as March came to a close. Rates did move up, though not noticeably until the last week of the month. Rates on 30-year FRMs were averaging 4.97% in Freddie Mac’s March 4 Primary Mortgage Market Survey, and 5.08% in the April 1 survey. As for other types of home loans, rate averages moved as follows across March: 5/1-year ARMs, a tiny 0.01 descent to 4.10; 1-year ARMs, a 0.22% drop to 4.05%; 15-year FRMs, a 0.06% rise to 4.39% on April 1.¹⁹

The latest home sales numbers? Not so hot. Pretty cold, in fact. New home sales slipped 2.2% in February to a new all-time low, while residential resales fell 0.6% in that month. The encouraging surprise was the February pending home sales figure: +8.2% despite bad weather. Economists had expected that number to be flat or slightly negative.^20,21

Major indexes. The numbers were spectacular. The NASDAQ and S&P 500 had their best months since July, and the Dow had its best month since November. The real yield of the 10-year TIPS (which had been unchanged after the first two months of the year) also increased.^1,22

April outlook. Well, you’ve heard it, we’ve all heard it: the talk that the rally is ahead of the economy, the warnings that equities are overvalued, murmurs over what might happen as interest rates rise. Yet the market soldiers on, largely in response to continued positive indicators. Real estate aside, so many signs indicate that the U.S. (and world) economy is improving. The mood remains bullish. The Dow was climbing toward 11,000 at the end of March, and the 12,000 mark does not seem so far away given current investor sentiment and global economic improvement.

Now, the major economic releases for the rest of April: the most recent Fed FOMC minutes (4/6), February wholesale inventories (4/9), March retail sales and CPI, February business inventories, and the Fed’s April Beige Book (4/14), March industrial production (4/15) , March housing starts and building permits and the University of Michigan’s April consumer sentiment poll (4/16), the Conference Board’s March leading indicators (4/19), March PPI and existing home sales (4/22), March new home sales and durable goods orders (4/23), the February Case-Shiller home price index and the Conference Board’s April consumer confidence survey (4/27), and the initial reading on first quarter GDP (4/30). We get the March consumer spending data on May 3.

Riddle of the month. This is an unusual paragraph. How quickly can you find out what is unusual about it? It looks so plain you would think nothing was wrong with it. In fact, nothing is wrong with it. It is unusual, though. Study it, and think about it, but you still may not find anything odd. What is missing from it?

Contact my office or see next month’s Update for the answer.

Last month’s riddle. A rope ladder hangs over the side of a docked ship and dips into the water. The rungs are 15.75″ apart, all equally distanced. At low tide, two of the ladder’s rungs are underwater. At high tide, which is exactly 3.5′ above low tide, how many rungs will be underwater?

Last month’s riddle answer: Two. Although the tide rises 3.5′, the ship also rises the same amount. So there will be no change in the number of rungs under water.

The month in brief. We saw a very pleasant 180º from January. New M&A action, nice corporate profits and the possibility of a rescue for Greece helped the market. By the end of February, 457 companies in the S&P 500 had issued 4Q earnings reports, with earnings per share about 154% above a year ago.¹ The S&P 500 had its best February since 1998, rising to 1,104.49.²

Domestic economic health. Consumer spending increased, even though consumer confidence didn’t. Personal spending advanced by 0.5% in February, and the Commerce Department also noted a 0.7% gain in inflation-adjusted purchases of durable goods and a dip in the personal savings rate to October 2008 levels. It suggested consumers were shopping enthusiastically.³ Yet consumer confidence indices went south: the Reuters/University of Michigan index went from 74.4 to 73.6 and the Conference Board barometer went from 46.0 from 55.9.⁴

How about the manufacturing and service sectors? The February data showed more growth. ISM’s manufacturing index came in at 56.5, and its service sector index read 53.0 (up from 50.5 in January.)^5,6

As for consumer and producer prices, something really notable happened: core CPI fell by 0.1% in January. It was the first monthly decline since 1982. Overall CPI rose 0.2% for January. PPI rose 1.4% in January, 0.3% factoring out food and energy costs.⁷

In Washington, it appeared to be reconciliation or nothing when it came to health care reform. (Since 1980, reconciliation has been used 22 times in Congress and succeeded 19 times, one of those results being the Bush administration tax cuts.)⁸ Sen. Harry Reid (D-NV) introduced a jobs bill that would exempt employers from payroll taxes on new hires for the rest of 2010. Its fate was uncertain in the House.⁹

In February, the Federal Reserve took a small but notable step away from the emergency tactics put in place during the recession. It unexpectedly raised the discount rate from 0.50% to 0.75% – a little move that luckily didn’t send a big shock wave through the stock market.¹⁰

Global economic health. Would the Eurozone ride to the rescue of Greece? At the close of the month, it formally asked Greece for a plan to control its debt. Meanwhile, some economists speculated that the nation would be bailed out by some kind of unprecedented EU action. The respected Markit Economics PMI survey showed manufacturing increasing in Europe at the fastest rate in over two years; Eurozone joblessness also ticked down 0.1% to 9.9% in February.¹¹

Japan’s jobless rate was 4.9% in February, down from 5.1% a month earlier. Its GDP, which had been flat in 3Q 2009, came in at +1.1% for 4Q 2009. New data showed that China’s economy grew by 8.7% in 2009. Impressive? Certainly. Yet look at Taiwan: we learned last month that its economy was growing at an annualized rate of 18.0% during 4Q 2009.^12,13,14

World financial markets. It was truly a mixed bag last month – some indices had great gains, others big losses. Some gains in the Asia-Pacific region: Shanghai Composite, +2.10%; Hang Seng, +2.42%; Australia All Ordinaries, +1.18%; Sensex, +0.44%. Losses in that region: South Korea’s Kospi, -0.49%; Nikkei 225, -0.71%. In Europe, the FTSE 100 gained 3.20% while the DAX and CAC 40 respectively declined -0.18% and -0.82%. Russia’s always volatile RTSI was -4.51%. The best-performing and worst-performing indices of the month were the benchmark indices of Mexico (+4.09%) and Turkey (-9.05%). The MSCI Emerging Markets Index declined by 0.27% in February, while the MSCI World Index gained 1.77%.^2,15

Commodities markets. The broad commodities market staged a rebound last month – and the dollar kept strengthening. The U.S. Dollar Index gained another 1.12% in February to go +3.20% on the year. On the NYMEX, the big mover was oil, which had its finest month since May 2009, advancing 9.29%to erase some severe January losses. Other fuels did well last month: RBOB gasoline futures gained 8.64% and diesel fuel gained 8.00%.²

In metals, copper shot up another 7.58%. Other metals logged nice gains in February: gold rose 3.31%, silver 1.91%, platinum 2.25% and palladium 5.11%.²

It was winter, and when it came to crops, there was volatility. Pork bellies performed better than any other notable commodity in February, posting a 12.02% gain. Other commodities had banner months: soybean oil, +9.82%; wheat, +9.55%; copper, +7.58%. Sugar futures cratered, dropping 21.07% on the month. Orange juice was +5.51% last month and +11.27% through the first sixth of 2010.²

Housing & interest rates. Snow or no snow, the January numbers weren’t pretty. Existing home sales fell 7.2% from the previous month – on the bright side, they were 11.5% above January 2009 figures.¹⁶ New home sales dropped 11.2% to a record low adjusted annualized sales rate of 309,000 units – and that was a 6.9% descent from year-ago levels.¹⁷

We all knew mortgage rates would rise; it was just a question of when. Last month turned out to be “when”. By the end of February, rates on 30-year FRMs averaged 5.05%. As for averages on other kinds of mortgages, the percentages were as follows: 15-year FRMs were averaging 4.40%, rates on 5-year hybrid ARMs were averaging 4.16% and rates on 1-year ARMs averaged 4.15%.¹⁸

Oh yes, Fannie Mae asked for $15.3 billion more from the Treasury to keep its net worth in the plus column. It also announced plans to buy up as many as 200,000 delinquent home loans out of mortgage-backed security trusts in March.^19,20

Major indexes. Stocks made up a lot of ground last month. It was not only the S&P 500’s best February in 12 years, but also the NASDAQ’s best February since 2000. At the end of February, the real yield on the 10-year TIPS was at 1.48% – right where it was at the end of 2009.^2,21

March outlook. We had some really nice signals at the start of the month – consumer spending increasing by the biggest monthly amount since mid-2008, a mid-50s ISM manufacturing index reading, and some strong M&A activity, all welcome after some very poor numbers concerning housing and consumer confidence in preceding days. The market ultimately decided to pay attention to mergers and earnings in February and take some of its collective mind off economic challenges. Will that trend continue this month? The markets have weathered the sovereign debt crisis nicely, and seem resilient enough to handle all but the biggest geopolitical shocks. Worth noting: at the start of March, the Dow, NASDAQ and S&P 500 had each crested their 50-day moving averages.²²

The major economic releases for the balance of March: January factory orders and pending home sales (3/4), February’s jobless data (3/5), January wholesale inventories (3/10), February retail sales, January business inventories and the University of Michigan’s February consumer sentiment index (3/12), February industrial production (3/15), February housing starts and building permits (3/16), February PPI (3/17), February CPI and the Conference Board’s February leading indicators (3/18), February existing home sales (3/23), February new home sales and durable goods orders (3/24), February consumer spending (3/29), the Conference Board’s February consumer confidence survey and the Case-Shiller home price index for January (3/30), and February factory orders (3/31).

Riddle of the month. A rope ladder hangs over the side of a docked ship and dips into the water. The rungs are 15.75″apart, all equally distanced. At low tide, two of the ladder’s rungs are underwater. At high tide, which is exactly 3.5′above low tide, how many rungs will be underwater?

Contact my office or see next month’s Update for the answer.