Last Week’s Highlights:

Stocks:                                On verge of 13K again

VIX:                                   Stock volatility falls – VIX at 16.5

Bonds:                                Inching towards 4% - 3.85%

Oil:                                     $127 – No help from OPEC

Regular Gas:                      $3.80 - $4.00 per gallon on the way

Dollar:                                Holding at 1.56 euro

Housing Starts:                   Surprised the market with an 8.2% rise

Consumer Sentiment:       Lowest in 28 years                        

Economics This Week:

Date       Item                                   Est.                       Comment

5/19       Leading Indicators           Unch.                    LEI show improvement

5/20       PPI                                     0.1%/0.3%          Still on the rise

5/23       Existing Home Sls            4.85M                   Expected softness

Sentiment Dips, Construction Surprises

Last week’s Michigan survey again showed weakness in the consumer sentiment data with the lowest reading since June 1980.  The Sentiment data typically dovetails with the Consumer Confidence Index (data due next Tuesday) and, of course, this all translates into consumer spending, or lack thereof.  One might think the $27 billion in rebate checks sent out thus far by the Treasury Department would have improved the outlook, but most likely this report did not fully capture that impact. It certainly doesn’t take an economist to figure out why consumer confidence is down, what with the price of gas and the general bleakness in most market sectors, but a glimmer of hope was also seen in data last week.

The housing starts report showed an unexpected 8.2% increase in construction, with multifamily units rising 36% after a 35% drop in March. While one month doesn’t make a trend, and we’re probably all pessimists when it comes to good housing data, you can’t completely ignore this piece of more positive news. The April level of housing starts is above the level of December and is nearly the same as the average level of starts of the four prior months. If you’re even a bit of an optimist you can see some stability in the data from the Briefing.com chart below – I guess we’ll take it where we can find it, right?!

Survey Says...

In a survey reported last week, the National Association for Business Economics suggests the economy will improve the second half of this year. The 52 economists surveyed indicate that GDP growth will increase to 2.1% in the second half. More than 60% of the economists surveyed predicted that businesses and consumers will find it easier to borrow in the final six months of the year. Of the surveyed group, 56% say the US is in a recession. [I had to laugh a bit at this one, kind of like a weathermen standing in the rain with 56% suggesting 100% precipitation!] Ok, back to the report – the economists predicted GDP will slow from the 0.6% Q1 level to 0.4% in Q2, but see strong second half improvement. The NABE survey also suggests improvement in 2009, with GDP rising to 2.7%.

Stock Volatility Drops Like A Rock

If you watch the VIX (a measure of equity market volatility based on put and call trading), you’ve seen an amazing move in the last few weeks. The index has contracted dramatically, that is, volatility has fallen significantly. As you can see from the chart below, the VIX spike to over 30 in early March has corrected back nearly 50%, to around 18. This typically is taken as sign that the market is more under control and sentiment about future pricing has calmed. The fact that we have not had any dramatic firm collapses as we had in Q1 may be the simple answer, but with energy prices rising and consumer spending, sentiment, and confidence waning, it’s an interesting data point that may indicate that the equity market seems to feel pretty good. I guess we could make the assumption that the market now believes that the economy has indeed rounded the corner and is on its way to recovery. The worst is behind us now? Not sure I’m quite ready to make the statement, but it sure feels better than it did at the start of this year.

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