"Week in Review" Market WrapUp by Chris Puplava

The big market movers this week were the Producer Price Index (PPI), Housing Starts, and the Federal Open Market Committee (FOMC) minutes on Tuesday, and the Consumer Price Index (CPI) on Wednesday.

The FOMC minutes for the March 27-28 meeting were fairly upbeat on inflation as policymakers noted "that data over the intermeeting period, including measures of inflation expectations, suggested that underlying inflation was not in the process of moving higher." Most participants agreed that "the end of the tightening process was likely to be near," and that some members expressed concern that retention of the phrase "some further policy firming may be needed to keep the risks...roughly in balance" could be misunderstood as suggesting that the Committee thought that several further tightening steps were likely to be necessary."

Finished goods producer prices rebounded in March as expected following a large drop in February. The PPI was up 0.5% in March coinciding with the consensus while PPI less food and energy was up 0.1%, below the 0.2% forecast. Energy prices rose 1.8% with food rising 0.5%. Food also carries a larger weight in the headline index at 21%, compared to 16% for energy.

The better than expected core PPI number coupled with a debate within the FOMC minutes suggesting that the current interest rate cycle may be near an end sent the markets up on Tuesday with the DOW seeing a triple digit rise with mild follow through during the remainder of the week.

Housing starts declined in March by 7.8% to an annualized pace of 1.96 million units, below February’s 2.126 million unit pace, though still above March 2005 levels. The greatest weakness in the numbers came from single-family units which fell 12% with the greatest gains coming from multifamily units, which jumped 15.7%.

The CPI data released on Wednesday was similar to the PPI data in that the headline CPI rose 0.4% for March in line with the consensus, but unlike the PPI the core CPI was above expectations, rising 0.3% while the consensus called for a 0.2% rise. The year-on-year (YOY) headline CPI overall rate rose 3.4%, down from January's 4.0% YOY rate. The YOY rate for the core remained at 2.1%, marginally within the upper bound of what the Fed would prefer.

The core rate increase was pushed higher by hotels, apparel, airfares, prescription drugs, physicians' services, tobacco, rent, and owners' equivalent rent, with some of these gains coming from pass through of energy input costs. Energy prices rebounded 1.3% after declining 1.2% in February. March's boost was led by a sharp 3.6% jump in gasoline prices.

The following graphs below are of the S&P 500 sectors on a one year basis analyzing valuation of each sector by using value bands measured by the upper and lower PE extremes.

To summarize the sector results covered above I have included the following table that provides a short term S&P 500 sectors from a P/E multiple and earnings trend standpoint.

The markets managed to trade flat for most of the day before breaking down in late afternoon trading when crude oil spiked above $75 per barrel, up more than 2% on the day. The spike in oil renewed concern that high gas prices heading into the summer driving season could take a toll on the economy.

It was another big day for commodities as silver rebounded after yesterday’s 20% drop, rising 9.14% to close at $13.08 per ounce with gold also putting in a strong showing, up $21.47 an ounce to close at $633.97. West Texas Intermediate Crude (WTIC) was up 1.72% to close at $73.67 per barrel while Henry Hub spot natural gas was down 3.4% to close at $7.66 per mBTU.

Rising commodity prices drove the energy and precious metals indices higher, with the AMEX Gold Bugs Index (HUI) up 3.97% to close at 373.68 and the Philadelphia Gold & Silver Index (XAU) finishing up 3.44% to close at 155.32. The Philadelphia Oil Service Index (OSX) rose 1.89% to close at 228.85 and the AMEX Natural Gas Index (XNG) and AMEX Oil Index (XOI) rose 0.98% and 2.83% respectively.

CONTACT INFORMATION
Christopher M. Puplava
PFS Group
PO Box 503147
San Diego, CA 92150-3147
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