The correction has started, however mild it may yet be, with dip-buyers still swarming around session closes and late morning valleys like so many drones trying to convince the queen of the hive to fly again.

But the psychology has clearly been damaged, if only for a while. Though the Dow Jones streak of trading days without a 3-day pullback just set an all-time record (101 days, thanks in no small measure to the Hewlett-Packard (HPQ) earnings report), the exalted sense of a market entitled to a bump up every day is gone.

The damage was done on Wednesday, first by Fed Chairman Ben Bernanke in the morning and then later that afternoon by the release of the FOMC (monetary policy committee) minutes. Both of them allowed for the possibility of easing back on the pace of Fed bond-buying in the foreseeable future, as opposed to some far-off point on the misty horizon (i.e., anytime after this calendar year). I say kudos to them both, and not simply because I said last week that the market was set to decline.

The spectacle of Wall Streeters complaining that the Fed had bungled its communications – they let the market go down! – causing a grand total decline of about two percent from its initial lunatic peak on Wednesday morning was really one of the more fantastical sights the last two days. The real problem was that the trade had locked in on the notion that decision time had ended – the Fed would goose the markets forever, so all you do is buy, a silly idea from the start.

The message from the Fed wasn’t so much that a letup in stimulus is imminent over the next few months, as it was to get the markets not to act as if they could go from mini-bubble to bubble on the “guarantee” of eternal stimulus. That was a bit of folly that needed to be punctured for the good of the market – parabolic price rises always end badly. Always.

I even heard the “Goldilocks” term dropped last week in connection with the economy, probably in an effort to contain the damage from the Fed. That term had been on ice since 2008. Not to be left out, Cumberland perma-bull David Kotok announced on Wednesday that the correction was a buy point – at a time when we had barely lost a percent (Kotok also declared last year that there would be no seasonal swoon come Many, about which he was also a tiny bit off).

You may have also read that banking giant HSBC estimated a below-50 purchasing manager index (PMI) for China Wednesday night, the bank’s report being more trusted than the official version. The combination of the two led to a knockdown punch for the Japanese markets, where equities had risen over 80% (!) since November in a very 1999-style performance. A little over 7% was shaved off of that in one session.

Yet the history of excess is that it never ends when the handwriting is on the wall. A few early-birds leave, but the typical pattern is that a period of rough sailing is followed by the startling revelation that the world hasn’t ended yet. Human nature is such that investors will listen forever to predictions that the trend will never end, but discount predictions of a reversal if they don’t come true immediately. The first wobble is nearly always followed by triumphant new highs down the road, ironically providing the last best exit point at a time nobody believes it.

There are two weeks remaining until the May jobs report. If it’s a dud, or below estimates, markets are apt to continue having trouble finding their footing until the next Fed meeting in mid-June. There’s a meeting of the European Central Bank the day before the jobs report, but I wouldn’t expect any more action from them yet. Any more reversal of the short-yen trade would be welcome news for Germany and the dispensers of the euro.

If the jobs report is a “Goldilocks” enabler, or a little above estimates but not too much, the rally could get fresh legs. A strong report could present problems. One doesn’t look likely from any of the survey data so far, but initial releases are often wide of the mark and we could find ourselves looking at a lot more leisure and hospitality workers, at least on paper. Most of the market’s rise this year can be attributed to the herd group-think that unlimited stimulus makes stocks the betting favorite. It certainly isn’t earnings. A strong jobs report would revive fears of the Fed letting up on the gas.

In any case, this as-yet quite small correction is unlikely to have run its course, and the overall rally is unlikely to be over either. A test of the S&P 50-day moving average is a reasonable short-term outcome, and new highs later in the year are also a reasonable intermediate scenario. The trouble signs are slowly growing, but as I wrote throughout 2007, it takes more than that. Dangers, heights, calculations, all of these can be ignored for longer than any notion of good sense. You need to run a lot of actual bodies over the cliff before the herd begins to get the idea that a change in direction might be called for.

The Economic Beat

The week was bookended by two interesting reports, one from the Chicago Fed, and one from the Department of Commerce. The first report gave us the regional bank’s National Activity Index, as good a measure as any of how the economy is doing. It’s April measure came in at (-0.53) vs. (-0.23) in March, keeping the 3-month average (CFNAI-MA3) submerged just below the waterline at (-0.04).

source: Chicago Federal Reserve Bank

As you can see, it’s been generally trendless since the fall of 2009, with some occasional peaks and valleys, leading to cries that either the economy is back or call in the Fed. Right now the moving average is downward sloping, which isn’t promising for second-quarter GDP. Only one month of the quarter, April, is in the books, but the latest manufacturing surveys aren’t showing much and the last two weeks of jobless claims data has been above the April average.

Friday’s durable goods report for April did show a rebound bigger than estimated (3.3%), along with a downward revision to March. It’s a volatile series on a monthly basis, and perhaps the most useful nugget in the report is that new orders for business investment spending are up a mere 1.8% through the first four months, which isn’t much higher than the inflation rate. Shipments are only up 1.2%, about flat in real terms.

The main areas of strength in durables is coming from aircraft, which is in the middle of a replacement cycle driven by demands for fuel efficiency, and motor vehicles. The latter is somewhat more reliable, because aircraft orders are often switched off in a downturn and not restarted or accepted for delivery for many months afterwards. Obviously auto sales slow in a crisis as well, but aren’t as likely to have shipments go to zero.

The biggest drivers in auto sales continue to be the availability of credit, in turn driven by a healthy securitization market, and the elevated average age of the American auto fleet. Cars are old. A third driver this year is the demand for pickup trucks from the rebounding housing market.

That market, however, is still constrained by tight credit. An indication of that came in the latest new home sales data, which showed a drop in every category below $300,000 and an increase in every category over $400,000. The builders are talking up rising costs and holding the line on profits versus going for higher sales numbers, but I suspect that the lower end of the market is getting more credit-constrained. Most of the financing in this area has come from the builders themselves and the FHA, and the lower end of the economic spectrum is participating much less in the recovery (Bill Gross tweeted Friday that Washington “juices Wall Street with easy money & placates the 99 with food stamps and disability benefits”).

The average price for a new home rose to about $331,000, a record, and the annual rate rose to 454,000. Media and Wall Street types tend to crow over these numbers as if the word is on fire and homebuilding is going to fix the entire US economy (and by extension, the globe). But that rate is still the lowest since the 1960s, making an awfully small engine for a population that has doubled in size. There is clearly very much a mix issue going on, and I suspect that these data resemble the Depression more than any other decade.

The median price for an existing home rose to $192,800, “the highest level of the recovery,” but the last Case-Shiller report showed the median price is still down 29% from 2006. That is probably why the National Association of Realtors (who put out the existing home report) are still complaining of limited inventory (Econoday wrote that supply “poured into the market in April,” so they’re not quite on the same page). A very large 30% of sales are still all-cash, and 20% are by investors.

It’s part of a general trend lately in retail commerce overall to target the higher end customer, not just in housing, because the lower end (which these days might be the bottom 90%) customer is struggling, as the latest results from Target (TGT), Wal-Mart (WMT) and even the teen retailers showed this week. Cold March weather surely played a role in retail sales, but April weather was good enough. When people are holding the line on teenage spending, that’s a careful consumer.

The agriculturally-focused Kansas City Fed region crept back into positive territory with a reading of 2, though the readings on backlogs and employment continued to decline. Like the durable goods report, the regional readings are falling into a pattern of overall very minimal growth, but not outright deceleration. Next week will feature regional reports from Dallas and Richmond on Tuesday, and the more influential Chicago report on Friday. I should expect that Chicago is due for a bit of a rebound, on restocking grounds alone.

A new Case-Shiller report will also come out on Tuesday, which has a bit heavier schedule than usual due to the Memorial Day holiday. The Consumer Confidence report comes out the same day.

But the rest of the goodies are towards the end of the week. Another first-quarter GDP revision comes out Thursday (the corporate profit revision is probably more useful), along with the weekly claims data. It still looks to me like California keeps throwing off the latter.

The biggest reports are on Friday, with April personal income and spending and the Chicago PMI. PMI data from EU countries come out on Thursday. It irritated me no end this past Thursday to see the Bloomberg crawler constantly announcing that European PMI indicators “rose,” when they did no such thing. They all declined, including Germany, but not as steeply as the month before. These are diffusion readings, so they have to flatten out to neutral (50) eventually, even if the continent is depopulated.

All US markets are closed Monday, May 27th, for Memorial Day.

It’s a tough business sometimes, this musing of the market outlook. Two weeks ago, I was writing on Seeking Alpha that “the springtime correction is upon us.” I did allow that markets might move up another “percent or two,” and sure enough they did. More than two, even (though not by much).

However, allow me to say that I’ve seen this movie before. It was in the spring of 2011, when from mid-April to the first week of May, the S&P rose about 5%. Traders rushed into high-beta stocks for a trade and a short-squeeze, even as earnings failed to live up to expectations, particularly in cyclical stocks. On May 13, 2011, I wrote that “probably the most common sentiment on the Street is that the market is currently overshooting its way into a big correction,” but that people were afraid to sell because “bailing now would mean missing the overshoot.” By August, the market was 20% lower.

Hang on, you say, this time is different. Or perhaps, that time was different. Of course it was (is). They’re always different in some ways. Two years ago it was a combination of whispers about trouble in China, Europe (no chance of that happening again), and increased commodity margin requirements that helped bring the market down. Given the recent bleeding in commodities (which had been going the other way in 2011), the last isn’t likely to recur.

Some things are the same, though. One is that the market is ridiculously overextended. My indicators say that the last time the market was this overbought on an intermediate basis was mid-February – of 2011. That was followed by a garden-variety 5% correction, in turn followed by the obligatory triumphant reversal march to a marginal new high in April. And that was that.

Markets correct (as opposed to crash) primarily because of an excess of sentiment. It may seem like it’s always because of some unexpected bad news, but as a rise climbs giddier heights, it becomes more fragile to any news that doesn’t fit the prevailing narrative. What constitutes “bad” news to a bunch of scared trigger fingers becomes increasingly amorphous. The essence is that the rise becomes a sentiment stampede, and the sentiment tires out for one reason or another. One can never quite pinpoint the moment or nature of buyer exhaustion in advance, but with a bit of experience, one gets a feel for when a critical stage has arrived. Like right now.

There are, of course, exceptions to the infatuation rule and these are known as bubbles. 1929, 1987, 1999. They lead to horrible, gut-wrenching crashes, but the early stages of bubbles always feel grand. Traders don’t fear the onset of bubbles, either. They fear the end of them.

I don’t think that the current period will rise to bubble stage. Mini-bubble clearly, as we are already there. But the current rise isn’t being fed by a massive influx of retail money, like 1929 or 1999. It’s being pushed around by various trading strategies, and one big difference is that trading strategies bail out far quicker than the retail public ever does. Some are even precisely timed to a certain event.

For example, Wednesday’s rise was fed by a sudden influx of buy orders around 11 AM, partly designed to trigger more buy orders set to execute on a break above the previous day’s high. Typical up-market stuff, right out of “Moving the Tape 101.” Curious that it came on expiration Wednesday.

Example two came about 2 PM Friday. Another barrage of buy orders, this time designed to break the S&P above its three-day top of 1660 after three failed attempts, which would of course trigger more buy orders.

Not coincidentally, it also pushed a considerable amount of expiring options contracts deeper into the money and a much larger amount out of it. The open interest on the S&P 500 1600 call strike alone – nearly 120,000 contracts – was more than nearly all of the puts between 1600 and 1660.

But before you get to feeling bad for the options dealers (or wonder how they could let such a thing happen), you need to wait ’til the end of the movie. The retail-oriented SPY ETF had a massive imbalance in puts below the expiring May strike (i.e., out of the money) – over two million, by my estimate, including more than half a million between 163 and 166 alone, all of which were worth serious dinero a week ago and exactly zero at 4 PM on the 17th (the SPY closed at 166.94). That compares to less than 200,000 calls in the same strike range.

Talk about leading lambs to the slaughter. It was total carnage, a complete wipeout. Game, set, match and championship to the options dealers. Oddly enough, I predict the epic massacre will not be on the cover of Barron’s, or featured on NPR’s “Only a Game.”

Tonight and tomorrow’s news accounts on radio and the press will talk about investors being cheered by the latest batch of positive economic news, namely the University of Michigan sentiment index – which peaks when stock prices do – and the Leading Economic Indicators. Neither report is ordinarily good for more than five or ten minutes attention on the tape. No, it was nothing more than another springtime sidewalk hustle – albeit epic in scale – with the dealers once again filling up the bars late Friday afternoon and early evening with their customers’ money. Those Ocean’s Eleven guys were children in comparison.

The Friday evening futures market was trading up another significant amount as I write, but I wouldn’t put too much stock into it. The market is set to reverse, and you should hope that it does. Corrections are healthy, but bubbles burst. Ask the lambs – they’ve seen how it ends.

The Economic Beat

The week led off with an April retail sales report that confirmed the sluggishness of the sector, yet was given a pass because it beat consensus. The ex-auto, ex-gas number was plus 0.6%, which has now been crowned a trend. A good number is now an upward inflection point, you see, while a weak number is “just one number.”

However, the rebound strength in categories like building materials was weather-related. If you recall, cold weather was given much of the blame for weak March sales. Weather should get credit for the rebound too – although building materials were indeed up 1.5% from March and 7.7% from a year ago (unadjusted), the March-April combined total was only up 1.5% year-on-year.

As for one month’s number, year-to-date retail sales are up 2.4% over 2012. According to the CPI figure released Thursday, half of that is inflation (retail sales data aren’t inflation-adjusted). Frankly, a one-percent gain is nothing more than a pimple. If you’re clinging to the notion that the economy is picking up and has escaped the springtime slump, consider that the April 2011 retail sales report showed an ex-auto, ex-gas reading of 0.7%.

The trend is that consumer sales growth is slowing to near zero (where it can keep the growth in S&P 500 sales company: either zero, -0.2% or -0.4% in the first quarter, depending on whose number you pick). It could pick up, of course – but why?

“Housing” is the answer on everyone’s lips, and housing starts have indeed continued at their trend rate, though April missed consensus by a wide mark. The miss isn’t really worth a fuss – year-to-date, single-family starts are still up 27% over last year, about in line with the pick-up that began in January.

There’s been a lot of builder talk lately, some of it featured in the Wall Street Journal, that homebuilders intend to keep new home growth on a leash. The reasons cited are pricing discipline, labor scarcity (?) and a rise in input costs, but I have to wonder if another reason, one that doesn’t sound quite so boffo in corporate presentations, isn’t that growth is still credit-constrained. Much of the single-home sales financing is being done by the builders themselves, in concert with the FHA. Banks have been playing a small role. I suspect builders may be aware of the limits on the size and growth possibility of that credit pipeline. Their sentiment index remains pessimistic.

Permits rebounded from the previous month in what should be the peak month (though possibly June) of the season. The real question is whether commercial credit conditions loosen enough to allow for another big surge in multi-family housing. If so, the cyclical end is approaching in construction, though the market traders won’t see it until it’s too late (and it could be six to eighteen months until there’s an explosion large enough to get everyone’s attention).

On the manufacturing side, there was no good news at all, zip, zero, none. So, that must be just one month’s data.

Not in the case of the New York and Philadelphia Fed surveys, both of which were negative at (-1.4) and (-5.2) respectively. Both surveys followed up their weakest March reading since 2009 with the weakest April reading since 2009. Both reported negative numbers in new orders and shipments, with rises in inventories directly tied to precipitous drops in the latter. Industrial production fell (-0.5%) in April, with every category but mining down. Manufacturing capacity utilization slipped to a six-month low.

Yes, but sentiment is up. The University of Michigan sentiment index climbed to 83.7. Although this index closely tracks the stock market, Econoday actually had the temerity to claim that it offered “a very upbeat indication for May’s economic data, hinting at significant gains for jobs and consumer spending.” Perhaps they should have actually read the report, which said that the gains were concentrated in upper-income brackets. Presumably they are already employed. The index’s last peak of 82.7 was followed by a November jobs report of 146,000 and a fourth quarter GDP rate of 1%. The previous peak, in July 2007, was followed by a recession. You have to admire their chutzpah, if not their logic.

Leading indicators were up 0.6%, “more than expected,” though not more than expected, since the difference was in building permits two days before. The gains were led by the April stock market surge and the sudden improvement in weekly claims.

Yet the improvement in claims may disappear. I have observed from time to time that the claims data this year is more volatile than a year ago, a phenomenon I have tentatively ascribed to California (which makes up 1/6 of all claims) contributing lumpy data by alternating estimates with hard data. There is also speculation that Hurricane Sandy reconstruction efforts are temporarily suppressing claims (the tri-state area of NY, NJ, CT makes up another 10% of the national total).

The plausible-sounding latter factor may or may not be at work, but I suspect the former reason more. Over the winter, the year-year improvement in claims dropped to about 5%, or about half the level of 2012. Then it picked up again, only to recede again. In an effort to better see the prevailing trend, I compared actual claims for the first 18 weeks of 2013 (i.e., the year to date) versus the same period in 2012, and came up with a rate of improvement of about 5.5%. That indicates that the trend that began in the fourth quarter of 2012 is still intact, and that the LEI will drop again next month: permits, stock prices, and claims should all reverse, even if not dramatically.

Inflation is admittedly a lagging indicator, but how one can brag about an accelerating economy in light of the latest Consumer and Producer Price indices (CPI, PPI) is a bit of a mystery. The trailing 12-month consumer rate is 1.1%, with the producer rate at an even lower 0.7%. A recent drop in energy means that the core rates are higher, at 1.7%, but some of that drop can be attributed to traders taking off global growth bets on crude oil.

Do not get me started on the annual Street analyst charade of falling gas prices being good for the consumer. The current national average is about a nickel cheaper than a year ago. That may mean a lot to national truck fleets, where every penny counts (diesel is down about a nickel too), and airline corporate profits (jet fuel is down about 15%!), but a nickel isn’t making anyone rush down to the mall to buy furniture or jewelry – if they even notice the difference.

For the market, next week’s highlights begin on Wednesday with the release of the FOMC minutes, unless existing home sales prints up some wild number earlier that day. Several Fed governors and one Journal article have hinted at slowing asset purchases in the last week – could the Fed have been softening up the market for what was in the minutes?

The other big numbers come Thursday, with new home sales, and Friday, with April durable goods orders. I’ll be interested in the Chicago Fed’s national activity index on Monday, though it is no market-mover (yet). A clutch of “flash” PMI data comes on Thursday, and Friday will have some EU data of interest, including German GDP estimates and the investor confidence survey. Traders will begin leaving in droves at lunchtime for the long Memorial Day weekend.

Investing is so easy, isn’t it? All you do is put your money into the machine and it goes up. If the needle drops for a moment, just drop in some more cash and it goes up back again.

There may be one more week left to this “May Madness,” though it would probably be better for the market if there weren’t. Most of the indices are extended, in particular the Nasdaq, and another weak of gains would almost surely be erased immediately afterwards.

But the momentum train that began with the S&P 500 index bouncing off of its 50-day moving average has been running hard, with the main impetus being the conviction that the market is going to go up almost every day. It’s been up 14 of the last 17 days, so the odds appear to be in favor of that conviction, if you’re a momentum trader.

That’s deceptive, though. If the market is up again next week, you can safely take the short side of that trade. The S&P 500 is nearly 11% above its 200-day exponential moving average, and that kind of altitude makes traders and programs nervous. It should, since it’s usually followed by a pullback, often a testing one. Interestingly enough, every time the index has gotten from 160 to 180 points above the EMA in the last few years, it’s been followed by a subsequent return trip to the average.

The intermediate and long-term indicators on the market are seriously overbought. The 8%-12% correction is still imminent, perhaps made more so by trader capitulation and whispers that maybe the market will go up another 10% first. Not likely.

Take heart, though, because such a correction would be good for the market. When stock prices get too juiced on their own up-today, because-it-was-up-yesterday momentum, it sows the seeds of a crash. If stocks were to keep moving higher throughout the summer, as some are beginning to predict, it would greatly increase the odds of a fall blowout. If you want to see the market higher in October, hope for some air to come out of the balloon soon. The Dow is on its longest run (about 90 days) without a 3-day losing streak since – 1958!

It’s come on light volume too. The move has come almost less on buying conviction than a fear of selling, hence the expression “chicken long.” Leon Black, however, of buyout firm Apollo Management fame, is not afraid of selling. While the Wall Street Journal is celebrating easier credit conditions, Black’s firm is selling “everything that isn’t nailed down,” precisely because credit has gotten too loose again. Junk bonds are below 5%, PIK (pay-in-kind) bonds, last seen in the spring of 2007, have returned and margin debt is nearing its all-time record high again. It calls to mind the old adage – “if it seems too good to be true, it probably is.”

Something else that may be too good to be true is the idea that central banks are going to print equities to heaven. A currency battle is getting underway, though no one in government circles wants to talk about it. Since Japan embarked upon its massive program to devalue the yen – or as the G-20 agreed to pretend, raise inflation – the EU, Australia, South Korea, Vietnam and Sri Lanka have all cut interest rates. More rate cuts are on the way. Here’s a tip – they’re not trying to prop up stock markets.

There admittedly remains the possibility of the lunatic-defiance trade. The market does gets periodic bouts of it, and despite the invariably bad ending, many traders love it. For one thing, it’s simple. For another, the natural inclination of most traders and investors is to be cheering for things to go up. Whether it makes sense or not, it’s a satisfying exercise in self-validation. The notion that all news is good news – because either the economy is better than expected or the Fed is in longer than expected – is creeping back into the discourse. That’s not good for anything but a short burst of short-term profits for traders. The payback always does far more damage.

Bow your head for a moment at the passing of Alan Abelson, Barron’s magazine’s erudite lead writer for decades. He will be missed.

The Economic Beat

The very light week of data had only one monthly release, wholesale sales and inventories, numbers which as a rule don’t have much of a tape impact. This one garnered a bit more than usual, due partly to the lack of anything else, and due partly to the fact it wasn’t very good. Wholesale sales experienced their biggest drop in four years, and the seasonally adjusted inventory-to-sales ratio is at its highest since October 2009.

The drop in sales wasn’t that surprising, as the unadjusted inventory-sales ratio had hit a multi-year peak the month before. The inventory-sales ratio isn’t dramatically higher than the last four years, only marginally. What should concern you is this chart of the year-on-year changes:

That wholesales series looks ominous.

Weekly claims, which came out the same day, were in a different vein, as the seasonally adjusted number was the lowest since before the recession (though it will be revised higher next week). The broader claims trend has been zigzagging the last six months or so. The rate of yearly improvement dropped off late in the fourth quarter to about half its rate of roughly 10%, but after several months of about 5% improvement it has lately trended back to 10%. I’m almost afraid to say so and bring back another surge in claims.

The rising stock market has beguiled the media into any number of misstatements. I heard one Bloomberg reporter gushing about that great April jobs report – it wasn’t by any standard but the market fearing something worse after a disappointing ADP report (to give credit, Journal writers have been throwing some cold water on the notion of late, going so far as to call it “weak“).

Others are talking about increases in job openings and hiring, but it isn’t true. According to the latest Labor Department survey (the JOLTs survey), the number of job openings in the first quarter of 2013 was down from the first quarter of 2012. The difference was quite small, but it wasn’t positive. The number of jobs added in the first quarter and through the first four months of 2013 are less than the similar periods of 2012, and the “quits” rate, which is thought to be a good indicator of labor confidence, is unchanged over the last twelve months.

But the stock market is up, so everything must be better, or else it wouldn’t be up. It stands to reason.

Monday will bring the April retail sales report. The weekly reports were modest at best. The small number of chains still reporting monthly sales were on balance better than plan, but since chains that struggle drop out of the sample, it’s hard to draw too much inference from the small sample. Mass-market drugstore chains Rite-Aid (RAD) and Walgreen’s (WAG) missed estimates, but the market dialed in on Gap (GPS), which beat estimates again. The consensus is for an easy-to-beat negative number, though +0.4% excluding autos and gasoline.

Small-business confidence comes out Tuesday, with consumer sentiment on Friday. In between are a goodly slate of useful data. Wednesday is the day of the week, with April industrial production and producer price index (PPI), and the May New York Fed survey and homebuilder sentiment index.

The last item is usually a good tip-off to housing starts, which come out on Thursday, along with the Consumer Price Index (CPI) and the Philadelphia Fed survey for May. Both Fed surveys are expected to show a slight rebound from weak, but still positive April results. The Leading Indicators wraps up the US week on Friday.

There will be some market-sensitive data coming from overseas: Chinese industrial production and retail sales figures are due out over the weekend. EU data on tap includes industrial production (Tuesday morning) and the initial GDP estimate (Wednesday).

The charge past 1600 (and 15,000 on the Dow – two round numbers in one day!) was led by yet another central bank rate cut (the European Central Bank) and a jobs report that might just as easily have gone the other way. The latter wasn’t robust, with an initial estimate of 165,000, and not much ahead of the consensus estimate of about 155,000 or so. But therein lies a tale.

After the ADP payroll report checked in Wednesday with a figure of 119K, well short of expectations, fears of another sub-100K report (March was originally 88K) were well in place. Indeed, I was half-expecting it myself. The apparently small beat was much larger in that context, and the roar of “risk on” echoed across trading desks.

I’ve more to say about the jobs report below, but the fact that about 130K of the total – 43K in leisure & hospitality, 31K in temping, 26K in health care and about 29K in retail trade, all low-paying jobs at the bottom of the scale – suggests that the labor market is not as strong as some of the beaming faces on newsreaders would suggest. There was also an increase of 163K in part-timers, and while that number comes from a separate survey than the headline payroll data, it’s something to keep in mind.

The economy isn’t shrinking, it’s slowing. But not rapidly. This allows for both bull and bear viewpoints to be loud, if not exactly thrive. Lately the sentiment has been fearful even as the market has robotically advanced, which in turn allows the market to keep rising when the worst fears aren’t realized.

It’s not a new scenario, yet is a peculiar dynamic that’s never been easy to predict. I’ve been seeing “unjustified” rallies for decades, and the main characteristics they seem to share are the capacity for going on longer than seems possible (or justified), sudden endings that seem inevitable in retrospect, and perhaps most importantly, two other phenomena tied to the calendar. One is that the first hiccup usually comes in May-June, occasionally July. This is typically followed by a we-didn’t-die-after-all rally that lasts into the fall, when the final coup de grace is administered and the rally is crushed. Rinse and repeat.

If you’re wondering why I’m calling this rally unjustified, it’s because both earnings and revenue growth are miniscule, even non-existent. There are always calls for things to get better in the back half of the year – every year I’ve been in this business, and probably every year since the Depression – but I didn’t hear much of it from corporate management last month. I haven’t forgotten about the Fed, either. If Fed rallies and policies were all-powerful, the Dow would be at 50,000 and unemployment 4%. Don’t hold your breath.

Still, what matters in the short term isn’t how true perceptions are, but how widely believed they are. “True enough for now” could be the slogan of many a rally. Even so, a correction should begin within a week or two anyway, if not this week. I wrote last week that equities would try to punch through 1600, led by the ECB and possibly the jobs report. But they are past now. There isn’t much else to lean on, though a few days more momentum is certainly possible.

The defiant tone of Friday’s rally is typical of the last blip that comes before every downturn. Stocks are now well overbought on a short-term basis, dangerously overbought on an intermediate one, and massively overbought on a long-term one, more so than at any time since the tech bubble. Equities usually chop for a while after a breakout to new symbolic levels. The robot trading that drives the market (they’re the marginal buyers and the most active) switches into defensive mode at this time of year, and other traders know that. The same news that gets winked at in March will get taken more seriously in May.

Looking at the patterns in the economic data and stock prices, it looks to me like we are setting up for a repeat of 2007. A fading economy is accompanied by an insistence that it really isn’t – and even if it is, the Fed is on the job. A spring high is followed by a minor correction in the summer, followed by fresh highs in the fall. Then reality starts to sink in again. If Europe holds everything together with chicken wire and spit for another year, then the day of reckoning will get postponed. If not, it’ll happen this year.

There is always the chance that the EU comes to an elegant, orderly solution, but they have given absolutely no signs of doing so yet. Those who claim that Europe is at the turning point now, do so on the reasonable basis that one, things can’t get much worse and so some sort of rhythmic blip is nearly inevitable; and two, one can always simply blame the policymakers afterwards if the prediction doesn’t come to pass. But both the EU and China have to confront their bad debt in one way or another.

Japan lost decades by pretending its bad debt didn’t exist. The EU doesn’t pretend such, only that it might go away on its own if nobody talks about it too much (and if they do, they should speak of it only in German). I don’t know what China will do. It’s clear that its government is aware of the problem. Skeptics claim that bad debt always comes home to roost, bulls claim that monolithic government policy and huge foreign reserves can fix anything – but I remember that being said about Japan, too.

The US, to its everlasting credit, dealt with the lion’s share of its bad debt some time ago, to the point that big profits are now being realized by those brave enough to go in and buy during the crisis. But it can’t go it alone, day-trader sentiment notwithstanding. Ask a banker what happens when all of its customers are broke.

If you take a pass on the Economic Beat every week, then here is one spoiler: job growth has slowed, the April report notwithstanding. 2013 is running slower than 2012. Keep that in mind before you decide that a spring correction is now passé.

The Economic Beat

In all the table-thumping over the jobs report – “Job Gains Calm Slump Worries,” read the Wall Street Journal headline – what’s being overlooked is that job growth has nevertheless slowed. Whether you look at adjusted or unadjusted data for payrolls, employment growth through the first four months of 2013 is in fact lower than it was in the same period of 2012 and 2011. The household survey is showing employment growth at half the rate of the first four months in 2012.

One has to be careful comparing monthly data between the household survey and the establishment payroll sampling – they converge over time, but can be quite different in a given month. Still, it’s interesting that household growth for the last two months is only about 80K (adjusted), while the payroll growth is 300K. The household survey had a sharp drop in March, followed by a sharp recovery in April, a month that also saw a large (163K) increase in people working part-time on an involuntary basis (“for non-economic reasons”).

As most of the job growth in April was at the bottom of the ladder in occupations that have high percentages of part-time workers – leisure and hospitality, home health care, temping – one possible explanation for the divergence between household and payroll data is that people working more than one part-time job are being counted once in the household survey, and more than once in the payroll sample. That doesn’t make it the right explanation, but it does fit.

It appears to me that the retail hiring data may still suffer from the lack of December hiring, throwing the BLS model off. The category will take a hit from the pending closure of the Sears (SHLD) and Wal-Mart (WM) portrait studios. I certainly didn’t hear in corporate earnings discussions that anyone not connected with the mobile software business is anxious to hire.

There isn’t much hiring elsewhere, including manufacturing (goods-producing occupations fell). Weekly jobless claims took another big fall, but so long as California keeps sending in estimates followed by huge revisions, I’m going to presume that the first quarter trend is intact. The Challenger layoffs report stated that its measure of the first quarter of 2013 was identical to the first quarter of 2012.

The ISM purchasing manager surveys also fit a picture of a slowing economy, though there was some similar market relief in the fact that the manufacturing survey wasn’t negative. It was slightly below consensus and about neutral (50.7), but there was plenty of fear it would be below 50 (contracting). The non-manufacturing survey was also below consensus at 53.1, the lowest April since 2009. The industry scores were alright (though they can change quickly) with 13-5 in services and 14-4 in manufacturing.

The Chicago purchasing survey and Dallas Fed business survey were similar to the other regional surveys – getting weaker all the time. The Chicago PMI was actually better than it looked, taking a bit of downgrade from seasonal adjustment factors, as new order rates stayed level. But it was also the weakest April since 2009 and the pricing and employment components flatted out to the neutral zone. April auto sales stayed strong, led by pick-up trucks.

Factory orders fell (-4.0%) in March, well short of expectations but actually better than they looked. New orders for durable goods were revised down, which will weigh on this quarter’s GDP, but the business investment category got a big revision upward from plus 0.2% to 0.9%. Unfortunately shipments and backlogs were down, which won’t help the GDP measurement.

The Case-Shiller report was the magic talisman that market bulls kept chanting all week. Although the monthly gain only met expectations with a 0.3% increase, it was the year-on-year gain of 9.3% (up from 9% last month) that was paraded about. Housing is going to fix everything, it seems. It reminds me of a couple of years ago when commodities were roaring – the answer to every raised eyebrow was “China.” It works until it doesn’t.

A rise in homeowner equity is welcome, but shouldn’t be taken for granted quite yet. We’re coming off historically low levels, and the “boom-time gains” (Econoday) are being led by investment pools, whether it’s Blackstone Group (private equity) leading the charge as a distress play, or venture capital funds throwing money around Silicon Valley to fund more software concerns.

It’s fairly typical for the comeback in an asset class to be led by private investment pools, but in the case of housing there are still some important constraints that have not only not gone away, but could stay in place longer than the headlines and droolers suggest – tight credit, affordability, and sluggish employment. A great illustration is that construction spending fell in March, while residential construction spending rose.

Personal income and spending rose at the modest rate of 0.2% in March. The year-on-year rise in real disposable income stands at 1.1%, while spending is at 2.2%. 1.1% is just too low for the economy to get any real speed, perhaps tied to productivity being up just 0.9% year-on-year in the first quarter. Safeway (SWY) CEO Steve Burd observed that he has never seen such a disparity between first-of-month receipts and the end of the month, when many consumers are tapped out.

The shrinking, but not too much, data also allows for two views within the Fed to co-exist. The latest FOMC statement had it both ways, saying the committee could go either way, which provided more reassurance to the heroin addicts.

Next week brings the data to a screeching halt, which is good for bullish momentum, although questions and doubts about the jobs report may get louder. That leaves the field clear for earnings and overseas data. The bulk of high-profile earnings reports have either come and gone (March quarter) or won’t be ready for a couple of weeks (April quarter), but one potential bright spot is Walt Disney (DIS), which usually executes well and has good things to say. Something to watch out for is the European data on the slate, with Germany and France scheduled to report purchasing manager and industrial production data.

April managed to come through again. The markets wiped out most of last week’s losses, and while Friday saw the market go through its recent routine of running counter to the week’s trend, the damage was quite limited – with half an hour to go, the S&P was nearly unchanged on the day before doing a minor fade into the close. Considering the size of the GDP miss, that’s a respectable performance that can be counted as a victory.

It seems fair to add that the GDP miss wasn’t as big as it appeared. Although the consensus estimates were for something north of 3%, the weak durable goods report on Wednesday seemed to have convinced many that it was no longer in the cards. The very mild reaction to the print supports that conclusion, as futures barely moved in response. Though stocks did manage to fade about half a percent by lunchtime, buyers moved back in.

We could see 1600 on the S&P 500 by Wednesday, for the market will certainly be trying. Next week has a heavy data schedule and one can never be sure of such matters, but going into it the main events begin Wednesday, which not only has the first day of the month trade, but is the last day to position for Thursday morning’s European Central Bank (ECB) announcement.

The possibility of an ECB rate cut gained considerable traction during the week. To begin with, there was another collection of lousy purchasing manager data in the EU, topped off by the second monthly decline in a row for the German business investor confidence index. That seemed to convince the European markets of the likelihood of a rate cut, an event that has been increasingly favored in recent months as the economy continues to sour.

By the end of the week, two more events had occurred that pointed in the direction of the rate cut, at least to the eyes of this corner. One was an atypical weighing in on ECB interest rate policy by German Chancellor Angela Merkel, who steers clear of such matters as a rule. Madame Merkel opined that the bank was in “a difficult situation,” given that higher rates might be appropriate for Germany (in her opinion), while for other countries “it would need to do more.” Some read this as ECB opposition, but I see it as a pre-emptive apology for German savers up in arms about ever-lower rates (join the club).

At nearly the same time, the Bundesbank (German central bank) came out against the ECB bond-buying plan, a matter that many thought settled last year, but is still moot in the German court system. The motivation could be anything from camouflage to outright petulance, only the bank knows for certain, but it certainly has the appearance of a bank trying to maintain its bona fides in the face of a cut it knows is coming.

The ECB is indeed in a difficult situation. It’s no secret that bank lending in much of Europe is drying up, aggravating the downturn. What’s more, a twenty-five basis point rate cut will do little, if anything, to alleviate the problem in the current environment. But a rate cut does accomplish a couple of other worthy goals. The obvious short-term benefit is to rally equities – European stocks raced ahead last week – though that will probably come to an end within hours of the cut’s announcement.

More importantly, it will give the euro some breathing room against the yen, whose precipitous descent is cutting most of all into the sales of the EU’s biggest exporter: Germany, which derives over half of its GDP from sales abroad. With the US and Japan both pursuing ZIRP policies and quantitative easing, and China managing its exchange rate, the ECB can ill afford to sit around and simply twiddle its thumbs in the wait for everyone to balance their budgets. Germany needs to arrest the yen’s slide against the euro more than it needs another quarter-point for its savers. Let the Bundesbank grumble, it’s what they like to do.

So the signs point to a rate cut that is uppermost in trader’s minds and algorithms – for the moment. There are other hurdles to cross on the way there, including the ADP payroll report before the open on Wednesday and the ISM manufacturing report shortly afterwards. Monday and Tuesday are stuffed with data releases as well. They aren’t as high-profile, but a sufficiently juicy lemon could prevent the market from toasting 1600.

On Friday comes the jobs report, which could very well provide the inflection point for the spring correction, though I wouldn’t expect any straight lines. The report shouldn’t come as a complete surprise, given the ADP precursor two days before, but another report like March would probably provide the starting point for the process of bringing equities back to earth. A middling report could be sold as keeping both the Fed and some amount of growth in the game, while a strong report might set off a short squeeze and set new records with elan.

The weak March data in jobs, retail sales and durable goods weren’t enough to keep markets from rising in April (if you think it was about earnings, you certainly keep score differently than I do). It’s no secret on the floor that the market wants to take out 1600, and is hungry for an excuse to do so next week. That said, don’t underestimate the power of the turning of the calendar. Last week’s air pocket over a hacked AP tweet should be all the reminder that you need of the power of algorithmic trading. The default buy trade comes off in May, and weak news starts to matter again. Be prepared for the possibility.

The Economic Beat

The report of the week was the GDP estimate, though it didn’t move the markets very much. For once I can say that it was neither better nor worse than it looked, as there were several offsetting factors.

To begin with, there’s the deflator, or measure of price inflation, that determines what “real” GDP is, which is the number that gets printed on the headlines. It was reported as 1.2%, a result that I feared might come in a half-point lower, given that energy prices started falling in March. The fourth-quarter deflator, originally reported as 0.6%, has since been revised up to 1.0%. Revisions in this area are often significant, but it does feel like 1.2% is closer to the annual rate than usual.

An upward revision could come from imports. Goods imports got a January boost from the catch-up after the December port strike in Long Beach, California. Yet the February data weren’t as strong and unless March sees a significant boost, which I doubt, the import estimate number will be revised downward. March 2012 saw a significant uptick in imports, partly energy-boosted, that was probably modeled into the estimate. As imports are a subtraction in the GDP calculation, any cut will boost GDP.

Some tried to blame government spending cutbacks for the shortfall, but there wasn’t any particular area of strength elsewhere to justify that line. The data are all initial estimates and shouldn’t be taken as gospel, but with that in mind, domestic final sales fell from a 1.9% rate in the fourth quarter to a 1.5% rate in the first. Nominal GDP was reported at 3.7%, and it’s going a take a big revision to catch that number up to 2012′s first quarter rate of 4.2% (the deflator can’t help, though imports might). If current GDP stays below a 4% rate, it will be the first time since 2009 that the first quarter has done so, making for a less than auspicious start.

PCE, or personal spending, was supposed to have recovered to a 3.2% annual rate, though that number seems high to me in light of the first quarter’s retail sales. Some of it is due to auto purchases, but a good part of it is also due to energy costs and a cold winter. Despite some of the usual inane talk of late about how moderating gasoline prices are going to rejuvenate the economy, after going from very expensive to very expensive minus five bucks a week, February gasoline prices were at an all-time nominal high for the month. Let me assure you that heating oil wasn’t cheap either. Not to be left out, natural gas staged a sharp rally that began in mid-February and roared throughout March, a month that was not comfortable in the middle of the country so far as the temperature went. Possibly revised spending data will come out Monday.

The durable goods number (-5.7%) that effectively knocked the 3% GDP number off its perch wasn’t entirely bad, but it was a long way from good. Television tried to blame it on Boeing (BA) orders, but the ex-transportation category was also a big miss, at (-1.4%) versus estimates for +0.5%. The most redeeming factor was that the business investment category, non-defense capital goods excluding aircraft, was given an initial estimate of +0.2% (the next revision comes out this Friday). However, orders in the category were down from last year for both the month and quarter. The rolling 12-month rate of change was negative for the 3rd month in a row, which hasn’t happened since oh, 2009.

New home sales were on the bubble, as television reported them slightly above estimates and other media below, but existing home sales were definitely short. Nevertheless, the former result seem to reinvigorate markets, as did the talk of the ECB rate cut. For all that, if you had told me the S&P would regain nearly 2% during the week, I would surely have guessed that the GDP and durable goods data had beaten estimates, not come up well short.

Assorted Federal Reserve banks reported data in tune with the rest. The Chicago Fed National Activity Index reversed from an upward revised +0.76 in February all the way down to (-0.23) in March. It’s been volatile lately, with the three-month moving average hovering around the flat line. The Richmond Fed and the Kansas City Fed both reported survey results in the negative mid-single digits. The Markit “flash” PMI result declined, with the regular ISM result due Wednesday. The Chicago survey comes out the day before and should give us one last clue to what the national number will be – and perhaps more important from stocks’ point of view, what the market expects it to be.

Weekly claims data continues to be quite volatile. California apparently keeps reporting estimates and then catch-ups, helping to create big swings (the state makes up about 1/6 of the national total). Then there are holiday effects, April school vacations, and so on. The declines in adjusted claims during the first half of March, when the jobs report data was collected, did not translate into a good number, so it may be that the increase in the first half of April won’t translate into another weak number. Barring further revisions, the total number of initial claims for the first quarter fell 4.3% from the first quarter of 2012. That’s less than half the rate of decline from 2011 to 2012 (10.4%).

Claims and survey data don’t indicate a hiring boom, but the Consumer Confidence survey on Tuesday and ADP payrolls on Wednesday ought to prepare the market for whatever is coming. I suspect an upward revision to March, but beyond that I won’t guess.

Personal income and spending for March comes out on Monday, though they ought to track the data from the just-released GDP report. It’s followed by the last of the monthly housing data, with pending home sales (for existing homes) on Monday and the Case-Shiller price index on Tuesday. Construction spending comes out Wednesday, which is not only the first day of the month, but also has the ISM manufacturing report, auto sales for April, and the FOMC announcement in the afternoon. For what it’s worth, the markets tend to trade more sideways than anything else when confronted with such a heavy barrage of data.

Thursday has the ECB announcement and trade data. Friday ends with the jobs report, factory orders and the ISM non-manufacturing survey. The focus of earnings will shift to health care and energy, which may balance each other out. The week is going to be a lot for the market to digest.

Earnings weren’t much help. Many of the largest companies in the financial and industrial sectors were light on revenue and/or earnings, accelerating flight into the consumer staples, utility and health care sectors. Next week will be heavy on tech stocks, and equities could use a jolt of optimism from them. Taiwan Semiconductor (TSM), the world’s largest chip foundry, reported decent results during the week and raised guidance, so there is still hope.

Indeed, having now bounced off its 50-day exponential moving average, it would be quite typical to see the S&P 500 index mount another charge back to the top of its trading range and the sacred 1600.

You may well wonder what might possibly be the catalyst, but the market has never required solid grounding for its forays into the stratosphere, just a bit of optimism and the failure of the earth to stop rotating. It could come from the resolution of the Boston situation (a very surreal week here), or perhaps some decent earnings (non-GAAP, of course) from the cloud sector, or good news from the slate of PMI “flash” releases on between Monday’s close and Tuesday’s open, including China and the EU. The last aren’t required to be positive, just not as bad as expected or as the month before. The first-quarter GDP estimate on Friday might look good.

If the above end up not looking good, then the spring sell-off could arrive early, unless the central banks spring back into action. Both Bundesbank (Germany’s central bank) President Jens Weidmann and International Monetary Fund (IMF) chief Christine Lagarde have hinted at the possibility of the European Central Bank (ECB) lowering rates soon. One could legitimately argue that ECB President Mario Draghi’s two infamous utterances of “unlimited” and “whatever it takes” last year were the main reasons the markets were up instead of down.

The preponderance of evidence certainly points to the global slowdown the IMF dialed up this week, lowering its forecast for global GDP growth to 3.3% and 1.9% for the US. The problems are still centered in Europe and China, both of which are saddled with piles of bad loans that they would prefer not to acknowledge. The Europeans seem resigned to waiting for a deadly crisis to persuade the Germans to change their minds about aiding in a continent-wide restructuring, while the Chinese leadership is no more anxious to admit to the size of its property bubble than ours was.

How the globe is going to somehow finesse its way out of the overhanging debt by ignoring it in the hopes that meager growth and time can cure it all isn’t clear to me. It seems to be asking an awful lot of US housing to lead the globe back to health, not with unemployment unlikely to improve much in the face of stagnating global trade. The improvement in jobless claims has leveled off considerably from last year, and we are still five million jobs away from 2008 levels. That’s a lot of houses to build.

The Fed can keep rates low, but only time and the economy can persuade still-reluctant banks to forget about their losses and start lending on reasonable terms again. We’re quite likely to get another credit-markets fright before that happens. Equities haven’t really focused yet on the economy – it’s still about the percentage trade, the calendar, and whether one should be optimistic about tomorrow or not.

The heavy volatility and seesaw action in recent weeks are a sign of a market getting ready for some subsea action. That doesn’t mean that the bottom is about to drop out, a process that could take many months, with lots of rebounds in between. But it does imply that tops could be profitably sold.

On a different topic, I would like to briefly note how difficult a week it was here in the Boston area. My sympathies to all directly affected, and my gratitude to all who expressed their concern.

The Economic Beat

The report of the week so far as visibility is concerned was housing starts. For myself, it was industrial production.

Housing starts broke over the one million annual rate (1.036mm) in March for the first time in many years. So why did the homebuilder sentiment ratio, reported the day before, fall back to 42 (50 is neutral)?

One reason is that the rates for both single-family starts and new building permits declined. The headline starts number got a huge boost from multi-family construction, a bulge that is probably going to recede by next month, two at the most. That leads to two inferences, the more obvious one being that the rate of housing starts will decline next month, at least on a seasonally adjusted basis.

The other is that credit continues to be tight for individual homebuyers. The rise in multi-family construction is being helped along by better conditions in commercial lending and investor pools. So far as single-family purchases, though, banks are still plagued by their past lending practices, having to cough up relatively large sums on a periodic basis to atone for sloppy practices. Before anyone rushes to blame the regulators, I would observe that banks have been repeating this cycle since deregulation began in the 1970s: chasing some lending fad in the hopes of getting some of big money, booking nice paper profits for a short amount of time, then becoming reckless in pursuit of same. Afterwards they are stuck with a hangover that lasts much longer than the party ever did.

Some of the refinancing news of late is suggesting an inflection point in the remaining number of homeowners able to profit from doing so, and successfully wade through the hundreds-of-pages long agreement moat. It’s getting to the point that you might snagged on the qualifying bar if you tipped a waiter only 10% back in the nineties. That tightness is present in the new home sales segment too, where the qualified buyers are predominantly sellers of other homes, those able to obtain FHA financing, and investors. That pool may not be able to sustain the growth rates we have seen in the initial months of recovery. Commercial mortgages and loans, by contrast, are experiencing easy times.

Industrial production in March was weaker than expected. The headline number of +0.4% exceeded the 0.3% estimate, but the beat was all due to autos and an uptick in utility production (March was cold). Manufacturing actually fell (0.1%). That was echoed in both the New York and Philadelphia Federal Reserve surveys. Both were short of estimates, with New York at 3.05 and Philadelphia at 1.3, and both readings were the lowest April observations since the recession. New orders weakened to barely positive in New York and slightly negative in Philadelphia.

Two-third of the Philadelphia respondents cited demand uncertainty as an obstacle to hiring, with only 17% (about 1 in 6) citing regulatory uncertainty. The spring slowdown certainly seems to be here, and the main problem is centered in Europe’s recession. It is likely to deepen, going by the latest data from Germany, if the yen continues to weaken and make German exports less competitive. The Chicago Fed national index is on Monday, and I’m curious to see what it has to say about March.

The latest batch of price indices revealed benign pricing conditions, perhaps too benign if you’re worried about deflation. The Consumer Price Index (CPI) fell to a 1.5% rate over the last year, not far from the 1.1% rate logged by the Producer Price Index (PPI). Recent drops in energy helped out, with the CPI “core” (excluding food and energy) at 1.9% over the last year and the PPI at 1.7%.

There was an interesting contrast between the Leading Indicators, which fell by (0.1)% where a gain had been expected, and the Fed’s Beige Book, whose comparatively upbeat tone helped out stocks on Wednesday. The Book authors wrote that “outlooks…remained optimistic across sectors and Districts,” and the report cited “robust” conditions in oil and gas, along with tight housing markets. The Conference Board (authors of the Leading Indicators), by contrast, commented on “weak demand” and that the March data “reflect an economy that has lost some steam.”

In the midst of all of this good news came the revelation from Bloomberg that its consumer comfort index had leapt to its best level in five years. Perhaps taxes weren’t as bad as people had feared.

Next week brings the rest of the latest round of housing news, with March reports for existing home sales on Monday and new home sales on Tuesday. Durable goods for March are on Wednesday, providing the last chance to rework first-quarter GDP estimates before its initial release on Friday. The market will be ill-placed to withstand disappointment in any of them, though as I wrote in Seeking Alpha, the first-quarter deflator measure may come to the rescue for the GDP headline print. The latter needs to be at 3% or better to comfort the market.

There will a full slate of earnings as well, with the beleaguered Apple (AAPL) reporting on Tuesday and a number of high-beta high-fliers reporting during the week, including Amazon (AMZN) on Thursday. The tone of those reports will decide if we make another attempt at 1600 this spring, or a trip back to 1450 first.

It’s about this time of year that I write what has become an annual ritual about hopes floating higher. The springtime phenomenon of exaggerated aspiration based on a calendar and stock market that seems to promise better things is an old one that gets more entrenched every year: If the rest of the month holds up, April 2013 will be the eighth one in a row to show a gain.

This year does seem to be a bit different in tone, after back-to-back surprise disappointments in the March jobs and retail sales reports. A year ago, the record warm weather had the press awash in excited talk about “escape velocity,” a phrase that has been conspicuously absent recently. The market isn’t much different: at April 12, 2012 the SPX had logged a year-to-date price gain of 10.3%; on April 12, 2013, 11.4%.

A good question is whether they will end much differently. Last year saw a tough correction – as usual – over the May-June period, followed by the usual rallies over August-September (even in 2008) and Thanksgiving-New Year’s Eve. It’s become fashionable of late to claim that the late spring correction is too anticipated to happen this year, though such complaints were difficult to find going into the rally periods. They replicated themselves right on schedule.

One might wonder why the first quarter posted another double-digit return at all, given that earnings estimates have come down steadily throughout, to the point that income growth is estimated (though not actually expected) to be negative. The start of the season wasn’t all that auspicious, with all three major companies – Alcoa (AA), JP Morgan (JPM), and Wells Fargo (WFC) – reporting year-on-year revenue declines.

It’s a fair question also to wonder why the market was up last week too, given the weak reports and lack of help from earnings. I keep repeating it – it’s just a seasonal trade. The mid-week pop that came around the Fed’s latest minutes was just based on a permission slip to keep going, as there were no revelations published. Traders know the rally isn’t earnings-based or discounting some glorious second half, as the talking heads on television plead. It’s just a momentum trade that needs the ground underneath to shift in order to be derailed.

The candidates for derailing the train don’t include earnings. They’re the calendar, central bank actions, geo-political surprises such as war, or anything that causes the fixed-income trading desks to freeze up. Earnings do matter eventually, as does the economy, but they tend to matter more when they are going up. Corporate profits declined throughout 1998, but the tech bubble was just getting underway.

I would expect more of the same through next week. Monday is the deadline for taxes (have fun), usually an up day, and Friday is the expiration date for April options, also an up day more often than not. There are a lot of earnings coming out too, but that isn’t going to affect the group that shows up to buy after the volume dies down every morning, then reloads every afternoon. They’re here for a little bit longer. Then the float will start to descend.

The Economic Beat

Both the highlight and surprise of the week on the economic front was the March retail sales report. The consensus estimate had been for no change in headline sales, which I had derided as excessively cautious, though I knew auto sales would be down slightly. By Friday morning, the last estimate I heard for ex-auto sales was 0.3%-0.5%, which was where I stood. After all, March had included Easter, always a shopping positive, and the Redbook weekly chain-store report had indicated a 0.8% monthly gain.

We were all wrong. The number might be revised upward, of course, but after both January and February were revised downward, that action doesn’t seem to be the odds-on favorite. The headline seasonally adjusted number was (-0.4%), the ex-auto number was (-0.4%), and the ex-auto, ex-gas number was (-0.1%).

The numbers did suffer slightly from a widening in the gap between the February and March seasonal factors. One or two categories were alright on a seasonally-adjusted basis, notably furniture stores (+0.9%) and miscellaneous retailers (+0.7%). But it was still a weak report, despite some of the emails I received trying to tell me it wasn’t.

It was. The year-over-year change for first quarter sales was only +2.8%, not much above the rate of inflation and the smallest such increase since the 2009 drop. The only other first quarters weaker this century were the recession years of 2001 and 2002, which were between 1.5% and 2%. It was the fourth weakest number since 1993, and close to recessionary territory. It doesn’t qualify as such, or make one inevitable, but it is worrisome.

The revision to February also took that month’s year-year gain down to less than one percent, the weakest year-on-year reading since December 2009. Some of that is due to the unusually warm weather in February 2012 that made for an exceptional month, and makes for a difficult comparison. The same goes for March and the first quarter. They’re still weak numbers, though, and while I would be ordinarily be inclined to wait for second-quarter comparisons to wash out the weather effect, we now have the sequester to deal with, and it’s only beginning to bite.

The data were consistent with each other last week, if not the market’s rise. The Michigan sentiment number plunged again, to 72.3 when 79 had been expected. It’s been volatile lately, but the trend seems to be around 75. Small business confidence also zigged the wrong way, falling a point to 89.5. That lines up with the unexpected decrease in February wholesale inventories, which fell 0.3% seasonally adjusted. Year-on-year wholesale orders actually declined, and the rolling 12-month total, while still showing a gain of 3.75%, is steadily falling towards zero. The unadjusted inventory-sales ratio is the highest in three years.

Lack of economic strength showed up in pricing statistics, too. Import-export prices both fell in March, and the year-on-year categories are weak. Oil prices were higher a year ago, which accounts for much of the change, but outside of food exports most categories are weak. Producer prices were also weak in March at (-0.6%), similarly pulled down by energy, being up 0.2% ex-food and energy. The year-year rate is stable at 1.7%.

Jobless claims continue to zigzag crazily, and fell back to a 346,000 rate seasonally adjusted. Seasonal factors could continue to be problematic for the headline number in coming weeks.

The FOMC released its latest meeting minutes, and there was really nothing at all new in them. The fact that QE withdrawal is apparently not imminently upon us was all that a mid-April market needed to float higher.

Next week the focus shifts to housing, industrial data, and first quarter earnings. The first category starts off with the homebuilder sentiment index on Monday, followed by housing starts on Tuesday. March will be another tough annual comparison, as the weather was on the cool side. Revisions are often large.

In the manufacturing area, we’ll get the New York Fed survey on Monday, Industrial Production on Tuesday and the Philadelphia Fed survey on Thursday, which also has leading indicators. I’m not sure any of it will mean as much to the market short-term as Friday’s options expiration.

Earnings get underway in earnest, and it will be interesting to see if the markets vary from their pattern of rallying in options week regardless. After JP Morgan and Wells Fargo reported declining revenues on Friday; too-big-to-succeed Citigroup (C) gets a crack at it on Monday. Bank of America (BAC) rounds out the gang of four on Wednesday.

Tuesday includes Coca-Cola (KO), Goldman Sachs (GS), Johnson and Johnson (JNJ), and Intel (INTC).

Besides B of A, Wednesday includes American Express (AXP) and EBay (EBAY). Thursday has Morgan Stanley (MS), Phillip Morris (PM), IBM and Microsoft (MSFT), the last under pressure from reports of steep drops in PC shipments.

Friday will see GE, Honeywell (HON), and McDonald’s (MCD).

Does anyone remember June 2, 2000? It was one of the more memorable trading days I’ve ever seen. On that day, the Labor Department announced that private non-farm payrolls fell by 116,000. A number north of 200,000 had been expected, and there were hopes for plus-300,000.

The market was rocked. As I recall, Dow futures were down over 200 points before the open. April had been a rocky month after a March-madness peak (does that sound familiar?) and this was a stunning slap in the face.

Then one of the biggest, most improbable reversals I’ve ever seen took place. After the opening drop, the dip-buyers did their usual rush to buy. After all, this had been a mostly winning strategy for over a year. The word spread like wildfire across trading desks that such a result would make Fed intervention a lead-pipe guarantee. Ergo, nothing to fear, because you “don’t fight the Fed.” The S&P 500 finished up over 1 1/2% on the day.

I’ve seen that episode rerun a number of times on a smaller scale over the years. A surprisingly bad number opens the market down sharply, and a Fed-to-the-rescue rumor inevitably starts. If the number was some physical stock number, like durable goods or new homes or whatever might have been hot, this too is remodeled as good news, because it will “clear inventories.”

Friday, April 5th of 2013 was not another June 2nd, but it was an imitation of sorts. The jobs number was much lower than anticipated, the market opened sharply lower, and then the narrative took back the reins. The speculation over when the Fed might start to rein in quantitative easing was suddenly transformed into a guarantee that the Fed would have to stay in the game the rest of the year, aided by some dovish Fed comments. Although the S&P finished down, some of the high-beta stuff, like the MDY (S&P mid-cap) and the IYT (transports) managed to rally back to finish on their highs, with the former nearly unchanged and the latter actually in the green.

The Treasury market was having none of it, finishing up strongly on the week. Here’s a tip – whenever the bond market and the stock market are saying two different things, you can make money fairly reliably by betting on the stock market for a week or two – momentum is momentum – but taking the bond market as the eventual winner. Depending on the time of year, stocks can gut it out for more than just a couple of weeks, but don’t be fooled. You can still take bonds and give heavy odds to boot. Note also that gold rallied sharply on Friday, reversing its recent weakness.

It’s not good to go overboard on only one month’s data. But the year-on-year job change has been lower than the 2012 equivalent every month this year, reversing the pattern of improvement from the last three years. The last time the year-on-year changes reversed in this manner was 2007.

The global economy is weakening, but it will take a bit more time for that to be clearer. On Monday the talk was about when the Fed might begin to tighten, but by Friday Treasuries had hit their high on the year. Ironically, the Wall Street Journal ran another article on Monday that wondered where the factory revival was, quoting Dan Meckstroth, an economist for a big manufacturing trade group as saying “there’s simply no statistical evidence of a broader renaissance at this point.” Clearly he isn’t reading enough Wall Street buy recommendations.

Have you notice what’s going on in China? The Hang Seng market index is down nearly 10% this year. Official Chinese export data is showing a huge discrepancy with Hong Kong data. By some odd coincidence, the government is beating up on foreign companies. Yes, it’s clear: The Chinese rebound must be on the way. Just like it is in Europe, where yet another batch of depressing PMI data was released this week, all of it in contraction territory, even Germany. But some of them beat estimates, an exciting event that ought to turn around their unemployment rates any day now.

Leveraged loans – basically, subprime lending for business instead of homes – is this year’s hot fad. The Fed expressed alarm a couple of weeks ago. On Thursday, State Street (SST) and Blackstone announced a new leveraged-loan ETF. It seems that they’re “on fire” – probably because the major investment banks have been pitching them like mad in recent months. They’ll protect against interest rate rises, you see. Remember how portfolio insurance was going to protect against equity declines? “Tiny bubbles, in my wine” goes the song. Or was it my brain?

But the fat lady hasn’t sung yet. Despite the growing nervousness over France joining the list of at-risk countries (the economy has been on the list for some time), French yields set a new all-time low at auction this week. In a world of ZIRP, you just hold your nose and hope the European Central Bank (ECB) can come through on its promises. Consensus estimates for the earnings season that starts next week are for one percent growth, a lofty goal that shouldn’t be too difficult to beat. Especially when much of the per-share gains are coming from reduced share counts.

The ECB still has an interest rate cut left to spend, and the market can switch back to rallying on hopes of no Fed contraction. The central-bank-invincible-armor story still has a few miles left on it.

Don’t forget the seasonal effect, too. Corrections are common in May and June, but crashes are almost non-existent, the “flash crash” notwithstanding. For example, had you gone into cash at the close of June 2nd, 2000, you would have missed out on the chance of an additional 3% gain over the next three months, even after that silly rally. Of course, you’d have also missed out on the 46% loss over the next 13 months, but that’s another story.

The Economic Beat

The jobs report probably wasn’t as bad as it looked from the non-farm payroll point of view – a gain of only 88,000 against expectations for about 200,000 – yet was just as bad as it looked from the household survey point of view, a loss of 206,000. The latter survey is subject to large revisions, but it’s still a long way from no change. An above-average revision of 300K, taking the number all the way back to plus 100K, isn’t out of the question, but then one would still be left with a rather unimpressive 100K.

I favor the March payrolls number to be upwardly revised – the March 2012 number was released as 120,000, seasonally adjusted; after last month’s annual benchmark revision it now shows a gain of 205,000. Wednesday’s ADP payroll report, a clue that the 300k+ whisper-number might not be happening, reported a gain of 158,000.

But before you rip the Labor Department (again), it must be said that first-quarter data is difficult to get right in real time, particularly in regards to seasonal adjustments. The reality of the budget calendar means that the reported workforce shrinks by around 2% after the end of every year (the difference between actual December and January payrolls). The mix of terminations, retirements and job changes makes for a high turnover that is difficult to report or count. The tally typically shrinks as noted in January, then rebuilds over the next few months. Some of it – hopefully a lot of it – is growth in the number of jobs, and some of it is uncounted jobs getting found again. In a good year, there is a net gain in counted jobs over the first four months, despite the sizable initial decline.

I criticized the February data last month as doing a poor job of accounting for retail trade, and it looks to me as if the problem stands only partially fixed. The decrease in March retail jobs may not be any more substantive than the increase in February; I suspect that sector net hiring should have been about zero over the two months, seasonally adjusted. Manufacturing reported a small loss of about 3K, but temp hiring remained steady at about 20K. Transportation and trade declined, and that isn’t healthy.

There are also cross-currents in the trends that are somewhat puzzling. One that stands out is that the unadjusted gain in February payrolls (1.022mm) was the highest ever for the month in my own database, which goes back to 1980. On a more representative percentage basis (to account for the higher population), it’s the biggest since 1999.

Yet 942,000 of that total, more than 90%, were “part-time jobs for non-economic reasons,” according to the household survey (meaning they would work full-time if it were offered). The household data aren’t directly comparable with the payroll figures on a monthly basis, yet clearly something is up. That was an historic increase in part-time workers, sizable even if cut in half. Workers in the “economic reasons” category fell back sharply in March, making for a puzzling pattern indeed.

The answer might unfortunately be traceable to the very large drop in the participation rate, to 63.3%. That’s the lowest rate since 1979, and doesn’t square with the seemingly robust number of additions in February (now reported as an impressive 268K in the seasonally adjusted total). When hiring is strong, the participation rate is supposed to increase, to the point that the unemployment rate may actually go up as people re-enter the labor force faster than they can be hired (or counted). Many took note of the fact that the unemployment rate would have moved up to 7.9% if the participation rate had stayed at February levels, and stock markets around the globe can be thankful that that particular result didn’t cross the tape.

The drop in the participation rate and a low jobs result is consistent with most of the recent sentiment surveys. On balance, they haven’t shown strength in hiring intentions, with the consumer confidence report showing an especially weak number and both ISM surveys indicating static-to-soft hiring outlooks.

A plausible explanation advanced at Briefing.com, amongst others, is that employers are standing pat on hiring. That has the advantage of being consistent with some of the low levels of weekly claims reported in early March. A “wait and see” attitude on the part of businesses with substantial government-related revenues makes intuitive sense – they’re waiting to see how the sequester sorts itself out. Still, that shouldn’t translate into eventual net hiring, because some sectors are going to be making cuts.

Those weekly claims did jump to a reported 385,000 last week, but that should be taken on a very provisional basis. The seasonal adjustment factor was quite large, as the Labor Department had to factor in the seasonal effects of both the end of March (actual layoffs are usually at ebb tide at the end of the first and third quarters) and Easter. It was something of a guess. I will note two warts in the report, one being that the unadjusted estimate from last week was not revised upwards, an anomaly both unusual and positive. On the other hand, the 314K raw estimate compares with 315.6K in the year-ago week, which is not positive, given that the Easter holiday should have acted to reduce claims.

We may find out a year from now that more jobs were added than thought. But for the moment, the year-on-year totals show a gradual softening. January’s year-year rate was down 25 basis points from the 2011/2012 rate. February and March both stand at 39 basis points lower. April 2013 is going to have to be awfully strong to pull the four-month initial period into positive territory for actual jobs, as happens in a good year.

There are ideological arguments being hurled about in the aftermath of the weak numbers, from claims that the prospect of increased health-care costs in January 2014 are responsible, to the notion that capitalist cabals are seeking to further enslave their hourly-wage lackeys.

However, the dominant motive for adding inputs to production is demand. Costs matter, but sales and profits matter more. If demand is anemic, it follows that spending on inputs will be as well. The recovery is now four years old, and we may have reached the plateau of the cycle. Canada did have a little June 2nd, when it reported the biggest job loss since 2009 (over 50K) in the face of an expected gain.

Imports of goods fell in February on a year-over-year basis, and weakening import demand is one of the strongest clues in recent times to a turn in the cycle. There was good news in the report too – imports of crude oil have also been falling, roughly five percent in barrel terms. Combined with a price drop of around ten percent from last year, it adds up to a big decline in money sent overseas (I’m presuming that the drop is mostly from added US production and not from decreases in demand, though clearly high gasoline prices did cut into product demand). It will also help the Q1 GDP print (imports are subtracted).

The ISM surveys of manufacturing and non-manufacturing industries shared the distinction of both printing the lowest March results since 2009. Both were below consensus, with the more influential manufacturing number providing the bigger miss. That came in at 51.3 versus a consensus of around unchanged (February was 54.2), while the non-manufacturing number reported 54.4, missing estimates for 56 and down from that level the previous month.

The reports were by no means disasters. The manufacturing report counted 14 industries as growing versus 3 in contraction, a solid score, while the non-manufacturing tally was 15-3. However the manufacturing new orders result was sharply lower (51.4 vs. 57.8), as was the prices gauge for non-manufacturing (55.9 vs. 61.7). The manufacturing employment question had a small net gain, but the much larger non-manufacturing survey showed a substantial drop (53.3 vs. 57.2). There does seem to be some softening.

Construction spending added 1.2% in February after a 2.1% loss in January. The year-on-year pattern has been fairly level for the last twelve months, with gains in the last two months down a bit from levels in 2012, when activity was boosted by warmer weather. Single-family home construction continues to do well, but I suspect a slowdown in commercial construction is coming soon. Factory orders for February advanced 3%, beating some estimates, but the revisions it contained to the previous week’s release of new orders for durable goods weren’t pleasing. In particular, the business investment category got a hefty bump downward to (-3.2%). That will cut into March shipments, a potential drag for first quarter GDP.

Motor vehicle sales continued at a decent rate (15.3mm annualized) in February, and the weekly retail reports showed strength leading into Easter. The combination of the two should lead to a decent March retail sales report. The consensus estimate currently stands at a ridiculously low 0.0% – talk about rigging the game! Look for something in the plus 0.3%-0.5% range.

That sure-fire “surprise beat” could combine with the Wednesday release of the Fed’s FOMC meeting minutes to put the market back to the important task of overreaching to 1600 on the S&P before giving up. Other reports include wholesale inventories on Tuesday, trade price data on Wednesday, the Producer Price Index on Thursday (PPI) and the Michigan sentiment index on Friday.

Alcoa (AA) will kick off the first-quarter earnings season on Monday, but the market doesn’t may as much attention as it once did, probably because the company has so often struggled in recent years. The more important reports begin on Friday, with JP Morgan (JPM) and Wells Fargo (WFC). I suspect many questions about litigation, putbacks and fines await them.

As it’s a holiday weekend, this week’s MarketWeek will be shortened. But never fear, the good stuff on the economy is still below in the Economic Beat.

The S&P 500 did indeed make a new all-time high on Friday, very closely replicating its performance in the first quarter of 2012. Last year the price of the index moved up 12% in the first quarter, this year it was up 10%. Stock prices did very little after the first quarter last year, though it was quite volatile, and only the rebound on the last day of the year meant that it was positive (barely) over the last nine months.

A similar pattern is quite plausible this year. Historically, when earnings growth has slowed in the late stages of a rally to the point where it’s weak or even negative, the market switches horses and tends to put on a copycat year. In recent decades, this has meant chanting something about Fed magic. It could be anything, so long as enough people are willing to go along.

It won’t be the Fed in the lead this year, as it is already quite extended. Nevertheless, it can still play a strong supporting role. In 2007, markets would consistently rally on the mere possibility of a rate cut. The mood didn’t end until they actually got one. I wouldn’t be surprised to see markets keep rallying in a similar fashion this year, this time on the possibility that the Fed doesn’t end quantitative easing.

The European Central Bank (ECB) has the best chance at playing the lead role this year, as it still has a small amount of room to cut rates. It’s quite possible that it will also wait until a rate cut is too late to do any real good. Unfortunately, the Cyprus solution has put the EU on the track of accelerating the decay of its weaker banks. Among the many analyses that conclude that the EU messed it up with Cyprus are a rather stern one by Ambrose Evans-Pritchard on The Daily Telegraph website, and my own video summary on this site.

The good news is that the problem will take time to manifest itself, though less so on Cyprus itself. The bad news is that like 2007, the failure for disaster to immediately follow will lull markets into a false sense of security. Without a geopolitical event from one of the usual suspects – the Middle East, EU, North Korea – equity prices should move up some more in April, historically the best month of the year for stocks, though one that has seen its share of spring storms in recent years. April will probably see the peak until later in the fall, possibly even for the year.

It depends on which policy decisions are made and which are avoided. The EU prefers to avoid and postpone hard decisions except in extremis – not unlike our own Congress – and so while I say that the Cyprus decision has rung the first exit bell for equities, there is time for the EU to right the ship. There is no indication it will do so until its hand is forced by imminent catastrophe.

I wish a Happy Easter to all, and remind American readers that many European markets close for Easter Monday.

The Economic Beat

The economic data was both mixed and distorted last week. The Chicago National Fed Activity Index had a good news, bad news kind of month with a sharp downward revision to January (from minus 0.32 to minus 0.49), yet a strong showing for February of +0.44. Most of the February rebound came from a rebound in production and the jobs report, which I previously wrote about as suspect. The revisions have been substantial lately, so it’s probably best to wait before making any firm conclusions. The more reliable 3-month moving average fell back to near zero (+0.08) – for now.

Housing had a funny week. Markets bathed all week in the warm glow of the largest year-on-year increase in the Case-Shiller housing index (+8.1% in January) since 2006. This increase is about to fix everything, going by the enthusiasm in the investment orchestra pit. It’s a little disturbing that a widely cited reason for the fix was that Americans will start using the equity in their homes to buy other stuff again. Wouldn’t it better if they were spending out of current income? At any rate, if you look at the longer-term Case-Shiller chart, the rebound isn’t quite so stunning.

The pullback in new home sales got much less attention. That’s the way of a rising market – feed on the good, ignore everything else. Sales fell 4.6% to a year-on-year rate of +12.3% from the approximate 27% y/y increase in January. Last year was pretty balmy at this time, though, so it’s fair to say it’s a tough comparison. Pending home sales also fell, by (-0.4%). There wasn’t much talk about that either.

Manufacturing didn’t have a great week, although you would hardly know it going by the business press. The durable goods result of +5.7% in new orders for February got a great deal of lavish attention. But excluding transportation, the data was a big miss, falling (-0.2%) versus an expected gain of 0.7%. Business investment spending fell 2.7%, though this should be given a little slack in light of the strong January rebound. The Wall Street Journal apparently bit on some hedge-fund propaganda and dismissed the weak February result as inconsequential, dwelling instead on the fact that the three-month moving average has been positive for four months in a row.

Alas, a bit of checking of the source data would have revealed the historical insignificance of the fact. It goes up and down all the time in an era of lean inventory management – it rose for four months in a row in 2008, too, when we had already entered a recession. The annual rate has been steadily following, as my chart at Seeking Alpha demonstrated.

The Dallas Fed business survey was +7.4, better than expectations but below March 2012′s result of +7.9. The Kansas City Fed reported (-5.0), versus +12 in March 2012. The Richmond Fed reported +3 versus a year-ago +7, and the Chicago PMI was about 52 versus a year-ago 62. Does anyone see a pattern here?

Retail sales and consumer sentiment measures were very much at odds. The ICSC survey was pessimistic about March, while Redbook was positive. I think that Easter shopping will help out and we’ll still get a respectable month. As far as sentiment goes, the Conference Board consumer confidence survey fell sharply to 59.7, a low reading, while the University of Michigan sentiment survey rose sharply to 78.6. Go figure. The Bloomberg weekly index fell back to where it was at the beginning of the year.

Personal income rose 1.1% and spending by 0.3% (0.7% before inflation) in February, as the former rebounded from the sharp January drop-off. I didn’t make much of the January decline because of the accelerated bonus and dividend payments in December, and I’m putting February data on the shelf too. A lot of companies paid at least two quarters of dividends in December, some more than that. Many bonuses may have experienced similar patterns. Having any confidence about what the monthly data are really saying could take until well into the third quarter. The data for private wages only should start to normalize with March.

Weekly job claims rose sharply, up 17,000 on top of the 5,000 revision to the previous week, or up 22,000 on an apples-to-apples basis. I’m still trying to figure out the volatility in the California data, and am still waiting for someone at Labor to return my calls.

Fourth-quarter GDP is now officially at +0.4% – for now. It was quite mixed, with spending and imports revised down, and investment spending and exports revised up. It also crucially depends on a sub-normal inflation rate of 1.0%, which I don’t consider realistic. The energy-sensitive measure is likely to see quite a boost in the first quarter.

Next week has three heavyweights – the ISM manufacturing index on Monday, the ECB meeting and press conference on Thursday, and the jobs report on Friday. Last month the ISM (national PMI) survey defied regional weakness to produce an above-consensus result of 54.2. Consensus for March is a cautious 54.0. The non-manufacturing report is on Wednesday.

The consensus estimate for the jobs report is 193,000 as of today, which means that the Street is really expecting another 230K or so, similar to the February result. I’m seeing whisper numbers for something much, much higher, probably as a result of the somewhat suspect claims data. However, if the methodology is similar, it may be right to expect a bigger print. None of the soft indicators from the employment or confidence surveys are backing a big number, apart from the Michigan report. That said, they often diverge substantially from the BLS employment situation. The ADP payrolls report on Wednesday might be a better clue. I thought the February BLS report was flawed, so it may be wise to take the March report with a grain of salt.

March auto sales and February construction spending come out on Monday, with factory orders on Tuesday. Perhaps the latter will bring us an upward revision in business investment spending. I’ll be looking carefully at the latest import data on Friday.

One of the things that strikes me about the modern market is the growing repetition of it all, a phenomenon I put down in part to the growing share of trading by algorithms. The first quarter is the buying season, and the indices tend to repeat year-ago behavior with remarkable consistency.

I’ve been writing in recent weeks about this calendar-repetition trade. My remarks have in turn been repeated in a number of places, and doubtless others have noticed independently as well. It’s become one of the topics of the month.

Let me present you with some fresh evidence, because this crowding around the seasonality explains more than anything much of the recent price behavior and what might be expected in the near future. It can be easy to get bogged down in the minutia or sheer volume of arguments about the nature of the economy, the central banks, and various attempted rationalizations of behavior that in the short run is anything but, except on the most superficial levels. Or when accidents strike.

Out of curiosity, I reviewed some columns I wrote in the spring of 2011. The March 25th column was entitled “March Madness” and could just as easily have been written today as then. The problems I cited were “European debt, growth slowdown, Japan, slowing China, the end of QE2” and remarked that the market is “perfectly capable of ignoring them so long as there is liquidity.” The only that is different is that the Fed pulled the rug out from underneath itself and, along with the European Central Bank, has overtly agreed to write a blank check for as long as necessary.

I’ll return to that point, but first note that on a price basis, the S&P 500 index is up 9.2% through Friday, March 22nd. The 2012 version was up 9.6% through March 23rd. I would attribute the small difference to the lack of an additional Fed easing program on the horizon to bet on. Indeed, every spring for ten years in a row has seen a big double-digit rally, even including the crash year of 2008. Each time, Wall Street strategists and economists predict that the economy will accelerate in the second half of the year and talk of 3%-plus real growth for the following year, and each year it doesn’t materialize. In April 2011 I wrote my fifth consecutive springtime column called “Hope Floats” and I’ll be writing one again shortly. I don’t know how I missed it last year.

All of the market rise and then some in recent years can be attributed to the first quarter rally and the end-of-year mark-‘em-up rally that takes place between Thanksgiving and Christmas. Sell in May and go away, indeed.

As regular readers know, I am one of the voices positing an imminent correction (but not before the end of the month, not unless the EU boots it). Those voices have become so numerous of late that it’s become something of a parlor game to pick the week – will it be early April? Late April? The calendar trade favors a breakdown between the third week of April and the end of the first week of May, so that’s where I sit in this calendar-driven year.

When ECB President Mario Draghi made his celebrated “”whatever it takes” claim, I noted that the bank’s announcement didn’t create a single new job, nor was it at all obvious that it ever would. The main thing it did was to divert the money river back into equities and buy some time for the eurozone to address its problems, which it has so magnificently failed to do that the current period will provide doctorate material for economics majors for decades to come.

The European situation is remarkably similar to two or three years ago. Germany’s membership in the eurozone means that it continues to enjoy an artificially low exchange rate that supports its export-driven economy. Meantime, it lectures its southern neighbors and fellow zone members on the need for more austerity, a process which has continuously driven down their economies into deeper misery, with the promise that someday it will all be made right.

Every six months or so, one of the members teeters, and some sort of minimal plaster is slapped onto the problem. The various EU leaders then proclaim that the crisis is history, everyone but Germany sinks deeper and deeper, and I keep writing that unless and until there is a eurozone-wide debt restructuring, the zone will remain a deadweight around the neck of the global economy.

One might say it’s irrelevant – “don’t fight the Fed,” and I agree up to a point. That point has been reached. Now the market is simply running on its own autopilot. Like a plane that has fuel but no pilot, it will simply keep going until it crashes. First-quarter earnings will act as a mild damper, but earnings aren’t all that important. The Street knows how to ensure that two-thirds of companies beat estimates with remarkable regularity. And I really don’t know when the payback comes. The second-quarter correction could be anywhere from ten to twenty percent, but my guess is that the markets will find some liquidity reason or reasons to trade back up again into the fall.

The market held up on Friday on hopes that the Cyprus situation will be resolved. I hope and expect it will be, but I thought that about Lehman Brothers too. Instead the politicians decided it was time to get tough in September 2008, partly because the administration had become partial to laissez-faire zealots who thought free-market justice was in order.

Now Brussels and Berlin both see a chance to “clean up” Cyprus and its unsightly financial system, with its immoral Russian money. There are right ways and wrong ways to fix things, and shoving them off tall buildings with fingers crossed isn’t one of the right ways. As we go to press, futures markets are having yet another “Europe didn’t destroy itself this week” rally. Fates preserve us.

The Economic Beat

The economy has so far gotten off to a positive, yet weaker start in 2013 than it did in 2012. Manufacturing indices are running weaker, trade is weaker, employment growth (real, not headline) is weaker. Only housing has had a genuinely better start, and a great deal of that is being fed by investment money pouring into the sector.

I don’t want to dismiss the investment-fed bump in housing as insignificant. Cyclical recoveries are usually characterized by pools of investment money coming in to snap up bargains once it is satisfied that the worst is over, and that money helps launch the next up cycle. The improving tenor of the headlines and the removal of much of the distressed inventory from the marketplace have helped gin up some urgency in buyers.

So, for example, existing home sales increased to a 4.98 million rate in February, with an 11.6% increase in median price (partly a mix issue, as the sales are not like-for-like) and a 6.5% price increase in federal agency-sponsored home transactions. Not a surprise to the market, and even slightly below consensus.

In addition, February housing starts showed a respectable increase, though the data is highly adjusted and subject to much revision. It was counterintuitive, for example, that the Northeast and Midwest showed large increases while laboring through a cold and snowy month, while the West and South declined. The latter may be partly why homebuilder sentiment declined from the previous month to 44, instead of rising as expected (50 is neutral).

However, credit is still quite limited in housing and there is no reason to expect that to dramatically change this year. It will heal over time, as all credit cycles do, but it will probably take longer than people think, especially given the respectable chance of another credit event coming along in the global markets that would cause banks to hunker down again.

The issue for the investor is more delicate. Housing isn’t going to make a big enough contribution this year to pull the economy above 4% nominal growth, and there is even some inference that GDP could fall back below that figure. However, what matters to current prices isn’t the reality but the belief, and many traders are happy to bet on crowd succumbing to the belief for a long enough time to make some decent profit. It’s something of a conundrum, because these types of trading credos tend to end abruptly and unpredictably.

Recent weekly claims data pose something of a puzzle. After a three-month period of very little year-on-year improvement, the data seem to have resumed a pattern of showing respectable decreases. However, it isn’t nationwide. The bulk of the difference is coming out of California, which often sends in estimates and has reported huge swings in recent weeks. It’s hard to know what to make of it.

Data out of Illinois and Michigan has been sharply better as well, and it’s tempting to attribute this at least in part to the auto industry, a large employer in the area. It hasn’t shown up yet in national estimates, though, and on the state level we’re still waiting for January data. Weather may also be at least partly responsible for slowing down the filing process – Texas and Florida data, for example, haven’t participated in the recent improvement.

Pennsylvania data didn’t show much improvement either, nor did the Philadelphia Fed manufacturing survey. It did manage to squeak out a positive result versus the negative estimate, as I predicted a week ago, but the result of +2.0 was considerably weaker than the year-ago figure of +12.5.

Retail sales have been moving up as we approach Easter, though the Bloomberg Consumer Comfort index declined. The Leading Indicators came in on schedule with a 0.4% gain, while the coincident and lagging indicators weakened somewhat.

There was of course an FOMC meeting too, and the obligatory rally followed by the obligatory sell-off. The Fed staff lowered its forecast for this year, as expected, though the outlook for the unemployment rate improved mildly (it’s a long-held tenet here that you should not put any money on Fed forecasts). I realize that Fed chairpeople are constrained in what they can say, lest they frighten the horses, but I wasn’t cheered by the chairman’s light dismissal of Cyprus, or his putting the declining participation rate down to demographics.

German business sentiment unexpectedly fell, but it will fall a lot harder next week if something goes wrong with Cyprus, now the main event on next week’s calendar. It’s a heavy calendar too, starting with the Chicago Fed national activity index and the Dallas Fed manufacturing survey on Monday, durable goods and the Richmond Fed on Tuesday, and the Chicago PMI and Richmond Fed on Thursday. That’s a lot of manufacturing survey.

There is housing data too, with new home sales and Case-Shiller data on Tuesday, and pending home sales on Wednesday.

Another revision of fourth quarter GDP comes Thursday morning and the market will most likely trade it, though it really isn’t meaningful by now. Corporate profit data will come that morning as well.

The oddball day is Friday. Personal income and spending data for February will be released, along with another consumer sentiment survey, but the US stock market is closed (European markets get their turn the following Monday). The banks will be open in the US that day. Whether they will be open in Cyprus, I cannot say.