>> Review of Last Week

DOWN FOR THE WEEK, UP FOR THE YEAR... Things weren't very pretty in the stock markets on Friday, the drop in prices offsetting earlier gains, so all market indexes ended down for the week, though still UP for this very young year. Let's hope the overall economy stays UP as well! There certainly were some encouraging signs in last week's economic reports.

The trade deficit in November grew by $3.2 billion, a little more than expected. But the key part of the report showed the total volume of trade has been shooting upward for the past several months. Exports, since bottoming in April, are UP seven straight months, growing 24.4% annually. December retail sales were down 0.3%, which disturbed some people who apparently missed the big upward revisions to November's numbers. If we put in these revisions, sales gained 0.3% overall, 0.5% excluding autos. Over the last three months, retail sales are up at an 11.3% annual rate (7.1% excluding autos).

Of course, jobs continue to be a concern and Initial Unemployment Claims were up slightly for the week, but the four-week moving average dropped to its lowest level since August 2008. Continuing Claims are now down to 4.6 million. The week ended with a tame inflation number, the Consumer Price Index (CPI) up just 0.1% for December. We also had industrial production UP 0.6% for December, bringing it to a 9.6% annual rate over the past six months. The influential Empire State Index zoomed from 4.5 to 15.9 in a single month, showing a nice rebound for manufacturing in the New York region.

For the week, the Dow was down 0.1%, to 10609.65; the S&P 500 was down 0.8%, to 1136.03; while the Nasdaq was down 1.3%, to 2287.99.

A benign inflation reading and a sliding stock market helped bond prices end the week headed in the right direction. The FNMA 30-year 4.5% bond we watch ended UP 66 basis points for the week, closing at $100.75. Mortgage rates should stay at their historically low levels for a while longer and, as noted above, average rates dropped in the most recent Freddie Mac report.

>> This Week’s Forecast

NEW HOMES NEWS... The markets will be closed Monday for Martin Luther King Jr. Day. The four days remaining will give us a few interesting indicators. Wednesday we'll have another look at the market for new homes, with December figures for Housing Starts and building Permits. We'll also have the PPI reading on wholesale inflation.

Q4 corporate earnings season continues and we'll keep an eye out for more signs of economic recovery. There will be lots of action, from Bank of America and Goldman Sachs, to IBM and Google, and from Starbucks to McDonald's.

>> The Week’s Economic Indicator Calendar

Weaker than expected economic data tends to send bond prices up and interest rates down, while positive data points to lower bond prices and rising loan rates.

Economic Calendar for the Week of January 18 – January 22

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months. Economists are back to thinking that nothing will change with the Fed Funds Rates during the first half of the year. They're probably correct -- unless we start getting scary inflation numbers or a nice spike in the recovery. Note: In the lower chart, a 1% probability of change is a 99% certainty the rate will stay the same.

Current Fed Funds Rate: 0%–0.25%

Probability of change from current policy: