The Markets

A fresh closing high on the Dow on Friday finally enabled it to edge back into positive territory for the year, while the S&P 500 ended the week basically flat. However, after the prior week’s respite from selling pressure, the Nasdaq and the small caps of the Russell 2000 returned to their recent losing ways.

Last Week’s Headlines 

• Growth in the U.S. services sector accelerated in April. The Institute for Supply Management’s gauge rose 2.1% to 55.2%. It was the 51st straight month of growth.
• Greater demand overseas for U.S. exports of natural gas and oil as well as aircraft helped cut the U.S. trade deficit by 3.6% in March, according to the Commerce Department. Exports were up 2.2%, while imports also rose 1.7% to their highest level in two years.
• Federal Reserve Chair Janet Yellen told a congressional committee that the Fed sees a rebound in the economy from winter’s weather-induced slump, but that low inflation and slack in the housing and labor markets will most likely continue to permit interest rates to remain near zero for some time.
• Yet another data point from the Federal Reserve confirmed winter’s impact on the economy during Q1. Business productivity slumped at an annualized rate of 1.7%, a far cry from the previous quarter’s 2.3% increase. However, productivity was 1.4% ahead of Q1 2013. Even though workers put in more hours during the quarter, reduced output helped push unit labor costs up 4.2% for the quarter.
• The European Central Bank once again left its key interest rate unchanged at 0.25% and said that ongoing low inflation might lead to stimulus measures next month, especially if the situation in Ukraine worsens.

Eye on the Week Ahead

With the bulk of Q1 earnings reports now in the rear-view mirror, investors will have to look to manufacturing and retail reports in both the United States and China for guidance. Inflation at both the consumer and wholesale levels is expected to remain subdued, while housing starts could show whether the housing market is emerging from its winter doldrums.