The economic news of the day was bullish; the trade deficit for March was smaller than expected and February's was revised down. But another surge in oil futures dampened sentiment in the stock market.

The price of a barrel of light, sweet crude for next month delivery rose by $2.27 on the New York Mercantile Exchange, settling at a new record high of $125.96. The price rose by $9.64 for the week.

By the end of stock trading, the Dow had lost 0.94%; the S&P 500, 0.67%; and the Nasdaq, 0.23%. After three weekly advances, all three indices lost ground this week with the Dow falling by 312.22 points or 2.39%. The Nasdaq fell by 1.27% and the S&P 500 fell by 1.81%.

In contrast, the yield of the benchmark 10-Year Treasury Note fell by 9 basis points on the week (yield moves inversely to price). This was the best performance for the note in seven weeks.

Next week's economic calendar is relatively busy, though Monday's release schedule only contains the Treasury's budget report for last month. April is obviously a heavy tax receipt month and in April of last year, revenue exceeded outlays by $177.7 billion.

Due to the economic slowdown, last month's surplus is expected to be lower at about $158.0 billion. This would put the running total for the fiscal year to date (begun last October) at a deficit of $153.4 billion. This is much larger than the $80.8 billion deficit for the same period in the 2007 fiscal year.

The budget affects the bond market since it indicates the Treasury's borrowing needs. Higher deficits mean more Treasury debt securities will be issued which will compete with those already in the market.

On Tuesday, the retail sales report for last month will likely be the focus of trader interest. In March's report, the Commerce Department said the seasonally adjusted level of sales rose by 0.2%, a little bit stronger increase than had been predicted. In addition, February's originally reported decline of 0.6% was trimmed to a drop of 0.4%.

But the report was far from bullish. Though auto sales increased by 0.2% after a 1.2% decline the month before, sales excluding this category edged up by just 0.1% following a 0.1% decline in February.

For obvious reasons, another volatile category is sales at gasoline stations. They rose by 1.1% in March due to rising gasoline prices. Excluding both the auto and gas station categories, sales were flat (0.0%) in March.

April's report is expected to be mixed. Overall sales are expected to be flat (0.0%). But auto sales were exceptionally weak in April and reports from many major retailers reported good sales last month. Consequently, sales excluding the large but volatile auto category are expected to have risen by as much as 0.5%. If this is the case, it would be the strongest ex-auto rise since last November.

Another early release on Tuesday is the report on import and export prices for last month. In the report for March, the Labor Department said its seasonally adjusted index of import prices rose by 2.8%, a much larger increase than analysts had predicted. Prices spiked up by 3.2% last November but apart from that, March's increase was the largest since September of 1990.

Though a large portion of the jump was due to a 9.1% increase in prices of imported petroleum products; even excluding the category, prices were up by 1.1%. This was the largest ex-oil jump in the history of the data series (begun in December 1988).

On a year-over-year basis, import prices were up by 14.8% due primarily to a 60.0% surge in petroleum prices. Excluding the category, prices were up by 5.4% Y/Y.

Oil prices rose again last month so another strong overall increase in the import figure is anticipated. Forecast estimates range from 1.5% to 2.0%.

Later on Tuesday, the report on business inventories for March will be released and it is expected to be relatively strong. February's report was interpreted as somewhat bearish even though it said inventory levels rose by 0.6% and January's previously reported increase of 0.8% was revised up to 0.9%. While inventory increases are often considered bullish, an indication of accommodating rising demand projections; they can also be interpreted as a bearish signal if they are seen as a backup caused by declining demand.

February's report revealed some of this bearish aspect. It said sales declined by 1.1% -- the largest drop since January of last year. This pushed the inventory-to-sales (I/S) ratio up from January's 1.26 to 1.28.

The I/S ratio is the value of remaining inventories divided by the value of sales for the month. The figure indicates how many months it would take to entirely deplete the inventory at the prevailing sales rate. A longer turnover time means that there is less pressure on the production process to replenish supplies.

The last factory orders report said that manufacturers' inventories rose by 0.9% in March and yesterday's wholesale trade report said wholesale inventories fell by 0.1%. Over the last year, retail inventories have averaged a 0.2% monthly increase. Given these calculation inputs, business inventory levels rose by 0.4% in March. Manufacturer sales were up by 1.1% in February and wholesale sales were up by 1.6%. Using the monthly average of 0.3% over the last year for retail sales, the total is an increase of 0.9%. These changes would push the I/S ratio back down again.

Wednesday brings a key inflation indicator, the Consumer Price Index (CPI), a gauge of price changes at the retail level. In the report for March, the Labor Department said the CPI rose by 0.3% following a flat reading (0.0%) in February. Most of the gain came from a 1.9% rise in the energy index following a 0.5% decline in February. The index of food prices rose by 0.2%, a deceleration from February's 0.4% increase. Excluding those two volatile categories, the so-called core index rose by 0.2% -- also following a flat reading in February.

Analysts are looking at a replay of March's numbers in April's report -- an overall increase of 0.3% and a core increase of 0.2%.

Thursday has a busy release schedule. The jobless claims report will once again address the employment situation. In yesterday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits fell last week by 18,000 to 365,000. The decline was not unexpected following a surge of 38,000 the week before. And, despite the decline, the four-week moving average, which smoothes out some of the short-term volatility, rose by 2,500 to 367,000, the highest reading in six weeks.

Initial claims have clearly been on the rise over the last year. For this year to date (eighteen weeks), the average weekly reading has been 355,111. For the same period last year, the average was 316,556.

The report said that the level of continuing claims for the week ending April 26 (continuing claims must be at least a week old) fell slightly by 10,000 to 3.02 million. This was a bit of a surprise given the increase in initial claims that week. But the four-week moving average rose by 16,750 to 2,998,750, the highest level in a year.

The average weekly continuing claims reading for the year-to-date (seventeen weeks) has been 2,842,588. For the same period last year, the average was 2,506,588.

Another early release on Thursday is the index on manufacturing in the New York area. The New York branch of the Federal Reserve said last month that its manufacturing index came in at 0.63. A reading over 0.0 indicates a general increase in activity relative to the preceding month. While the April's index was only nominally positive, it was much stronger than analysts' predictions of a contraction reading of about -14.0. It was also a marked improvement over March's record low reading of -22.23.

A flat reading or another slight increase is anticipated for May's index.

A little later, the Federal Reserve will release its report on industrial production, a gauge of output from the nation's factories, mines, and utilities. The report for March showed an output increase of 0.3% following a decline in February of 0.7%.

The largest component, manufacturing, saw just a 0.1% increase following a 0.5%. Mining output grew by 0.9% following a 0.3% rise in February. The utilities category, noted for its volatility because of weather variability, increased by 1.9% following a 3.6% February decline. Overall output is expected to have been flat last month or to have risen just slightly.

Another closely watched statistic in the industrial production report is capacity utilization, the ratio of output to potential output. The utilization figure came in at 80.5% last month. Though this was up from 80.3% in February, it was below the originally reported February reading of 80.9% and was the second lowest reading since January of last year. The reduction was a positive inflation indicator since high utilization can lead to production bottlenecks that drive up prices.

Later still on Thursday, the Philadelphia branch of the Federal Reserve will release its regional manufacturing index. It came in at -24.9 in April. Like the New York index, any reading below 0.0 represents a contraction of activity. April's reflected a fifth consecutive monthly contraction. Moreover, it was the weakest reading since February of 2001. Another contraction reading of about -20.0 is forecast for this month's index.

On Friday, the report on housing starts for last month will be released. In the last report, the Commerce Department said the seasonally adjusted, annualized rate of housing starts fell in March by 11.9% from February's 1.075 million to 947,000, the lowest pace in seventeen years.

Prospects for a near-term turnaround were not good. March's report said that the level of building permit issuance fell by 5.8% to a 927,000 annualized rate. This was subsequently revised up slightly to 928,000 but it was still the lowest level since April of 1991.

Most analysts believe the housing slide has not bottomed yet. The starts pace is expected to have declined once again to between 925,000 and 940,000. The rate of building permit issuance is expected to have fallen to about 910,000.

The final release of the week is the first read on consumer sentiment from the twice-monthly surveys conducted by the University of Michigan. The final sentiment index for April was 62.6, the lowest reading since 1982. Forecasters do not predict much change in May's preliminary index.

10:30 AM EDT : Treasuries are up this morning but gains are so far modest. Technical pressure and bullish economic data released this morning is providing resistance while falling stocks are generating some movement into bonds.

In today's only economic release, the Commerce Department reported that the seasonally adjusted value of imports exceeded that of exports in March by $58.2 billion.

The deficit was substantially smaller than the $61.0 billion that analysts were predicting. Moreover, February's originally reported gap of $62.3 billion was revised down to $61.7 billion.

The report said the value of exports declined by 1.7% from February's level but the larger import category saw a decline of 2.9%. The export level was still the second highest on record while the import level was the third highest.

Since net exports constitute a component of gross domestic product, the better than expected deficit figure for March and the improved reading for February suggest stronger growth in the first quarter than the 0.6% rise cited in the advance GDP report released last week.

But stocks are down sharply this morning. The insurance and financial services company, American International Group (AIG), reported after the bell yesterday that it lost a much larger than expected $7.81 billion in the first quarter or -$1.41 per share. Analysts had expected a loss per share of about -$0.76.

The news has rekindled fears of more trouble for credit flows, which would hinder economic recovery. Aside from the effect this has on stocks because of reduced expectations for corporate earnings, the credit concerns also prompt investors to seek out safer, government-backed debt securities (Treasuries).

Another development that is weighing against stocks is the ongoing rise in oil prices. In overnight trading, the price of a barrel of light, sweet crude oil for June delivery was up over $126.00. The price has since retreated but in recent trading it was still up over the closing level of yesterday's regular trading session.

High oil prices benefit the energy sector of the stock market but they depress the rest of the market since they divert corporate and consumer spending from other areas of the economy. High energy prices also increase the cost of producing and transporting goods and are, therefore, inflationary.

Inflation is also bad for bonds and traders there are looking ahead to next week's release of the Consumer Price Index, a key gauge of inflation at the retail level. Buying activity at the retail level will also be addressed next week in the monthly report on retail sales. These and other economic releases are expected to be positive for bonds but this leaves the market vulnerable to surprises . . . .

source: Lion, Inc.