Weekly Economic Commentary

Waiting for the Turn

Market participants will have to look elsewhere for direction this week amid a quiet week for economic reports in the United States. Policy events at home and abroad could help fill the void. The May jobs report was a disappointment any way you look at it, but we will examine whether it was the start of a new trend. Japan’s economy is still transitioning from recovery to rebuilding in the wake of the March 11 earthquake.

Policy, Not Data, Likely to Move Markets this Week

The week after the release of the monthly jobs report (released Friday, June 3) is typically a quiet one for economic data, and this week fits that pattern. Other than the usual weekly readings on retail sales, initial claims for unemployment insurance and mortgage applications, there are no market-moving economic reports due out in the United States this week. The data that is due out — trade deficit and wholesale sales and inventories — is both “old” (for April) and considered second-tier by market participants.

The lack of a robust calendar of U.S. economic data this week will force markets to focus on policy and overseas events. The Federal Reserve (Fed) will release its Beige Book (a qualitative assessment of economic and business conditions in each of the 12 regional Federal Reserve districts), and a plethora of Fed speakers are on tap. Speeches by hawks (those favoring a tighter monetary policy) outweigh appearances by monetary policy doves (those who generally favor easier monetary policy). As we have noted in the past, while the hawks and doves on the Fed seem to garner the most attention from the financial media, it is the center of gravity at the Fed-Chairman Ben Bernanke, Vice Chairwoman Janet Yellen and New York Fed President Bill Dudley, that will likely dictate Fed policy in the coming months. All three are slated to speak this week. Any shift in tone (which has been toward easier policy for longer) from this group would be notable. The next Fed policy meeting is June 22. Fed Chairman Bernanke will hold a press conference that day and the Fed will also release its latest economic forecast as well.

Overseas this week, markets remain vigilant for another rate hike in China as Chinese authorities are expected to release some of China’s economic indicators for May. Although China’s economy has decelerated over the past year (from 12% to near 10%), economic growth has not slowed enough to cool domestic inflation. The desire to cool the pace of inflation in China is driving China’s central bank, the Peoples Bank of China, to raise interest rates. We, and the market, expect a few more rate hikes in China over the coming months.

Outside of China, monetary and fiscal policy is in focus overseas this week, as central banks in Europe, the United Kingdom, Australia, New Zealand, South Korea, Brazil, India, Peru and Indonesia are set to meet. Of these central banks, South Korea, Peru, Brazil and India are expected to raise interest rates this week. More than 25 central banks around the globe are already raising rates to combat domestic inflation brought on by soaring economic growth, and all the banks expected to raise rates this week are in that group. Central banks in Australia, Indonesia, and New Zealand have also raised rates in the past few years, but have paused recently.

Meanwhile, most developed economies’ central banks have continued to maintain accommodative monetary policy as these economies struggle with slow growth and more restrictive fiscal policy. Although the ECB did raise rates earlier this spring, the latest flare-up in the fiscal woes in peripheral Europe (Greece, Portugal, and Ireland) has put the ECB back on hold. The Bank of England (BOE) is on hold as well, as the large cut in public spending enacted by the UK government in 2010 begins to take hold.

May Jobs Report a Disappointment, But Not Likely to be the Start of a New Trend

The weak May employment report confirmed the recent lull in economic activity, but in our view does not represent the start of a new trend for the economy or the job market. The private sector economy created just 83,000 jobs in May 2011, far short of lowered expectations, which fell dramatically in the days leading up to the jobs release. Despite the disappointment, the private sector economy has created jobs for 15 straight months, totaling 2.1 million jobs, but there is still a long way to go to recoup the 8.8 million jobs lost in the Great Recession. There was some evidence in the May jobs report of downward pressure on jobs from the Japanese earthquake, the late Easter, poor weather, and higher oil prices, although even excluding these factors, the report would have represented a deceleration in job creation relative to recent trend.

The 5,000 drop in manufacturing jobs between April and May reflected both unusually severe weather in the Midwestern and Southern United States in May, as well as supply chain disruptions associated with the earthquake, tsunami and nuclear disaster in Japan. The late Easter (Easter fell on April 24, 2011, which is the latest that Easter has occurred in nearly 70 years) most likely contributed to the seasonally-adjusted 9,000 drop in retail employment in May (after a huge 64,000 gain in April) and to the 6,000 drop in employment in the leisure and hospitality industry in May, following average monthly job gains of 45,000 in this category in February, March and April. Higher oil prices may also have impacted both retail and leisure employment as more money spent by consumers on gasoline means less money available to spend on clothing and travel.

Looking ahead to June, the late Easter impact will fade and if the weather cooperates, we should see a return to an average of about 200,000 job growth per month. However thus far in June we have seen tornados in Massachusetts and areas in the Midwest and West are bracing for historic flooding following near record snowfall this past winter. On the supply chain front, there are some signs (see section below) that Japan has finally moved from the cleanup phase to the recovery and rebuilding phase nearly three months after the devastating earthquake and tsunami hit on March 11. This should help manufacturing employment bounce back in June and the months ahead.

Fundamentally, the backdrop for hiring in the United States remains solid, but not spectacular. Corporate profits are at a new all-time high, companies have plenty of cash, financing costs are low, banks are more willing to lend to businesses today than at any time in the past five years and credit markets are functioning better now than at any time in four years. In addition, the economy has been in recovery for two years, jobs have been added in each of the past 15 months, and growth in emerging market economies (where we send 50% of our exports) remains robust. Finally, layoff announcements over the past 12 months (476,000) were the fewest in any 12 month period since 1998, when the unemployment rate was 4.5%.

While the low level of layoff announcements suggests that businesses are confident that the recession is over, obstacles remain to hiring. In the financial sector, the Dodd- Frank regulatory burden is still being absorbed by banks and other financial institutions, making planning and hiring difficult. Uncertainty over monetary and especially fiscal policy at home and abroad is being met with caution among business owners, especially among small businesses who account for two-thirds of job creation. Finally, while credit to businesses from the banking system is flowing as freely as it has in several years, the terms of the credit are not quite a generous as they were in the mid-2000s.

On balance, the backdrop for hiring remains supportive for modest (200,000 to 250,000 net new jobs per month) job creation in the coming months, but it is still likely to take the economy several more years before it recoups all of the jobs lost during the Great Recession.

An Update on Japan

On balance, market participants probably underestimated the impact of the March 11 earthquake in Japan (the world’s third largest economy) and its aftermath on the global economy. The market expected some supply chain disruptions as a result of the quake, tsunami and nuclear disaster, but the market probably underestimated both the severity and duration of the disruption. Looking ahead, while there is not as much high frequency (daily, weekly) economic data in Japan as there is in the United States, the data released over the past week or so in both Japan and outside of Japan, suggests that a turn in the Japanese data is at hand, although evidence of the impact of the quake is likely to persist for a while longer.

Signs that the Japanese earthquake would have a more pronounced impact on the global economy were evident in the 15% month-over-month drop in Japanese industrial production in March versus April. Other signs included:

·         A 37% year-over-year plunge in vehicle sales in March 2011 versus March 2010.

·         The 20 point drop in a the key “economy watchers” diffusion index from 48.4 in February 2011 to 27.7 in March 2011, indicating only about one-quarter of respondents thought conditions were improving in March down from one half of respondents in February.

·         The 15% year-over-year drop in department store sales in March.

As the April data was being reported in early May, the situation looked even worse. After plunging 37% year-over-year in March, vehicle sales fell 51% year-over-year in April. Even the economic data in the United States felt the impact, most notably the big drop in the Institute of Supply Management’s (ISM) non-manufacturing index for April report released in early May.

By mid-May, there were signs of a bounce back in Japan, although a more muted one than expected by the market. In short, the incoming data in Japan had stopped getting worse, a key precondition for data getting better.

·         The Economy Watchers survey improved to 28.3 in April from 27.7 in March, but remained well below the pre-quake peak.

·         Machine tool orders, which plunged 8.0% year-over-year in March, rose 6.8% in April, but remained well below pre-quake levels.

·         Department store sales, which plunged 15% year-over-year in March, fell by only 1.5% year-over-year in April

·         Overall retail sales, which fell 8% month-over-month in March, posted a 4% month-over-month gain in April.

·         Industrial production, which fell 15.0% month-over-month between February and March rose 1.0% between March and April, and private sector surveys suggest that Japanese industrial production will accelerate sharply in both May and June

Over the past week or so, some of the incoming Japanese data for May suggests that the rebuild effort picked up steam in May. Even some of the U.S. economic data most impacted by the quake looked better. For example, the ISM’s non-manufacturing index moved from 53.8 in April up to 54.6 in May, reversing some of the post-quake losses seen in the April report. In addition, Japan’s ISM index for May moved higher after falling in March and April, and Japan’s non-manufacturing ISM rose to 43.8 in May from 35 in March and near 34 in April. The pre-quake reading here was 50.

There are several key reports on the Japanese economy for May due out this week (Economy Watchers, consumer sentiment and machine orders) that are expected to show that the pace of recovery in Japan hastened in May.

----------------------------------------------------------------

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

Challenger, Gray & Christmas is the oldest executive outplacement firm in the United States. The firm conducts regular surveys and issues reports on the state of the economy, employment, job-seeking, layoffs, and executive compensation.

The ISM index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

Stock investing involves risk including loss of principal.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Weekly Economic Commentary

Housing Woes Continue

Housing and manufacturing data for April and May will provide the economic data backdrop in the United States this week, as investors react to the latest fiscal flare-up in peripheral Europe. Nearly two years into the economic recovery, the housing market remains in turmoil. We examine the positive and negative aspects of the housing market, and its impact on the health of the recovery.

Housing and Manufacturing Dominate the Week Ahead

As the market debates commodity prices and the fate of Greek debt, investors will absorb data for April and May on housing, manufacturing, and leading indicators this week. As always, markets will also digest the weekly readings on chain store sales, mortgage applications and initial filings for unemployment insurance. The Federal Reserve (Fed) will release the minutes of the April 26 – 27 Federal Open Market Committee (FOMC) meeting and several voting members of the FOMC are scheduled to make public comments this week. Overseas, it looks like a quiet week for central bank activity, as the only notable central bank meeting to set policy this week is the Bank of Japan, although another rate hike from the Peoples Bank of China (PBOC), which does not have a set schedule for its meetings, could come at any time.

The manufacturing sector will be represented this week by the Empire State Manufacturing Index for May (the first look at manufacturing in May), the Philadelphia Fed Manufacturing Index for May, along with the industrial production and capacity utilization data for April. The Empire State data was released as this report was being prepared and revealed that manufacturing activity continued to expand in New York State in May, but at a slower pace than in April. The 11.88 reading in May (a reading above zero in this Index indicates an expanding manufacturing sector in the New York region while a reading below zero indicates contraction in the sector) was the sixth consecutive reading above zero, and the twenty-second reading above zero in the past 23 months dating back to the beginning of the economic recovery in June 2009. We expect the rest of the month’s manufacturing data, including the Institute for Supply Management’s (ISM) report on Manufacturing, to show a similar pattern — continued growth in the manufacturing sector in May, but at a slower rate than in April. This pattern is consistent with the behavior of the manufacturing sector at a similar point (i.e., two years in) in virtually every other economic recovery since World War II.

Housing Market Still Struggling Two Years Into the Economic Recovery

Housing data for April and May will dominate this week, as we reach the peak weeks of the important spring selling season in the housing market. At the beginning of the week, the National Association of Homebuilders (NAHB) survey for May will provide a crucial update on the health of the new home market. At the end of the week, the existing home sales data for April will provide some color in the market that is still suffering the after-effects of the bursting of the mortgage debt bubble. In between, data on housing starts and building permits for April will be released.

There are many positives for the housing market including:

·         Homebuyer affordability (the ability of a household with the median income to afford the payments on a median priced home) is at an all-time high

·         The ratio of home prices to median income is at an all-time low (indicating that the housing bubble that peaked in 2005 has now fully deflated, and then some)

·         Banks’ lending standards for making home loans have been loosening since mid-2008

·         The financial obligations ratio (the ratio of financial obligations — including automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance and property tax payments — to disposable personal income) for renters is at a 16-year low

·         The inventory of unsold new homes is at an all-time low. As noted below however, it’s the inventory of unsold existing homes that is the concern

·         A rapidly improving foreclosure pipeline (mortgage delinquencies, defaults, bank-owned houses)

Nationwide, the housing market (sales, prices, construction) has been stagnant, at best, since bottoming out in early 2009, with the recent slide in home prices nationwide receiving most of the financial media’s attention. But the housing market is “local” and while the national stats on housing have stabilized, pockets of severe weakness remain in places like California, Nevada, Florida, Michigan and Arizona.

The main issue remains the huge inventory of unsold existing homes (3.5 million as of March 2011) plus the so called “shadow inventory” of bank-owned and foreclosed homes (roughly 3 to 4 million) that will enter the market. In addition, the slowdown in the later stages of the aforementioned foreclosure pipeline may largely be the result of the delays in processing documents rather than a fundamental improvement in the housing market. In addition, “distressed” sales continue to account for a large portion (one-quarter to one-third) of all existing home sales, putting further downward pressure on prices.

The housing market impacts the overall economy via several avenues. The most direct impact is on home construction. In 2010, construction of new homes accounted for around 2% of gross domestic product (GDP), down from 6% at the peak of the housing boom in 2005-2006. Not much was expected out of housing in 2011, and thus far, the sector is meeting those lowered expectations. Housing also impacts GDP indirectly via construction employment, commissions of real estate and mortgage brokers, and most importantly, via the wealth effect.

In April 2011, 564,000 people were employed in building houses and condos, representing less than one half of one percent of total private sector employment. At the peak of the housing bubble in 2005-2006, 1.1 million people were employed in the construction of new houses and condos, representing close to 1% of private sector employment. It is quite unlikely that the nearly 500,000 construction jobs lost over the past five years are coming back anytime soon. At the peak, nearly 2.2 million people were employed in the real estate industry as brokers and lenders. Today, that figure is closer to 1.9 million workers, and the 200,000 or so jobs lost here are unlikely to come back soon either.

The wealth effect associated with housing probably has the largest indirect impact on the economy. At the peak in 2005 – 2006, the value of residential real-estate (less the debt associated with residential real estate) stood at nearly $16 trillion. At the worst of the housing bust in early 2009, the value of real estate net of home mortgages was under $8 trillion. Today, more than two years later, the value of residential real estate (less real estate debt) remains close to $8 trillion. The good news is that despite the lackluster performance of real estate, overall household net worth (household assets less household liabilities) has increased by nearly $8 trillion since the early 2009 low, thanks to the surge in the stock market — and despite the flat performance of residential real estate. Still, in order for the consumer to fully recover the spending power it had prior to the real estate downturn, the housing market has to start to perform better. The economic recovery has occurred without the help of housing, and can continue without the help of housing, but the recovery is not likely to feel like a real recovery — nor achieve a more robust pace of growth — for most American’s until housing can regain some of its former glory.

----------------------------------------------------------------------------------

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

The NY Empire State Index is a regional economic indicator published by the Federal Reserve Bank of New York and released around the middle of the month. It's considered to be an indicator of economic conditions in one of the most populated states in the U.S.

Philadelphia Federal Index is a regional federal-reserve-bank index measuring changes in business growth. The index is constructed from a survey of participants who voluntarily answer questions regarding the direction of change in their overall business activities. The survey is a measure of regional manufacturing growth. When the index is above 0 it indicates factory-sector growth, and when below 0 indicates contraction.

The ISM index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Weekly Economic Commentary

Inflation Is Key This Week

Reports on April inflation dominate this week’s economic calendar, but China’s economic calendar and a possible rate hike in China are also on the market’s radar. The April jobs report was solid (not spectacular), but it is still a long climb back for the labor market.

As we noted in last week’s Weekly Economic Commentary, the first week of every month is chock full of timely economic data. The busy first week of the month usually gives way to a quiet “week after,” but that is not the case this week (May 9 – 13, 2011). Market participants have plenty of data to digest as they mull over last week’s data, which included the April jobs report, and market action, headlined by the plunge in commodity prices.

The key reports this week in the U.S. are on inflation and inflation expectations, but data on the March trade balance and April retail sales will garner plenty of attention as well. In addition, this week is when Chinese authorities release most of their economic data for April. The full slate of economic data in China coincides with the 2011 United States-China Strategic and Economic Dialogue in Washington, D.C. China’s currency and interest rate policies, as well as the U.S. fiscal policy, are likely to be among the key topics of conversation at the summit. Markets are still anticipating another few interest rate hikes from the Chinese central bank, the Peoples Bank of China (PBOC), and the next move could come at any time. Accelerating inflation in China (5.2% year-over-year CPI inflation expected in China in April) is pushing the PBOC to act and inflation data for April due out in the U.S. this week could put similar pressure on the Federal Reserve (Fed).

April readings on the Consumer Price Index (CPI) and producer price index (PPI) are due out this week in the U.S., along with the early May reading on consumers’ inflation expectations from the University of Michigan’s Survey of Consumers. The year-over-year readings on the PPI and CPI are going to grab plenty of attention, with the PPI likely to post a 6.5% year-over-year gain and the CPI a 3.1% year-over-year increase. Both indices are being driven higher by surging energy and commodity prices, although the gap between the PPI (6.5% year-over-year) and CPI (+3.1% year-over-year) underscores the “firewall” between higher commodity costs and the consumer. We’ll discuss this firewall effect later in this report.

Beyond what are likely to be startlingly large increases in the headline PPI and CPI, the core (excluding food and energy) readings on both are expected to be muted, which should give the Fed comfort. Still, in our view, Fed policymakers face a communications (and potentially a credibility) problem as headline inflation surges but core inflation — which is what the Fed focuses on when making monetary policy decisions — remains tame. Although our view is that Fed Chairman Bernanke did a solid job in his first-ever post Federal Open Market Committee (FOMC) press conference on April 27, his response to the questions around headline versus core inflation was not convincing. Bernanke has another chance to answer these types of questions following the June 22 FOMC meeting.

At the aforementioned April 27 press conference, Bernanke did mention that Fed policymakers were closely monitoring inflation expectations. One very timely measure of inflation expectations can be found in the University of Michigan’s Survey of Consumer Sentiment. That survey asks consumers what their expectations are for inflation over the next year and five years. The Fed typically focuses on the five-year number. Consumer’s five year ahead inflation expectations have been stable for the past ten to 15 years, after falling sharply between the late 70s and early 80s through the late 90s. The latest reading, at 2.9%, is right at the average reading over the last ten years or so. The Fed has made it clear that any upward move in inflation expectations would be met with tighter monetary policy, which makes this data point from the University of Michigan one of the most important indicators for market participants to monitor as the Fed prepares to remove the monetary stimulus from the system.

Solid April Jobs Report, but it is Still a Long Climb Back for the Labor Market

The private sector economy created 268,000 jobs in April, the 14th consecutive monthly gain. The result was better-than-expected and represented acceleration in job creation versus the prior month. A portion of the gain in jobs in April may have been related to the late Easter (April 24) in 2011 versus 2010 (April 4), which pushed some retail and lodging and leisure hiring into April this year, but the impact of the Japanese earthquake on the global supply chain may have held down hours worked and some hiring in the United States. State and local government hiring remains the weak spot in the employment market, as another 22,000 were lost here, bringing the total number of jobs shed in the state and local government sector since the end of the recession to nearly 430,000.

While not a booming report on the health of the labor market, the April jobs report (released Friday, May 6) suggests that the United States labor market weathered higher oil prices and the supply chain disruptions in Japan quite well thus far. In addition, the report serves as a reminder that while unemployment claims — which have moved higher in recent weeks raising concerns about a “double dip” recession — are a great, timely indicator of the health of the labor market, they say more about the unemployment rate than they do about the pace of hiring. Adding to the positive backdrop for the global economy was the April labor market report for Canada, which was also released on Friday, May 6. The Canadian economy added 58,000 jobs in April, which given the size of the respective economies, is the equivalent of 450,000 new jobs in the United States. The result far exceeded expectations and serves as further confirmation of continued growth in the global economy in the months and quarters ahead.

The monthly jobs report from the United States Department of Labor is actually two reports in one, which is why the unemployment rate can rise even as the number of jobs increases. The unemployment rate (the number of unemployed persons divided by number of persons in the labor force) is calculated using the "household survey," which tallies responses from 60,000 households each month (a huge number for a nationwide sample, where political polls typically survey around 1,000 people to garner data for national political races) asking them about their employment status. This month, the number of unemployed persons increased by 205,000 while the labor force increased by 15,000, leading to the higher unemployment rate. At 9.0%, the unemployment rate is below its recent peak of 10.1% (hit in the fall of 2009), but remains above the Fed’s 8.5% target for the unemployment rate for the fourth quarter of 2011.

The job count data (discussed below) is collected via the "establishment survey," which surveys 140,000 businesses and asks them about the composition of their payrolls. Over time, these two surveys (“household” and “establishment”) tend to converge and tell the same story about the labor market, but over shorter periods (a month or a quarter) they can send conflicting signals.

The April gain in private sector jobs was the most in any single month since February 2006. Over the past three months, the private sector economy has added an average of 253,000 jobs per month, also the best reading since early 2006. Encouragingly, the diffusion index (the number of industries adding workers less the number of industries shedding workers) ticked up to 64.6 in April from 64.4 in March. Over the past three months, the diffusion index has averaged 66.6, the highest reading since 1998, when the United States economy was booming. This solid reading is further confirmation that the United States labor market recovery is well underway and firmly entrenched even in the face of rising input costs and the global supply chain disruptions as a result of the earthquake and tsunami in Japan. However, the labor market still has a long way to go.

The private sector has added 2.1 million jobs in last 14 months (March 2010 through April 2011) after the private sector economy lost 8.8 million between December 2007 and February 2010. This is the best 14-month run for job creation since September 2005 through October 2006, but there is still a long, long way to go (6.7 million) to get back all the 8.8 million private sector jobs lost.

At current pace (253,000 per month over last 3 months) it will take another two years and two months to get those 6.7 million jobs back. That’s June 2013, or five and a half years after the peak in employment in December 2007.

By comparison, it took the economy four and a half years to get back to peak employment after the mild 2001 recession, and around three years after the mild 1990 – 91 recession, and less than three years to recover all the jobs lost in the severe 1981 – 82 recession.

The sluggish pace of job creation (relative to prior recoveries) is one of the reasons why this does not feel like a recovery yet to many people. This same phenomenon is also helping to keep wages muted, which acts as a firewall against soaring input prices being passed along to the end consumer. Finally, the tepid pace of job growth (and the still historically high percentage of people who have been out of work for more than six months) will resonate with the policymakers at the Fed, who are likely to be cautious about removing the stimulus too soon.

----------------------------------------------------------------------------

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Producer Price Index (PPI) is an inflationary indicator published by the U.S. Bureau of Labor Statistics to evaluate wholesale price levels in the economy.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Weekly Economic Commentary

Busy Week for Data and Policy

The week’s economic calendar is bookended by the April ISM report on Monday and the April jobs report on Friday. In between, both fiscal and monetary policy (at home and abroad) will take center stage.

Traditionally, the first week of every month is chock full of timely economic data. This first week of May is no different, as economic data, geopolitics and the debate over the United States’ debt ceiling is likely to replace first quarter earnings reports and guidance as the key drivers of market activity this week. From beginning to end, this week is full of crucial economic reports for April and March that will help guide actions of Federal Reserve policymakers and market participants. This ranges from the April report on business from the Institute of Supply Management (ISM) on Monday to the April employment report on Friday. In addition to the data, Congress returns to work this week after a two-week break, with the debate over the debt ceiling likely to take center stage. Market participants will also be debating the short- and long-term impact on markets and economies after U.S. forces killed Osama bin Laden, the mastermind of the September 11 terrorist attacks and leader of the al-Qaeda terrorist network.

In between the April ISM report on Monday and the April employment report on Friday, markets will digest data on the consumer (April vehicle sales, April chain store sales, March consumer credit), labor costs (productivity and unit labor costs in the first quarter of 2011), and factory orders. In addition, the regular weekly reports on retail sales, mortgage applications and initial filings for unemployment insurance are sure to draw some attention this week.

As this publication was being prepared, the ISM report on business for April was released. The report revealed that while the U.S. manufacturing sector has cooled in recent months, conditions in the manufacturing portion of the economy remain robust, and that the economic recovery that began nearly two years ago remains firmly in place. In addition, the forward-looking elements of the ISM (new orders, backlog of orders, new export orders) all suggest that the recovery will remain in place for the foreseeable future. In every economic recovery, the ISM typically gets to around 60 (it got as high as 61.4 in February 2011) and then begins to fade back to 50. A reading above 50 on the ISM suggests that the manufacturing sector is expanding. A reading above 44 on the ISM suggests that the overall economy is expanding.

Thus, while the ISM may have peaked for this cycle, we do not think this means that the economy is headed back into recession. In fact, a dip in the ISM in this point in the cycle is normal, and some easing of price pressures in the manufacturing area may allow the Fed to remain on hold a little longer.

Although all the economic reports due out this week will be closely scrutinized by markets (and the Fed), the key report is likely to be the April employment report, which is due out on Friday, May 6. The recovery in the labor market is still in its early stages (the private sector has added just over 1.8 million jobs in the last 13 months after shedding more than 8.8 million in the Great Recession and its aftermath), but it has picked up steam in recent months, having added close to 200,000 jobs per month over the last four months.

Markets are looking for a similar gain (around 200,000) in private sector employment in April and for the unemployment rate to remain at 8.8%. If the consensus is correct, the April jobs data will be another step toward recovery for the labor markets, but at its current pace, the labor market recovery is probably too slow to convince the Fed that tighter monetary policy is warranted.

Policy Parade

On the policy side, there are a scattering of Fed officials slated to speak this week, and markets will want to pay especially close attention to comments this week from Fed’s “Big Three”: Chairman Ben Bernanke, Vice Chairwoman Janet Yellen and New York Fed President Bill Dudley. Bernanke, Yellen and Dudley represent the “center of gravity” at the Fed, and their comments on the economy and interest rates should, in our view, carry more weight than comments from other Fed officials, especially vocal critics of quantitative easing (QE2) like Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser.

With Congress back from a two-week vacation, the nation’s fiscal situation is likely to return to the top of the headlines. Officially, the U.S. Treasury’s ability to borrow runs out on May 16, but in reality, Treasury has enough wiggle room to borrow until July 8, 2011. Between now and then, the debate over whether or not to raise the debt ceiling, how much to raise it by (a trillion would likely get us through the next year or so, while a $50 billion increase would only get us a week or two) and whether or not to tie an increase in the debt ceiling to a longer-term agreement on the scope of Federal spending and taxes will be an almost constant companion to the ups and downs of the market.

As we wrote in the April 11, 2011 Weekly Economic Commentary, in exchange for raising the debt ceiling, Congressional Republicans are most likely going to want deep cuts in spending for both fiscal year 2012 and beyond. The Senate Democrats and the White House want smaller cuts, and for spending cuts to be accompanied by tax increases. The game of “political chicken” over the debt ceiling limit in the next few months has to potential to move markets, especially the debt markets. As previously noted, a series of small ($50 billion or so) short-term increases in the debt ceiling are possible over the next few months, which would lead to a number of “drop dead” dates on the budget that may increase volatility in the financial markets.

Central bank policy will be a key theme overseas as well this week, as several major central banks, including the Reserve Bank of Australia (RBA), the Bank of England (BOE) and the European Central Bank (ECB) meet to set policy this week. Although both the RBA and the ECB have raised rates already in this economic cycle to combat domestic inflation concerns, neither central bank is expected to hike rates this week. The BOE remains on hold, perhaps in deference to the ongoing fiscal austerity in the United Kingdom, a path the Fed could choose to take should any budget deal between President Obama and the House Republicans contain sizeable spending cuts. Elsewhere, central banks in the Philippines, Romania, Malaysia, the Czech Republic and India all meet this week to set rates. Of those, both the Philippines and Malaysia could raise rates this week. Both have already hiked rates in response to booming domestic economic growth and in an effort to combat rising domestic inflation.

Although China’s central bank, the Peoples Bank of China (PBOC), does not have a set schedule for its policy actions, another move to tighten monetary policy (via interest rates or by an increase in banks reserve ratio requirements) could happen at any time, as authorities in China grapple with a booming economy and rising domestic inflation. The PBOC has raised its benchmark lending rate four times since October 2010, most recently on April 5, 2011, and has increased its reserve ratio requirement nine times since January, 2010, most recently on March 18, 2011. Over the weekend of April 30-May 1, the Chinese Purchasing Managers Index for April was released revealing that China’s manufacturing economy continued to cool in April. The report is the first information markets get on the health of the Chinese manufacturing sector each month. At the margin, the continued cooling in the Chinese manufacturing sector may mean fewer rate hikes by the PBOC in the weeks and months ahead, but the PBOC will almost certainly raise rates one or two more times, and that could happen as soon as this week.

------------------------------------------------------------------------

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

Stock investing involves risk including loss of principal.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

The ISM index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

Chinese Purchasing Managers Index: The PMI includes a package of indices to measure manufacturing sector performance. A reading above 50 percent indicates economic expansion, while that below 50 percent indicates contraction.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Weekly Economic Commentary

Focus on the Fed

The main event this week for financial markets is likely to be the Federal Reserve’s (The Fed) Federal Open Market Committee (FOMC) meeting and the first-ever post-FOMC press conference by Fed Chairman Ben Bernanke. The U.S. economy receives its first quarter report card this week, and the results are likely to look worse on the surface than they actually are in substance.

Earlier this year, the Fed announced that Chairman Bernanke will hold a press conference after four of the eight meetings of the Fed’s policymaking arm, the FOMC. The press conferences will coincide with the release of the FOMC’s quarterly economic forecasts, which are made at the FOMC meetings held in January, April/May, June, and October/November each year. Thus, on April 27, June 22 and November 2, 2011, the FOMC statement will be released at 12:30 PM ET, 1 hour and 45 minutes earlier than usual. Although the two-day FOMC meeting, the release of a new economic forecast, and the first ever post-FOMC meeting press conference by a Fed Chairman presents a seemingly perfect opportunity for the FOMC to signal a shift in policy, our view is that the conditions are not right yet for the FOMC to signal the change this week.

If the consensus is correct, the outcome of this week’s two-day FOMC meeting is not in doubt. All 80 of the economists and strategists surveyed by Bloomberg news expect the FOMC to keep rates steady at the conclusion of the meeting, and we concur with that view. Market participants do not expect the FOMC to raise rates until the first quarter of 2012, and we concur with that view as well. We also share the consensus that the FOMC will continue to endorse its Treasury purchase program (Quantitative Easing or QE2) at this week’s meeting, and that the hurdle for the FOMC to launch a new round of purchases (QE3) when QE2 ends on June 30 remains high.

While the outcome of the meeting is not in doubt, the “internals” of the meeting (the FOMC’s latest economic forecast, the wording of the FOMC statement, and most importantly, the tone and content of Bernanke’s press conference) are all likely to move the FOMC one step closer to removing the unprecedented monetary policy stimulus now in the system. As noted in the most recent Beige Book (a qualitative assessment of economic and business conditions in each of the Fed’s 12 regional districts), while the overall economy and labor market have improved this year, they have not improved enough yet to warrant a tightening of policy.

Inflation, inflation expectations, and the recent surge in commodity prices will likely dominate the FOMC’s internal discussion this week, and are likely to be the topic of many of the questions posed to Bernanke at the post-meeting press conference. While the most recent Beige Book notes that some manufacturers are having success in passing on higher input costs to their end users, rising input costs are not being passed through in the rest of the economy. Preventing these higher input prices from being passed through is, in large part, due to slack in the labor market. The weak, though improving, labor market is keeping wage inflation to a minimum. Thus, until the FOMC sees more sustained evidence of stronger labor markets leading to higher wage inflation, they are unlikely to signal any change in policy.

As we have written in prior Weekly Economic Commentaries, the noticeable improvement in the economic data so far this year, along with a measurable uptick in readings on core inflation (inflation excluding food and energy), already has some market participants debating the timing of the Fed’s first policy tightening. We say “policy tightening” because unlike past episodes, where the Fed only had one policy lever at its disposal (typically the Fed funds rate), this time around the Fed has several levers to tighten policy, including reducing the size of its balance sheet and/or increasing the target Fed funds rate. While a lot can change between now and 2012, the market now expects the Fed’s first rate hike in March or April of 2012, and we also expect a hike in 2012, but perhaps not until the middle of the year. We expect the Fed to maintain the size of its balance sheet over the second half of 2011, but the Fed is likely to begin to shrink its balance sheet in 2012, by not reinvesting interest payments from Treasury and mortgage-backed securities holdings or proceeds of maturing bond holdings. The signal of a shift toward allowing its balance sheet to shrink could come as soon as the June 2011 FOMC meeting. Any such signal would be data dependent, and also dependent on the progression of the FOMC’s economic forecasts.

Economic Growth in the First Quarter Stronger than it Appears

Six weeks ago, we wrote in a Weekly Economic Commentary that economic growth in the United States in the first quarter “looked solid” and that the economy was on track to post a 3.0 to 3.5% gain in the first quarter of 2011. Since then, the economic data that feeds into gross domestic product (GDP) has faltered, and consensus estimates for GDP growth in the first quarter have moved down sharply, from 3.3% at the beginning of the year to 1.9% now. The economy grew at a 3.1% annualized rate in the fourth quarter of 2010 relative to the third quarter of 2010, so the 1.9% growth rate projected for the first quarter (relative to the fourth quarter of 2010) represents a marked deceleration in growth. While it is not unusual for the economy’s growth rate to slow for a quarter in the midst of an economic recovery — our view remains that the economy is in the early stages of recovery — the deceleration in growth between the fourth quarter of 2010 and the first quarter of 2011 will draw a great deal of attention from the media.

The likely deceleration in growth between the fourth quarter of 2010 and the first quarter of 2011 is largely the result of an expected slowdown in consumer spending (which accounts for two-thirds of GDP) from the torrid 4.0% annualized pace in the fourth quarter of 2010. While the press is likely to cite rising energy prices as the main reason for the slowdown in consumer spending between the fourth quarter and the first quarter, our work suggests that rising consumer energy prices usually have the biggest impact on spending six to nine months after the price increase occurs. The culprit for the deceleration in spending in the first quarter may simply be the surge in vehicle sales in the fourth quarter of 2010.

Another area of weakness in the first quarter is likely to be net exports. In the GDP accounts, exports add to GDP while imports subtract from GDP. During the first quarter, imports surged (in part due to rising commodity prices) but mostly due to stronger consumer and business demand in the United States for consumer and industrial goods. Export growth remained solid in the first quarter, but the pace of growth slowed. Taken together, the surge in imports and the slowdown in the pace of exports could shave as much as two percentage points off of first quarter GDP. Net exports added more than three percentage points to growth in the fourth quarter as imports dipped and exports surged.

On the bright side, inventory accumulation is likely to be a plus for GDP growth in the first quarter, and business capital spending could be a plus as well. Beyond that, housing construction, business investment in new office parks, malls and factories, and especially state and local government spending are likely to be drags on growth in the first quarter.

Looking ahead, we continue to maintain our below-consensus estimate for GDP growth for 2011. However, despite the ongoing supply chain disruptions in the automotive and technology sectors as a result of the earthquake and tsunami in Japan, we expect growth will reaccelerate in the second quarter and over the course of 2011. Additionally, the leading indicators of economic growth continue to point to expansion in the economy over the next nine months.

Although rising consumer prices, uncertainty over both fiscal and monetary policy, the aforementioned earthquake-related supply disruptions, and a still sluggish housing sector are likely to weigh on growth, an improving labor market, booming emerging market economies, a thriving manufacturing sector, low business and consumer financing costs, and falling consumer debt burdens suggest the continuation of a modest economic recovery in 2011.

----------------------------------------------------------------------------------

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

Stock investing involves risk including loss of principal.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Weekly Economic Commentary

In a “Wait and See” Mode

This week’s docket of economic data and events is relatively thin, which should allow market participants to absorb last week’s deluge of economic and policy news, and prepare for next week’s decision from the Federal Reserve (The Fed) and debate later in the spring on the budget and debt ceiling. Monetary policy in China also remains a concern.

At least on the surface, the market’s attention is likely to be focused on the peak week of first quarter corporate earnings reporting season, along with a handful of economic reports in the United States that are primarily focused on the housing market. Expected housing data this week includes homebuilder sentiment for April, along with existing home sales, existing home prices, and housing starts for March. On balance, the housing data (prices, sales, construction activity, etc.) is likely to continue to show a relatively moribund housing market as the all-important spring selling season was getting underway. Not much was expected from housing in 2011, and thus far, housing has lived up to the low expectations that the market had heading into the year.

Markets will also digest the Philadelphia Fed manufacturing index for April, and it is likely to show that the manufacturing sector continues to roll along, seemingly impervious to rising input costs, potentially peaking profit margins, and possible supply disruptions resulting from the earthquake in Japan. The manufacturing sector continues to be a source of strength in the economy, aided by very strong overseas (and especially emerging market) demand, a weaker dollar, and the ability to pass on higher input costs. In addition to the regular weekly readings on retail sales, mortgage applications, and initial claims for unemployment insurance (all of which are components of the LPL Financial Research Current Conditions Index), the March leading indicator data is due out this week. The leading indicator data in recent months has pointed to further gains ahead for the U.S. economy over the next six to nine months. The March data is likely to confirm that view as well, but the data is likely to reveal that the pace of economic growth may slow in the quarters ahead. Our view remains that we are still in the early innings of the economic recovery. (See the March 29 Weekly Economic Commentary for more detail)

“Wait and See” Mode on Policy

Federal Reserve policymakers will be fairly quiet this week ahead of next week’s Federal Open Market Committee (FOMC) meeting. Fed officials have traditionally observed an unofficial “quiet period” the week before an FOMC meeting. The release last week of the Fed’s Beige Book (a qualitative assessment of economic conditions in each of the Fed’s 12 regional districts) suggested that the economy continued to improve in March and early April, but not quickly enough to push inflation sharply higher or the unemployment rate lower. The consumer price index (CPI) data for March released last week revealed that while the threat of deflation (falling wages and prices) has subsided and that the Fed’s preferred measure of inflation (inflation excluding food and energy) has accelerated in recent months, inflation still remains quite tame by historical standards. While the Fed is likely to take note of rising food and energy prices at its next FOMC meeting on April 26 – 27 and will likely raise its forecast for both overall and core inflation in the forecast it prepares at the meeting, we do not think the Fed will begin to signal that it is removing the monetary stimulus in the system at this meeting. This FOMC meeting will be the first time Fed Chairman Ben Bernanke will hold a press conference at the conclusion of an FOMC meeting.

Turning from monetary policy (the Fed) to fiscal policy (Congress and the budget), last week’s address by President Obama laid out the Democratic party’s view on the nation’s priorities as the battle of the debt ceiling limit begins to heat up. Congress is on recess this week and next, but returns on May 2, facing an early July deadline on the debt ceiling. In short, President Obama’s plan to cut $4 trillion in spending over the next decade or so makes it a bit more likely that some kind of long-term budget deal can be agreed to by both parties around the time that the debt ceiling limit is reached. As we noted last week, in exchange for raising the debt ceiling, Congressional Republicans are most likely going to want deep cuts in spending for both fiscal year 2012 and beyond. The Senate Democrats and the White House want smaller cuts, and for spending cuts to be accompanied by tax increases.

In short, the next phase of the fight has just begun, and is likely to persist as an important part of the debate over the health of the economy and the financial markets for the next several months.

Monetary policy in China is also likely to be a concern of financial markets in the coming weeks on the heels of the hotter-than-expected readings on Chinese inflation and growth for March and the first quarter of 2011. Chinese authorities reported last week that the Chinese economy grew 9.7% year-over-year in the first quarter of 2011 and, although growth decelerated from the 9.8% year-over-year gain in the fourth quarter of 2010, the 9.7% reading for Q1 2011 was above the consensus estimate (+9.4% year-over-year) and most importantly above Chinese authorities' official target for growth in 2011 of 8.0%. Similarly, the March CPI report accelerated from February, was ahead of expectations, and at +5.4% year-over-year, is running way above the official target of 4.0% for 2011. The takeaway is that China has more tightening to do this year, and perhaps more than was priced in just a few days ago.

----------------------------------------------------------------------

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit