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.

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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.

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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.

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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

Weekly Economic Commentary

Beige Book and Budget Battle Take Center Stage

The outlook for Federal Reserve (Fed) policy provides the backdrop for this week’s batch of economic data and events in the United States. In addition, while the first skirmish in the great Budget Battle over 2011 is over, an even bigger battle lies ahead: the debt ceiling.

Beige Book and CPI Highlight a Busy Economic Calendar

The key economic release in the United States this week could be the Fed’s Beige Book — a qualitative assessment of business conditions in each of the 12 Federal Reserve districts around the nation. Also in the spotlight this week will be the March CPI data and the March retail sales report. Released eight times a year, the release of the Beige Book precedes the meeting of the Fed’s policymaking arm, the Federal Open Market Committee (FOMC), by two weeks. Often, what businesses (small business owners, bankers, retailers, real estate agents, manufacturers, etc.) tell their contacts at each of the 12 regional Federal Reserve branches (San Francisco, Dallas, Atlanta, Richmond, Kansas City etc.) end up as a big part of the discussion at the FOMC meeting.

In recent Beige Books, some businesses have sounded the alarm over rising commodity and raw materials prices, and their inability to pass these increases on to the end user. Economy-wide, raw materials costs account for around 5 to 10% of business’ input costs. In addition, recent Beige Books have noted some upward pressure on wages (which account for 70% of business costs and therefore have a much bigger impact on inflation).

Broadly speaking, recent Beige Books (which also comment on the overall economy, the labor market, housing, retail sales, nonresidential building — office parks, malls, factories, etc. — bank lending and financial conditions) have been consistent with moderate growth in the economy, very modest increases in overall inflation, and most importantly, with still accommodative monetary policy. We will be closely monitoring the Beige Book for any mention of the Japanese earthquake, fiscal conditions at the state and federal level, and how weather conditions may be having an impact on the economy.

On balance, we expect this week’s Beige Book to continue to show that businesses are still coping with rising commodity prices, that the labor market is improving, and that the overall economy continues to heal. Financial markets (especially the fixed income markets) are likely to be very sensitive to any ratcheting up of concern over inflation in the Beige Book.

Our view remains that the hurdle for the Fed to end its current course of quantitative easing (QE2) remains high, but that the hurdle remains even higher for the Fed to start another round of quantitative easing when QE2 ends on June 30, 2011.

The Fed’s Communication Problem on Inflation

While markets will be interested in all of the data due out this week (including the April data on manufacturing activity in the New York region and the weekly readings on retail sales, mortgage applications and initial filings for unemployment insurance in early April), the key report of the week is likely to be the March report on the consumer price index (CPI).

Rising food and energy prices have dominated the inflation debate for months now, and there are likely to be sizeable month-over-month gains in both food and energy prices in March. However, excluding food and energy (core CPI), the consumer price index is expected to be tame in March, rising just 0.2% month-over-month. The 0.2% month-over-month gain translates into a 1.2% increase year-over-year, a very tame reading by historical standards.

In formulating monetary policy, the Fed monitors core inflation, and while policymakers are sure to be pleased that core inflation remains quite low by historical standards, some have expressed concern that core inflation appears to have bottomed out in late 2010 at 0.6% year-over-year (October 2010), and has moved steadily higher since then. Markets have taken notice as well and, in general, consumers remain more concerned with rising food and energy prices, leaving the Fed with a communication problem. Hopefully, in his first ever post-FOMC meeting press conference on April 27, Fed Chairman Bernanke will address and assuage those fears. Until then, markets will focus on the accelerating core CPI and consumers will focus on the higher prices they pay each week at the gas pump and grocery store.

More Budget Battles Loom in the Months Ahead

Late last week, Congress and the White House agreed on a budget for the rest of fiscal year 2011, which ends on September 30, averting a government shutdown at the eleventh hour. However, more intense budget battles lie ahead — the 2012 budget and the Treasury’s borrowing authority (debt ceiling) — and markets are likely to be less sanguine about the upcoming budget battles than they were about the potential of a government shutdown. While the 2012 budget is a factor, in most years, including this one, budgets to fund the government are not finalized until well after the start of the fiscal year. Thus, the real battle on the budget is likely to come in the debate over the debt ceiling.

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 the potential to move markets, especially the debt markets. A series of short term increases in the debt ceiling is possible over the next few months, which would lead to a number of “drop dead” dates on the budget that may impact financial markets. And while some observers may think that an agreement on the debt ceiling and more spending cuts is more likely in the wake of the agreement reached last week on the 2011 budget, we disagree. Our view is that despite the agreement on the 2011 budget late last week, the risks of the battle leading to a default by the U.S. Treasury (while still extremely low-lawmakers would almost certainly act to prevent such an outcome), they have risen in recent weeks, as the political rhetoric at the extremes of both sides of the aisle ramps up.

At the same time, while the odds are long that a deal can be worked out soon between House Republicans, Senate Democrats, and President Obama to pass a package that would begin to meaningfully address the nation’s long-term budget deficit problem (too much spending, not enough revenue, too much debt), the chances have gone up in recent weeks as well.

Although the details of the budget deal agreed to last week are unclear, it does appear as if there was an agreement to cut some discretionary spending, defense spending, as well as some entitlement spending. All three of these areas, along with some tax increases, are likely to be part of any bipartisan effort to tackle the deficit in 2012 and beyond.

We expect debate about the debt ceiling limit (and to a lesser extent,  the budget for fiscal year 2012, which begins on October 1, 2011) to be front and center for the next two months. Last week, Treasury Secretary Tim Geithner told Congress that the nation’s $14.29 trillion debt limit would be reached on May 16, 2011, although he noted that actions could be taken to extend that date into early July if necessary.

Last week, the Chairman of the House Budget Committee, Paul Ryan of Wisconsin, released a plan to cut trillions off of the deficit over the next 10 years, mainly by addressing Medicare, an entitlement program that helps to provide healthcare to senior citizens. Later this week, President Obama is expected to release his response to the Ryan plan, and that response is likely to include both spending cuts and tax increases to help restore fiscal sanity in Washington.

So although the first round of the budget battle is over, the next phase of the fight has just begun, and is likely to persist as part of the debate over the health of the economy and the financial markets for the next several months.

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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 Market Commentary

Policy Parade

As is often the case during the week following the release of the monthly employment report, this week’s economic calendar is relatively sparse. The few reports that are due out are not likely to be market-moving. Instead, market participants are likely to continue to mull over the March employment report (released Friday, April 1) and shift their focus to policy issues (both fiscal and monetary) at home and overseas. In addition, market participants will continue to monitor the price of oil, which ended last week close to $108 per barrel.

Rising Food and Energy Prices Battle with Improving Labor Market for Consumer’s Attention

If recent history is any guide, this week’s sparse slate of economic data in the United States is not likely to be market-moving. While the weekly reports (for late March) on retail sales and initial claims for unemployment insurance may draw some market attention, the only other data that has the potential to move markets are the reports by the nation’s retailers of their March “same store sales” on Thursday, April 7. The caveat here is that the late Easter this year (April 24) is likely to pull sales from March into April, while the relatively early Easter in 2010 (April 4) pulled sales in March at the expense of April.

Thus, retailers this year face tough comparisons in March 2011 relative to March 2010, although gasoline prices near $3.75 per gallon and sagging consumer confidence will also likely be blamed for poor sales in March. Although the financial media is likely to be quick to pounce on any weakness in spending in March and blame it on rising oil prices, due to the Easter shift, most market participants will average retail sales in March and April to get a better sense of the underlying health of the economy.

In our view, an improving labor market, rising personal incomes, and a doubling in the equity markets over the past two years have thus far trumped rising food and energy prices, and sagging home prices, and allowed consumer spending to make a modest contribution to overall economic growth in 2011. However, further gains in oil (and gasoline) prices would cause us to revisit this view.

The Labor Market Gains Momentum

The private sector economy added 230,000 jobs in March 2011, exceeding economists' expectation of a 206,000 gain. The unemployment rate fell another 0.1% to 8.8% in March and the components of the March jobs report were all solid, suggesting similar sized job gains in the months ahead.

The monthly jobs report is chock full of information, and we could fill several pages with all the details of the report. The items below caught our attention:

·         Looking Ahead: The composition of the March jobs report suggests more solid jobs gains are ahead in the coming months, as the number of jobs at temporary help supply firms increased markedly in March. This job category is one of the best leading indicators of future job gains. In addition, hours worked rose, and overtime hours held steady in March. Both metrics suggest that companies have pushed their current production capacity to the limit, and probably need to hire more staff to meaningfully increase production.

·         Japan: There was not much discernable impact on the March jobs data from the Japanese earthquake and its aftermath. Timing played a big role here, as the earthquake hit just after most of data for the March jobs report was collected. The slight dip in hours worked in manufacturing between February and March may have been the result of Japan-related parts shortages at several auto plants in the United States. Our best guess is that the April jobs data will see a larger impact from the quake and its aftermath.

·         Weather: Weather often plays a role in the monthly jobs report, and the harsh winter weather at the end of 2010 and in early 2011 was not especially data-friendly. The weather was more “normal” in March, and that may have boosted payrolls modestly in March relative to February. However, in construction, an area that is especially weather-sensitive (i.e. warmer and drier weather means more jobs), the number of jobs fell by 1,000 in March after a 37,000 gain in February. Overall, the impact of weather on the monthly jobs report should fade as the calendar turns to springtime.

·         State and Local government: State and local governments shed another 15,000 jobs in March 2011 and nearly 300,000 state and local jobs have been lost in the last 12 months. Since the end of the recession in June 2009, nearly 500,000 state and local government employees have lost their jobs. We continue to expect that state and local government employment will be a drag on the overall labor market for the foreseeable future, as states, counties, cities, and towns struggle with too many expenses and not enough tax revenue.

Typically, state and local government employment is a reliable source of strength for the economy and labor market. But in this cycle, state and local governments, under severe pressure from lawmakers and the public, are shedding jobs instead of adding them. In the early part of the Great Recession, state and local governments actually added jobs, but since August 2008, state and local government employment has declined in 26 of 31 months, the weakest period for state and local government employment on record (data extends back to 1940).

Late Easter: As noted above in our discussion of retail sales in March, Easter in 2011 is “late” this year. Based on the “late” Easter (and because Easter-related school holidays are later this year than last), we expected to see a drop in retail and in leisure/hospitality employment in March, and then a big snapback in April. Instead, both the retail sector and the leisure/ hospitality sector saw sizeable employment gains in March, suggesting that there more gains to come in these sectors in months ahead.

Fed: At 8.8% in March, the unemployment rate is already below the Fed’s forecast: Fed policymakers expected the unemployment rate to average 8.9% in the fourth quarter of 2011. This, by itself, does not mean that the Fed is behind the curve and has to tighten policy immediately however. Indeed, the Fed will release a new forecast at the end of April, and wage growth, which is key to the transmission of higher commodity prices into overall consumer prices, remains subdued. Average hourly earnings fell to $19.20 per hour in March from $19.30 in February, and are running just 2.0% ahead of year-ago levels. With wages accounting for 70% of business costs (commodity prices account for between 5 and 10% of costs economy wide) it will be difficult for businesses to pass on higher commodity costs to the end user. We will continue to monitor this and other measures of wages in order to gauge when the Fed is likely to begin removing stimulus in the system.

Revisions to Prior Months: Keeping with the recent pattern (and consistent with a growing economy), net revisions to prior months private job counts were higher again. In a sea-change in sentiment from last summer, many market participants are beginning to worry that the government’s monthly tally of employment is systematically underreporting the strength in the labor market.

Policy Parade This Week

There are plenty of fiscal and monetary policy (at home and abroad) events this week to fill the void left by the absence of key economic reports this week.

On the fiscal policy side, Congress is facing a very short-term (April 8), an intermediate-term (sometime in the next two months) and longer-term (two to three years) set of fiscal issues, all of which will be debated — although not necessarily resolved — this week.

In the short term, Congress has to agree this week on how much spending to cut this fiscal year (which is already six months old), as a government shutdown looms this Friday, April 8. Negotiations have been ongoing behind the scenes for weeks, but as this commentary was being prepared for publication (April 4, 2011) no deal had been reached to fund the government for the next six months.

In the intermediate term, Congress must raise the debt ceiling (basically, the limit on the U.S. government’s credit card) before the Treasury runs out of the ability to borrow. The latest estimate is that the Treasury will hit that limit between now and mid-May, although they could use accounting gimmicks and other one-time items to extend that to the end of June. Over the longer term, it is possible that Congress could use the short- and intermediate-term deadlines to work out a solution to the nation’s longer-term budget problem — too much spending and not enough revenue, but odds are low that this can be achieved this year.

House Republicans will grab headlines this week as they release their budget proposal for fiscal year 2012, which begins on October 1, 2011. Early copies of the budget circulated over the weekend of April 2 – 3, and the budget is likely to call for $4 trillion in cuts (mainly in healthcare) over the next 10 years. This is only the start of the fight for the future of the budget.

Not to be outdone by fiscal policy, there is plenty for markets to digest on the monetary policy side this week. There are eleven appearances by various Fed officials this week, including one by Fed Chairman Ben Bernanke. In addition, the Fed will release the minutes of the March 15 Federal Open Market Committee (FOMC) meeting. Participants will be scouring public comments (and the minutes) for signs that the Fed is planning to remove some of the monetary stimulus now in the system. The Fed’s Beige Book is due out on April 5, and the next FOMC meeting is April 27. On that day, Fed Chairman Bernanke will release the FOMC’s latest economic forecast and hold his first post — FOMC meeting press conference. We do not expect a signal of a change in policy from the Fed at the April meeting, but a signal at the June meeting is increasingly likely given the improving job market and rising inflation expectations

Overseas, central banks in Australia, Japan, England, Poland, Peru and Europe will meet this week to discuss monetary policy. The Bank of Japan remains in easing mode, and has done even more easing of policy since the earthquake, and it is no surprise that that Peru’s central bank will hike interest rates as it combats high commodity prices and a booming local economy bolstered by those same soaring commodity prices.

Remarkably, however, the European Central Bank (ECB) is poised to raise rates at its meeting this week, despite the ongoing fiscal and banking woes in Europe. Unlike the Fed, which has a mandate from Congress to promote full employment and low and stable inflation, the ECB’s only mandate is to keep inflation low and stable. This fact will not be lost on opponents of the Fed in Congress and elsewhere this week. Our long held view remains that while the hurdle for the Fed to end its latest round of quantitative easing (QE2) early is high, the hurdle for starting QE3 in June when QE2 ends is even higher.

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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.

Investing in international and emerging markets may entail additional risks such as currency fluctuation and political instability. Investing in small-cap stocks includes specific risks such as greater volatility and potentially less liquidity.

Stock investing involves risk including loss of principal Past performance is not a guarantee of future results.

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.

The fast price swings in commodities and currencies will result in significant volatility in an investor's holdings.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 Market Commentary

The Path to a More Transparent Fed

Last week's batch of economic data had a weaker tinge to it, but financial markets largely dismissed the data, focusing instead on events overseas. If history is a guide, the market may not be able to ignore this week's data, which includes key reports on manufacturing (Institute for Supply Management (ISM) and Chicago Area Purchasing Managers), consumer spending (personal income and spending for February and vehicle sales for March), and employment (Challenger layoff announcement, ADP employment and the government's employment report) in March. China's ISM report for March is also due out this week, as market participants continue to debate the timing and extent of the next interest rate hike in China. On the policy front, Congress returns from recess just in time to address the looming government shutdown (April 8). As emerging market nations continue to grapple with robust growth and rising domestic inflation, Taiwan's central bank is expected to raise rates this week. In addition, there are several notable Fed speakers on the docket this week, as market participants continue to debate when the Fed will begin to rein in some of the unprecedented monetary policy now in the system.

While the employment data and ISM for March (due out on Friday, April 1) will draw the most attention from policymakers and market participants, the February data on personal income, personal spending, and inflation that was released as this report was being prepared revealed accelerating incomes, slower spending, and another tick higher for core inflation. In addition, the February data on personal income and spending showed that spending by consumers on energy and energy-related goods and services accounted for 6% of total spending and 5% of total personal incomes in February. This is a metric we are watching closely as we gauge the impact of rising energy prices on the economy.

At the peak of energy prices in July 2008, consumer spending on energy goods and services represented 7% of total personal spending and 5.7% of personal incomes. In the early 1980s, consumer energy spending accounted for nearly 10% of spending and 8% of incomes.

Another Step Towards a More Transparent Fed

Last week, the Federal Reserve (Fed) announced that Fed Chairman Bernanke will hold a press conference after four of the eight meetings of the Fed’s policymaking arm, the Federal Open Market Committee (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, along with the FOMC’s forecast, will be released at 12:30 PM ET, and Bernanke will take questions at 2:15 PM ET. At the other FOMC meetings, the FOMC statement will be released, as usual, at 2:15 PM ET. Operationally, this suggests that any major shift in Fed policy is much more likely to come at one of the four press conference FOMC meetings, rather than at one of the four non-press conference meetings. These press conferences may also downgrade the importance of the release of the FOMC minutes (three weeks after the FOMC meeting) for market participants. Finally, the press conferences may make the weekly parade of Fed speakers less relevant to financial markets.

Press conferences are only the latest in a series of moves toward greater transparency by the Fed over the past two decades. Beginning in the early 2000s, the FOMC began contemplating ways to better communicate its policies to the public. It set aside time at several FOMC meetings a year to discuss communication issues, ranging from full transparency (i.e. broadcast the FOMC meetings live) to a more nuanced approach (making more frequent economic forecasts, setting and communicating explicit targets for inflation and the economy) and speeding up the release of policy related documents like the FOMC minutes and economic forecasts.

Since the onset of the financial crisis in 2007, the FOMC (as a proxy for the Fed) has taken a more active role in the economy, and that has raised the ire of some politicians and raised suspicion among the public that is largely unaware of what the Fed does or how it operates. This pressure from Congress (and the public) has probably hastened the FOMC’s move toward more transparency, and as the FOMC begins to unwind the massive monetary stimulus currently in the system over the next few years, clarity from the Fed on its goals for monetary policy and the economy is more crucial than ever. In addition, rising food and energy prices in recent months

also presents the FOMC with a communication issue with the public, given the policymakers’ focus on consumer prices excluding food and energy.

Until the early-90s, a shift in Fed policy had to be gleaned by “Fed watchers” and market participants from analyzing trading in the relatively obscure market for the federal funds rate, the interest rate that banks charge each other to borrow overnight. Then, in 1994, the FOMC began issuing a statement the same day a change in monetary policy was made. In 1995, this change was made permanent, but it was not until 2000 that the FOMC began issuing a statement following all of its meetings, regardless of whether or not a change in policy occurred. This policy will continue.

The release of the minutes of each of the FOMC meetings has taken a similar path toward greater transparency. Today, the minutes of each of the eight FOMC meetings are released to the public three weeks after the meeting occurs. Between 1993 and 2004, the minutes were released three days after the subsequent FOMC meeting, or about seven weeks after the meeting was held. In the 1960s, FOMC minutes were released with a three-month lag, and prior to that time, the FOMC minutes were published only annually.

Prior to 2007, the FOMC issued two economic forecasts a year, which were presented by the Fed Chairman at Congressional testimony in February and July each year. Beginning in 2007, the FOMC started publishing four economic forecasts per year (of economic growth, inflation, and the unemployment rate). The forecasts are published three weeks after the FOMC meeting. Under the new regime, the FOMC’s quarterly forecasts will be released the same day as the FOMC meeting.

From 1960 through most of the 1990s, the Chairman of the Fed rarely, if ever, made any public appearances, and took questions from the media even less frequently. Over the past several years, under increasing public and political pressure, Fed Chairman Bernanke has appeared on the television show 60 Minutes, held a town hall meeting, held a press conference, authored an op-ed in the Washington Post, and held several events where he took questions from students at universities around the country. The move announced last week to hold a press conference after four of the eight FOMC meetings a year continues that trend, and more closely aligns the Fed’s communication policy with that of other major foreign central banks like the European Central Bank and the Bank of England.

Where Are We in the Economic Recovery?

The current economic recovery commenced in June 2009, after the economy experienced the longest (18 months) and most severe (real gross domestic product declined by 4.1%) recession since the 1930s. Thus, the current economic recovery will be 21 months old at the end of March 2011. How does that compare to other recoveries?

Since 1945 (the end of WWII), there have been 12 recessions and 11 economic recoveries. On average, the 11 recoveries have lasted 58 months (around five years), and the median recovery (five were longer and five were shorter) was 45 months long. The shortest post-WWII recovery was in 1980 – 81 (12 months), the longest was the 120-month expansion in the 1990s and early 2000s. The last three recoveries (1980s, 1990s, and 2000s) were 92, 120, and 73 months long, respectively, putting the average recovery during that time at around eight years.

As the 2007 – 2009 Great Recession was the longest and most severe recession since the Great Depression in the 1930s, we think it makes sense to look at the length of recoveries following the three most severe economic downturns in the last 110 years — the Great Depression in the 1930s, the 1973 – 75 recession, and the 1981 – 82 recession. We find that the recovery following the Great Depression of the 1930s lasted 80 months, the recovery following the 1973 – 73 recession lasted 58 months and the recovery following the 1981 – 82 recession lasted, as noted above, 92 months. The average here is around six years.

During the height of the double-dip recession fears in the middle of 2010, we wrote extensively about what usually causes a recession to occur. Although the source of each recession is different, generally speaking, some of the conditions that lead to the end of an economic recovery include:

·         Widespread imbalances in the economy

·         Too much debt in the personal sector

·         A sudden and sharp tightening in Fed monetary policy

·         An inverted yield curve (when short-term interest rates are above long-term interest rates)

·         A soaring dollar

·         Sharply tighter fiscal policy

·         High nominal interest rates (think the late 70s/early 80s)

·         Pronounced weakness in global trading partners

·         A sudden and sharp spike in consumer energy prices

While some of these conditions (rising consumer energy prices, slower growth in some global trading partners) are in place today (and a few are often in place regardless of where we are in the economic recovery), many are not and, at just 21 months, the economic recovery that began in June 2009 is most likely only in its early stages. If the current recovery is the same length as the average recovery since the end of WWII, we are only about one-third of the way through. If this recovery follows the path of the recoveries following the three most severe recessions in the past 110 years, we are only about one-fourth of the way into the recovery. If the last 30 years is any guide, the current expansion will last eight years, and we are still in the “early innings” of the recovery.

Economic and market conditions can and will change, and we will continue to monitor the economic data and policy events in the United States and overseas as we assess the health of the economy and its impact on financial markets.

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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.

Investing in international and emerging markets may entail additional risks such as currency fluctuation and political instability. Investing in small-cap stocks includes specific risks such as greater volatility and potentially less liquidity.

Stock investing involves risk including loss of principal Past performance is not a guarantee of future results.

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.

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.

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