Incidentally, this is the time of the year that the Russell indexes are reconstituted. Preliminary lists for the Russell 3000 (which encompasses the 1000 and the 2000 benchmarks) were available on the Russell website on June 10th, 17th and 24th at 3:00 PM PT. After June 24th, the newly reconstituted indexes become effective, although final membership lists won't be available until Friday, July 1. Investors can find lists of the additions and deletions to the Russell 3000 on the Russell website.

BONDS
The FOMC is meeting this week. Typically two-day meetings take place on Tuesday and Wednesday, but this time they're meeting on Wednesday and Thursday. No doubt, this is simply due to scheduling conflicts, but it may be a bit disconcerting to investors who have become accustomed to the typical schedule! This means that a Fed announcement will take place on Thursday this week. Economists and bond investors are pretty much convinced that the FOMC will announce a 25 basis point hike in the fed funds rate target - that will bring it to 3.25 percent. Since the first rate hike a year ago, the Fed will have increased its target by 225 basis points.

Treasury yields are not up by 225 basis points. True, the 3-month bill is up about 200 basis points, but it typically runs on top of the fed funds rate. In June 2004, the 2-year note averaged 2.76 percent, the 5-year 3.93 percent, and the 10-year 4.73 percent. The yield curve chart below reveals that while yields fell across the board in the latest week, the 2-year note yield at 3.58 percent is about 80 basis points higher than a year ago; but at 3.69 percent, the 5-year note yield is 24 basis points lower than last June. Even more perverse is the 10-year note yield of 3.92 percent, standing 81 basis points below last June's average yield. Granted, yields fell this past week because stock prices plunged. It isn't unusual to see a flight to quality when stock activity is in flux.

Fed officials are still discounting many alternative hypotheses that might explain the declining yields at the long end in the face of Fed rate hikes. Thus, in their eyes, it remains a conundrum. I think investors are more willing to consider that some of the competing hypotheses might be possibilities. For instance, the flattening yield curve is often associated with a weakening economy. Given the declining trends in the manufacturing sector (durable goods orders were concentrated only in the aircraft sector), this may not be altogether out of the question. Also, many analysts who have learned to take a more global (rather than U.S.-centric) perspective believe that U.S. long term yields are down because they are competing with even lower yields in many foreign economies (Germany and Japan for starters).

No doubt, FOMC members will likely discuss these issues at their meeting this week. They might also be considering changes to the post-meeting statement. At each meeting, there is always the chance that the Fed will make a word change. Oh - I wouldn't be surprised if the Fed takes an extra minute or two re-reading their statement before releasing it to the public. Remember the May 3 correction'

Markets at a Glance

Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.

The Economy

May durable goods orders spurt
From April 2004 through April 2005, the monthly changes in durable goods orders look pretty pathetic. Indeed, the average monthly change over this 12-month period was +0.1 percent, hardly indicative of a booming manufacturing sector. And the first four months of 2005 were even worse as new orders posted an average monthly change of -0.3 percent. Thank goodness for May's robust figures, right! It helped to lift the monthly average change to +0.8 percent, just like the average monthly gains posted in 2003 and 2004. Well, the 5.5 percent spurt in May durable goods orders was entirely a result of healthy aircraft orders. Excluding transportation, new orders dipped 0.2 percent in May after decreasing 0.7 percent in April.

This is one of those times when it is important to compare the economy with transportation and without transportation. Excluding transportation, new orders have been posting more declines than increases in 2005. In May, orders for primary metals were flat, fabricated metals decreased 0.3 percent, machinery orders fell 1.9 percent, computers & electronics decreased 1.2 percent. Electrical equipment orders managed to post a 0.3 percent gain.

Undoubtedly, we should not discount the good news coming from a robust aircraft sector. This will surely help lift production in this sector. But the U.S. manufacturing sector needs more than new aircraft orders to keep the production lines humming this year.

Home sales remain at high levels
New single-family home sales increased 2.1 percent in May to a 1,298,000-unit rate. March and April sales figures were revised down, but there is no question that the housing market remained red hot in May. Existing home sales (which includes single-family housing as well as co-ops and condos) dipped 0.7 percent to a 7,130,000-unit rate. While total sales were down a tick in May versus April, the chart below depicts the rapid run up in sales over the past year as mortgage rates remain low.

Weekly mortgage rates managed to dip again in the latest week (June 23) and are back down to levels seen in February - at least for the 15-year and 30-year fixed loans. The 1-year ARM rate has remained relatively constant since last November. Judging only by these rates, one would never know that the Federal Reserve had raised its key policy rate during this period.

Housing bubble stories are more frequent these days. And just because Alan Greenspan isn't worried about a housing bubble, it doesn't mean that investors and analysts are worrying needlessly. In 1999 and 2000, before the stock market crashed, many analysts who worried about the stock market bubble were branded doomsayers. Five years after the crash, the Nasdaq is a mere shadow of itself and the Dow has not yet re-attained 11,000. When the only way that homeowners can afford to buy a home is by taking on interest-only loans, they are getting in over their heads.

Jobless claims in a holding pattern
New jobless claims decreased 20,000 in the week ended June 18 to 314,000, bringing claims to their lowest level in nine weeks. Since the beginning of the year, new claims have hit a low of 296,000 and a high of 351,000. Over this period, claims have averaged 315,000 per week. It feels like we haven't gone anywhere, but in fact, new jobless claims have improved in 2005 relative to 2004 when weekly claims averaged 343,000 and to 2003 when weekly claims averaged 402,000.

The Bottom Line
Another run up in crude oil prices roiled the stock market this week. Crude oil futures hit $60 per barrel, though they managed to close under that price each day this week. Nonetheless, fears of $3 gasoline aren't far behind.

Headline figures showed a robust durable goods report, but a look behind the numbers suggest that the manufacturing sector - apart from aircraft - is not strong at all. The housing numbers look red hot, although home sales were roughly unchanged in May from April levels. While median sales prices for existing homes continued to rise during the month, new home sales saw a drop in median prices. Nonetheless, both are up from year ago levels.

Economic indicators were sparse this past week, but as we head into the final week of June, indicators will once again be abundant. And to top things off, the FOMC is meeting on Wednesday and Thursday. Most are looking for an announcement of a 25-basis-point hike in the fed funds rate target on Thursday afternoon.

Looking Ahead: Week of June 27 to July 1

Tuesday
The Conference Board's consumer confidence index jumped 5 points in May to 102.2 after decreasing in April. This index has not declined as much as the University of Michigan's consumer sentiment index over the past several months - perhaps because employment has been improving slightly.

Consumer confidence Consensus Forecast for June 05: 104
Range: 100 to 108

Wednesday
The Commerce Department previously estimated that real GDP expanded at a 3.5 percent rate in the first quarter of 2005. Consumer spending moderated from the fourth quarter, and business fixed investment slowed even more dramatically. Usually, revisions from the preliminary estimate are minor.

Real GDP Consensus Forecast for Q1 05: 3.7 percent annual rate
Range: 3.5 to 3.9 percent annual rate

GDP deflator Consensus Forecast for Q1 05: 3.2 percent annual rate
Range: 3.2 to 3.2 percent annual rate

Thursday
New jobless claims dropped 20,000 in the week ended June 18 to 314,000. The four-week moving average also decreased marginally to 333,000 for the week. Thus far, the average for the three weeks in June is virtually the same as the May average for new claims.

Jobless Claims Consensus Forecast for 6/25/05: 325,000 (11,000)
Range: 316,000 to 335,000

Personal income increased 0.7 percent in April. May gains could be more moderate since nonfarm payrolls inched up modestly, hourly earnings grew more slowly than in April, and the average workweek was unchanged. Personal consumption expenditures grew 0.6 percent in April. Retail sales declined in May - and this points to slower growth in personal consumption expenditures as well.

Personal income Consensus Forecast for May 05: 0.4 percent
Range: 0.2 to 0.6 percent

Personal consumption expenditures Consensus Forecast for May 05: 0.1 percent
Range: -0.1 to 0.4 percent

The NAPM-Chicago's business barometer plunged to 54.1 in May. This index, which measures both manufacturing and non-manufacturing activity in the Chicago region, was still posting signs of growth for the month. It remains to be seen whether May was an aberration and the index will re-attain levels above 60 in coming months.

NAPM-Chicago Consensus Forecast for June 05: 53
Range: 50 to 56

The FOMC is meeting on Wednesday and Thursday. The two-day meeting is for preparation of the semi-annual monetary policy report for Congress. Investors generally expect that the FOMC will announce another 25 basis point rate hike in the federal funds rate target. This would bring the fed funds rate to 3.25 percent.

Friday
At mid-month, the University of Michigan's consumer sentiment index jumped nearly 8 points to reach 94.8, its highest level since January. Gasoline prices haven't fallen much - perhaps consumers are becoming accustomed to paying more at the gas pump lately.

Consumer sentiment Consensus Forecast for June 05: 94.5
Range: 93.5 to 95.5

The ISM manufacturing index fell back to 51.4 in May, its lowest level since June 2003. It remains to be seen whether this low trend continues, or whether the manufacturing sector begins to recover anew.

ISM manufacturing index Consensus Forecast for June 05: 51.3
Range: 49.3 to 52

Construction spending increased 0.5 percent in April. While housing starts are not declining, neither are they showing strong signs of increasing. Thus, they are likely to add less and less in upcoming months to ongoing construction expenditures.

Construction spending Consensus Forecast for May 05: 0.5 percent
Range: 0.0 to 0.8 percent

Motor vehicle sales fell 5 percent in May to a 13.2 million-unit rate with sales falling for both light trucks and autos. Autos were sold at a 5.3 million-unit rate while light trucks were sold at a 7.9 million-unit rate during the month. With high gasoline prices, one would expect improved sales gains for cars and fewer purchases of gas-guzzling SUVs.

Auto sales Consensus Forecast for June 05: 5.5 million-unit rate
Range: 5.4 to 5.6 million-unit rate