"Today was a good day," said Phil Orlando, chief market strategist at Federated Investors, referring to the day's economic reports.
He pointed to strength inindustrial production and capacity utilizationas well as improvement in the Empire State manufacturing survey as confirmation the manufacturing sector is getting stronger. But earnings, Orlando said, have been pretty mixed.
"We're developing a thought that maybe we are sort of peaking at the margin level," he said.
That's because companies seem to be reporting strength in revenues, but weakness in earnings, which would indicate profit margins are being hurt. Orlando cites three reasons for the squeeze: a nine-year high in worker productivity, negative unit labor costs in the last two years, and a surge in nominal inflation, which includes food and energy prices.
The sustained strength in productivity means companies are at the point where they need to hire workers, and wage inflation, coming from such low levels, may start to build. Also a lot of companies haven't been able to pass along higher raw materials costs, which is eating into margins.
Yet Orlando cautions that with only a handful of key earnings reports out so far, it's too early to come to a conclusion. Still, investors are taking a cautious stance and favoring stocks in defensive sectors, like health care and utilities. Consumer staples have also done well this week.
"We're starting to get a bit of a flight to safety trade here," Orlando said. "More 'beta-sensitive' categories are a little soft."
In economic news, The Thomson Reuters/University of Michigan's preliminary April reading on consumer sentimentrose to 69.6 from 67.5 in March, despite rising gas prices. The result was better than the 68.5 median forecast from economists surveyed by Reuters.
Also, industrial production rose 0.8 percentin March from a 0.1 percent gain in February, while capacity utilization rose to 77.4 percent in March from 76.9 percent in February, the Federal Reserve reported on Friday.
Meanwhile the consumer price index for March rose 0.5 percent, in line with February's gain, while core CPI rose 0.1 percent after gaining 0.2 percent the month before, the Labor Department said. Core CPI, which was better than expectations for a 0.2 percent rise, shows inflation, not including food and energy prices, remains subdued.
The Empire State Index of manufacturing rose to 21.70 in April from 17.50 in March.
Meanwhile in China, consumer price inflation rose 5.4 percent in the year to March, China said on Friday, which is the fastest rate since July 2008. The market had expected Chinese inflation rose 5.2 percent.
In Europe, inflationclimbed higher than expected in March to 2.7 percent year-on-year. It is the fourth month in a row that inflation has been above the ECB's target of 2 percent. European shares were also weaker as peripheral country debt issues resurfaced.
European stocks ended slightly higher, but posted their first weekly loss in a month as investors took in profits amid the return euro zone debt worries.
On Tap Next Week:
MONDAY: Housing market index, Eli Lilly shareholders meeting, taxes due; earnings from Citigroup, Eli Lilly before-the-bell and Texas Instruments after-the-bell.
TUESDAY: Housing starts, Fifth Third shareholders meeting, Moody's shareholders meeting, BlackBerry Tablet launches; earnings from Goldman Sachs and Johnson & Johnson before-the-bell, and IBM, Intel, Yahoo after-the-bell.
WEDNESDAY: Weekly mortgage applications, existing home sales, oil inventories; earnings from Abbott Labs, AT&T, United Tech and Wells Fargo before-the-bell and AmEx, Amgen, Apple, Qualcomm, Yum Brands after-the-bell.
THURSDAY: Weekly jobless claims, Philadelphia Fed survey, leading indicators, money supply, Citgroup shareholders meeting; earnings from DuPont, GE, McDonald's, Morgan Stanley, Travelers and Verizon before-the-bell and Advanced Micro and Capital One after-the-bell.
FRIDAY: Good Friday—All markets closed, banks open.
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