5:00 PM EST :

Treasuries rallied for a second day as geopolitical jitters enhanced the allure of the government-backed securities. Startlingly weak home sale news also helped bonds by dimming economic prospects, thereby bolstering the case for more Fed rate cuts.

The plusses for bonds were negatives for stocks, but the indices showed some stamina and finished narrowly mixed. In late trading, the 10-Year Treasury Note was up by one percent (32/32), lowering its yield to 4.07%; the Dow was up by 6.26 points to 13,365.87; and the Nasdaq was down by 2.33 points to 2,674.46.

The pace of new home sales fell sharply last month and the levels of the preceding three months were also revised lower. Though it is well known that the housing sector is in a slump, the weaker than expected sales data rattled stock traders. The effect was offset somewhat, however, by a stronger than expected reading in this month's Chicago Purchasing Managers Index.

Also lending some support to stocks was a modest decline in oil futures today, the first in five sessions. After being up for most of the day, the price of a barrel of light, sweet crude for February delivery turned lower and in late trading was down by $0.56 on the New York Mercantile Exchange at $96.06. In the previous four sessions, the price had risen by $5.56.

By the end of stock trading, the Dow had managed a slight gain of 0.5% and the S&P 500 rose by 0.14%. The Nasdaq took a slight loss of 0.09%. All three declined slightly on the week with the Dow losing 0.63%; the Nasdaq, 0.65%; and the S&P 500, 0.40%.

Treasuries made progress this week. The yield of the benchmark, 10-Year Note fell by 10 basis points (yield moves inversely to price). This follows last week's decline in yield of 7 basis points.

As was the case this week, next week's trading is expected to be light as traders stretch the holidays. But the economic release calendar is heavier than this week's and includes a couple of major market-movers.

On Monday, the housing issue will be addressed once again in the report on existing home sales for last month. In October's report, the National Association of Realtors said that the seasonally adjusted, annualized pace of sales fell by 1.2% to 4.97 million. This was an eighth consecutive deceleration and the rate was the lowest in nine years. No region of the country saw an increase in sales.

The softening market brought home prices down. The average price fell by $1,600 to $255,500 and the median price fell by $2,600 to $207,800. The average price was 3.4% lower than a year earlier and the median price was 5.1% lower.

The level of inventories of existing homes on the market at the end of October (also seasonally adjusted and annualized) was up by 1.9% to 4.453 million. At the prevailing sales pace, this represented 10.8 month's of supply.

Partly because the Index of Pending Home Sales edged up in September and October, forecasters are predicting that November's overall sales pace made a nominal gain of about 0.6% to 5.00 million.

The Securities Industry and Financial Markets Association has recommended an early close for bond trading on Monday (2:00 PM Eastern instead of 3:00). On Tuesday, the markets and government offices will be closed in observance of New Years.

On Wednesday, the national manufacturing index for December from the ISM will be released. In November, the index came in at 50.8, off slightly from October's 50.9. December's index is expected to show another deceleration in growth with a reading of about 50.5.

Between June of 2003 and October of last year, the overall index posted forty-one straight expansion readings. But the extent of growth declined throughout 2006 until the index indicated slight contractions in November and then last January. The index strengthened after that, hitting a fourteen month high of 56.0 in June. Yet, November's near-neutral reading was the fifth-consecutive fall in the index and the lowest since last January's slight contraction reading of 49.3.

Another housing-related release is slated for Wednesday. This is the report on construction spending for November. In October's report, the Commerce Department said that the seasonally adjusted, annualized pace of spending fell by 0.8%, the largest contraction since September of last year. Of particular interest was a 1.96% decline in the rate of residential construction spending. This was a twentieth consecutive monthly contraction and October's pace was the lowest in four years.

There is no reason to assume the residential sector made any headway in November and analysts predict that the overall construction spending rate fell by 0.4%.

On Wednesday afternoon, the Federal Reserve will release the minutes of its December 11 monetary policy meeting. Though the minutes might contain a surprise, Fed watchers are not expecting any. The meeting resulted in a well anticipated 0.25% cut to the Fed's target for the overnight borrowing rate between banks (federal funds rate) and a 0.25% cut to the rate for loans by the Fed to banks (discount rate). This left the fed funds rate at 4.25% and the discount rate at 4.75%.

The policy statement, released after the meeting explained the action: "Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time."

There were no indications in the statement that the Fed would not cut rates again at the next policy meeting scheduled for the 29th and 30th of January. In fact, the only dissenting vote against December's decision came from Boston Fed President Eric Rosengren who wanted a deeper cut to the fed funds rate of 0.50%.

But there has been a major development since the last meeting. Because borrowing directly from the Fed is traditionally perceived as a sign that a bank is in trouble, this source of funds has been avoided even though the repayment period was extended in August and the Fed has urged banks to use the service.

In order to keep monetary flows from bogging down, the Fed instituted what it calls a Term Auction Facility (TAF), a temporary program whereby short-term funds can be obtained on an auction basis using a broad range of collateral. The first auction was held on December 17 and bids totaled $61.6 billion for the $20 billion being offered. Just last Friday, the Fed announced that it would continue holding bi-weekly auctions for as long as necessary to address elevated pressures in short-term funding markets.

So while the meeting minutes may suggest additional forthcoming rate cuts (and most observers are expecting further monetary easing at the end of January), the TAF program offsets some of this bias.

On Thursday, the jobless claims report will spotlight the labor situation; thus heralding the approach of the heavyweight, monthly employment report. Though the data collection periods for the two reports do not coincide, the claims data, if nothing else, will act as a reminder of Friday's release.

In yesterday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits rose last week by 1,000 to a 349,000. The previous week's level was revised up from 346,000 to 348,000. Although the level was slightly higher four weeks before, last week's reading was the second highest since last February. The four-week moving average, which smoothes out some short-term volatility, slipped by 1,000 to 342,500 from the previous week's two-year high. The average level of initial claims for the year-to-date is 321,745.

The report said that continuing claims for the week ending December 15 (continuing claims must be at least a week old) rose by 75,000 to a two-year high of 2.713 million. The four-week average rose by 13,500 to 2,655,500 -- also a two-year high. The weekly average of continuing claims for the year-to-date is 2,544,440.

Though initial claims readings below 400,000 generally indicate more hiring than layoffs, the rising levels suggest a falling demand for labor and therefore fewer payroll gains.

The other major release on Thursday is the report on factory orders for November. In the last report, the Commerce Department said that the seasonally adjusted level of rose by 0.5% in October. This was slightly higher than the 0.4% that had been forecast and September's originally reported increase of 0.2% was revised up to 0.3%.

Yesterday's durable goods orders report for last month showed a smaller than expected increase of 0.1% following a 0.4% decline in October and a 1.8% decline in September. Nondurable goods orders have averaged a gain of 0.5% so far this year but they grew by 2.1% in September and 1.3% in October, suggesting that they may have fallen back in November. Recent forecasts called for an overall rise in factory orders of about 1.0% but the predictions will probably be trimmed considerably.

On Friday, the main event of the day will be the release of the employment report for December. In November's report, the Labor Department said the seasonally adjusted level of nonfarm payrolls rose by 94,000. This was down sharply from October's gain of 170,000 and below the average of about 140,000 in the twelve months prior to November. The unemployment rate, the portion of the active workforce without jobs, remained at 4.7% for a third consecutive month.

Partly because of the rise in jobless claims, analysts are looking for a smaller rise in December's payrolls. The current prediction is for a gain of 70,000. Forecasters are also looking at a rise in the unemployment rate to 4.8%. This would be the highest rate since June of last year.

The last release of the week will probably be eclipsed by the employment news. This is the ISM index on the non-manufacturing, or services, sector of the economy. It came in at 54.1 in November, down from October's 55.8 and the lowest reading since last May. As is the case with the manufacturing index, any reading over 50.0 indicates an expansion of activity and November's index represented a fifty-sixth consecutive expansion.

But though the services sector is much larger than the manufacturing sector, the services index data does not carry the same clout as the manufacturing data. One reason for this is the very size of the services sector. It is so large that extremes offset one-another and broad-based changes are necessary to make a significant impact on the overall index. Another reason is that the services data series is relativelyyoung (begun in 1997 vs. 1948 for the manufacturing series).

For December, the index is expected to be about 53.5. Though another growth reading, it would be the weakest in nine months.

10:30 AM EST :

Treasuries are up again this morning as flight-to-safety flows continue to provide support. The economic releases of the day were mixed but the weaker report is getting the greatest attention. The stock indices began their session with sizeable advances but much of the gains have been pared in choppy action.

In economic news, the Commerce Department reported that the seasonally adjusted, annualized pace of new home sales fell in November by 9.0% to 647,000. In addition, October's previously reported rate of 728,000 was revised down to 711,000, September's 716,000 was revised to 699,000, and August's 717,000 was revised to 701,000.

Last month's pace was the lowest since April of 1995 and much lower than forecasters' predictions of 720,000. The rate fell in November by 27.6% in the Midwest, by 19.3% in the Northeast, and by 6.4% in the South. The West saw a pickup of 4.0%.

Inventories of homes on the market fell for an eighth month to 505,000, the lowest level (seasonally adjusted) in two years. But given the declining sales rate, the inventory represented 9.3 months of sales. Though last August's 9.4 month supply was slightly higher, November's was the second highest since October of 1981.

The average new home price fell in November by $14,600 to $293,300 from October's average but the price was 0.5% higher than the previous November. The median price rose by $9,600 to $239,100 but was 0.4% lower than a year earlier.

The other release of the day was more bullish than expected. The Chicago Purchasing Managers Index, usually released on the last business day of the month, came out today due to the holiday disruptions. The index, a gauge of manufacturing activity in the highly-industrialized region, came in at 56.6, up from last month's 52.9 and higher than analyst predictions of 52.0. Any reading over 50.0 reflects a general increase in activity relative to the preceding month. December's reading was the strongest in six months.

While the Chicago PMI is often viewed as an indicator of how the national index will move, the correlation between the indices has not been strong lately. In the last twelve months, they have moved in the same direction only six times. The national index from the Institute for Supply Management will be released next Wednesday.

The home sales data is weighing against stocks this morning. Another negative factor is the ongoing rise in oil prices. Because of declining domestic inventories of crude oil and uncertainties stemming from political instability in Pakistan following yesterday's assassination of opposition leader Benazir Bhutto, oil futures are up again this morning.

In recent trading, the price of a barrel of crude for February delivery was up by $0.89 to $97.51. High energy prices divert business and consumer spending from other areas of the economy.

Once again, holiday fever is likely to result in rapidly thinning trading volumes today and this could exaggerate price moves.

5:00 PM EST :

Treasuries fell throughout today's session as stocks rallied on encouraging consumer spending news and more bullish news from the tech sector. An announcement by the Federal Reserve that it would continue to
conduct bi-weekly funding auctions indefinitely in order to fend off a credit crunch also perked up the stock market and drained some safe-haven support from bonds. In any event, light trading volumes may well have magnified today's price moves. In late trading, the 10-Year Treasury Note was down by 31/32, raising its yield to 4.17%; the Dow was up by 205.01 points to 13,450.65; and the Nasdaq was up by 51.13 points to 2,691.99.

The stand out-item in today's economic news was a huge jump in consumer spending last month. Such spending constitutes the bulk of all economic activity and suggests that conditions are not as bleak as recent data has suggested. The other release of the day showed a slight rise in consumer optimism since the beginning of the month, though the mood is still gloomy.

The push higher in stocks overcame several negative influences including a poor earnings report from Circuit City, a large jump in the consumer spending price index, and a spike in oil futures. These factors were trumped by the Fed announcement (coming on the heels of this week's first two such fund auctions for banks), news of a bail out for Merrill Lynch, and recent reports of strong earnings from such tech bellwethers as Oracle and Research in Motion.

The strong spending news raised demand expectations on oil and the price of a barrel of light, sweet crude for February delivery shot up by $2.25 on the New York Mercantile Exchange to settle at $93.31, the highest closing price for a front-month contract in the last seven sessions. Nevertheless, the Dow gained 1.55% on the day; the S&P 500, 1.67%; and the Nasdaq, 1.94%. All three gained for the week with the Dow rising by 0.83%, the S&P 500 by 1.12%, and the Nasdaq by 2.13%.

Despite today's bond market sell-off, Treasuries also made price gains on the week. The yield of the benchmark 10-Year Note fell by 7 basis points after two weeks that saw the yield move up by 30 basis points (yield moves inversely to price).

There are no major economic releases slated for Monday and the Securities Industry and Financial Markets Association (formerly the Bond Market Association) has recommended an early close for bond trading on Monday (2:00 PM Eastern instead of 3:00). Trading is expected to be extremely thin throughout the abbreviated session and it will get progressively thinner as the close approaches. The markets will be closed all day Tuesday.

On Wednesday, there are no major releases but the bond market will get some supply pressure from the monthly 2-Year Treasury Note auction. Some traders liquidate a portion of their old 2-Year Notes to make room for the new and most traders avoid buying the old issue since the new issue will be more liquid. Those who will be bidding for the new supply avoid buying the old in order to keep yields up (bids are for yield and bidders would like to get the highest they can).

Last month's auction was weak. Bids exceeded the offer amount by 2.21 to 1, the lowest bid-to-cover ratio since July of 2006. Noncompetitive bids, a gauge of individual investor demand, totaled $617 million, up slightly from $568 million in October's auction, but well below the average of $788 million for the twelve auctions preceding November's. Foreign demand was soft. Indirect competitive bids, which include those from foreign central banks, garnered just 23.5% of the issue. While this was up from 22.1% in October, it was below the twelve-month average of 32.9%.

Wednesday's deadline for competitive bids is 1:00 PM Eastern Time. The offering is expected to have a face value of $20 billion, matching the size of the last two issues.

On Thursday, the jobless claims report will highlight the employment situation. In yesterday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits rose last week by 12,000 to 346,000. The move was anticipated due to the jagged plot of recent data and a decline in claims levels in the preceding two weeks. The four-week moving average, which smoothes out some of the short-term volatility, rose by 4,250 to 343,000. This was the highest four-week average reading since October of 2005. For the year-to-date, the average weekly claims level has been 321,160.

The report said that continuing claims for the week ending December 8 (continuing claims must be at least a week old) also rose by 12,000 to 2.646 million. This was the second highest reading in two years, down by only 13,000 from the highest in that time, posted in the middle of last month. The four-week average rose by 23,000 to 2.633 million and that figure was the highest in two years. The weekly average continuing claims level for the year-to-date has been 2.541 million.

Another early release on Thursday is the report on durable goods orders for last month. Durable goods are defined as items meant to last three years or more. They are usually labor-intensive to produce, expensive, and therefore often financed. Because of this, the trend in orders provides some insight regarding upcoming production activity and the effect interest rates may be having on the process.

In October's report, the Commerce Department said that the seasonally adjusted level of orders fell in October by 0.4%, a weaker performance than consensus predictions of no change (0.0%). Somewhat softening the effect of the news were data revisions that changed September's previously reported decline of 1.7% to a drop of 1.4%. But October's loss represented a third consecutive monthly decline, the first time this has occurred since the period from November of 2003 through January of 2004.

A large but volatile category is transportation and October's report indicated that orders there were up by 0.2%. Excluding transportation, overall orders were down by 0.7% following a 1.1% increase in September.

Another category that is often filtered out of the data is defense since orders there are not governed by standard market forces. Defense orders were up by 8.5% following a sharp, aircraft-related 25.9% drop in September. Excluding defense, overall orders were down by 0.9% in October following a 0.3% increase the month before.

A particularly bearish indicator was the decline in orders in the category of ex-defense capital goods minus aircraft, a category which is seen as a gauge of core business demand. The order level there was down by
2.3% in October, the biggest drop in eight months.

Following three months of declines, a rebound is anticipated for November. Predictions range from an increase of 2.0% to 3.0%.

A little later, the Conference Board, an independent research firm, will release its Consumer Confidence Index for the month. Last month, the index fell to a two-year low of 87.3 from October's 95.2.

The biggest drop in optimism came from consumers' assessment of conditions in the months ahead. The expectations index fell from 80.0 to 68.7, the lowest reading in four years. The index of current conditions slipped from 118.0 to a two-year low of 115.4.

In November's news release, Lynn Franco, Director of the Board's Consumer Research Center, summarizes the situation: "Consumers' apprehension about the short-term outlook is being fueled by volatility in financial markets, rising prices at the pump and the likelihood of larger home heating bills this winter. In fact, consumers' inflation expectations have surpassed the spike experienced this spring and a larger percentage than last month expect stock prices to decline. The Present Situation Index, despite losing ground, still suggests the economy is expanding, albeit slowly. Despite this rather bleak outlook, consumers have not lost their holiday spirit and anticipate spending more on gifts this season than they did last Christmas."

December's overall index is expected to have slipped once again with predictions ranging from 86.5 to 87.0. Even at the higher estimate, this would be the lowest reading since October of 2005.

More supply comes to market on Thursday as the Treasury will be conducting its monthly auction of 5-Year Notes. As was the case with last month's 2-Year offering, November's 5-Year issue met with lackluster demand. The bid-to-cover ratio was 2.26, the lowest for the security since March. Noncompetitive bids totaled $117 million, up from October's $108 million but below the average of $144 million in the twelve auctions preceding November's.

And foreign demand was relatively light. Indirect competitive bids garnered 21.0% of the issue, the smallest award portion in four months and below the twelve-month average of 28.8%.

On Friday, the only major release is the report on new home sales for last month. As everyone knows, the housing sector has been in decline for the last two years but the seasonally adjusted, annualized pace of new home sales rose in October by 1.7% to 728,000. October's increase was deceptive, however, because September's originally reported pace of 770,000 was revised down by 7.0% to 716,000, August's previously reported rate of 735,000 was revised down by 2.6% to 717,000, and July's 798,000 was trimmed by 0.3% to 796,000.

As builders have backed away from new construction, the inventory of homes left on the market has fallen in each of the last seven report months. The seasonally adjusted inventory level in October was 516,000, the lowest since December of 2005. At the prevailing sales pace, this represented 8.5 months of supply. This was down from the 9 month turnover time in September.

The average price of a new home rose by $15,600 in October to $305,800 and this was just 0.3% less than the average a year earlier. But the median home price fell by $20,000 to $217,800, the lowest since September of 2004. This was 13.0% lower than the median price in October of last year.

Another decline in the overall sales pace is predicted for November. The consensus forecast is for a drop of 1.1% to 720,000. Behind August and September's readings, this would be the third lowest since January of 1996.

Thin trading will prevail throughout the week but Friday will again see a quick fade in activity as participants attempt to make the most of the holidays.

10:30 AM EST :

Treasuries opened in the red this morning and have continued to slide as the economic news of the day was stronger than expected. The economic data and a couple of bullish corporate news items have sparked a rally in the stock market, which is also weighing against bonds.

In today's news, the Commerce Department reported that personal income, the fuel for consumer spending, rose by 0.4% last month compared with a 0.2% increase in October. The move was right in line with predictions.

But the report also indicated a 1.1% spike in personal consumption expenditures (PCE or spending). This was the largest monthly increase since July of 2005 and was much stronger than predictions of an 0.8% rise. October's originally reported increase of 0.2% was also revised up to 0.4% and September's 0.3% increase was revised to 0.5%.

Strong economic news hurts rate-sensitive bonds since it reduces prospects of continuing interest rate cuts by the Federal Reserve. Another negative for the market was the headline inflation indicator contained in this morning's income and spending report. The price index for expenditures rose by 0.6% in November, the largest increase since September of 2005. Most of the hike was due to energy prices, however. Excluding food and energy, the so-called core index was up by just 0.2%.

The last economic release of the week was a little stronger than anticipated. The final Consumer Sentiment Index from the University of Michigan's twice-monthly surveys came in at 75.5. This was up from the preliminary reading of 74.5, released earlier this month. Forecasters were expecting little change from the initial reading. But the index was still the lowest in two years. November's reading was 76.1.

The final reading for the expectations index was 65.6, up from the preliminary reading of 63.2 but down from November's 66.2 and the lowest since October of 2005. The index of current conditions fell from the preliminary reading of 92.1 to 91.0, the lowest reading since March of 2003.

Despite the modest increase in the final overall index from the preliminary reading, the data indicate a generally pessimistic consumer mood. However, the spending news belies the inference that expressed attitudes correspond with actual behavior.

A bullish earnings report released by Research in Motion after the bell yesterday has helped the tech sector of the stock market to maintain yesterday's upward momentum this morning. Stocks are also getting a boost on word that Merrill Lynch may get a bail-out from a Singapore investment fund following steep losses due to the company's holdings of subprime mortgage products.

Trade is expected to be thin today as market participants attempt to stretch the holiday. The reduced liquidity may result in erratic price movements.

5:00 PM EST :

The inflation news released today was not supportive for either stocks or bonds, though bonds were in a better technical position to absorb the impact. Consequently, Treasuries were moderately lower on the day while the stock indices suffered deeper losses. In late trading, the 10-Year Treasury Note was down by 9/32, raising its yield to 4.24%; the Dow was down by 178.11 points to 13,339.85; and the Nasdaq was down by 32.75 points to 2,635.74.

A key inflation indicator, the Consumer Price Index, rose in November by the largest amount in over two years. Though the increase at the core level (ex-food and energy) was not as extreme, it was larger than predicted. Inflation weakens dollar-denominated investments. It also weakens the case for aggressive rate cutting by the Federal Reserve since economic stimulation also promotes inflation.

In the other major release of the day, industrial production rose a little more than expected last month though the report indicated a larger contraction in October than was originally stated. Capacity utilization rose slightly but from a downwardly revised October reading that made November's actual figure lower than analysts had predicted.

A drop in oil futures today failed to provide support for stocks. A barrel of light, sweet crude for next month delivery fell by $0.98 on the New York Mercantile Exchange to settle at $91.27. This followed a loss yesterday of $2.14, but for the week, the price rose by $2.99.

By the end of stock trading, the Dow had lost 1.32% for the day; the S&P 500, 1.37%; and the Nasdaq, 1.23%. After two week's of strong advances, the indices took sizeable hits this week with the Dow falling by 285.73 points or 2.10%. The S&P 500 lost 2.44% on the week and the Nasdaq lost 2.60%.

The drop in stocks this week did not translate into gains for Treasuries as the yield of the benchmark 10-Year Note gained 13 basis since last Friday's close (yield moves inversely to price). This followed a 17 basis point rise last week and today's closing yield was the highest in a month.

Next week's economic calendar is somewhat lighter than this week's. It kicks off on Monday with the report on the current account balance for the third quarter. The balance is the difference between dollars leaving and entering the country and includes investment income and unilateral transfers (foreign aid and government pensions sent abroad) so the report is broader than the monthly reports on international trade of goods and services.

In the report for the second quarter, the Commerce Department said the balance was a deficit of $190.8 billion. While this was a smaller deficit than the $192.0 billion analysts had predicted, the originally reported first quarter gap of $192.6 billion was revised to a wider deficit of $197.1 billion. For the third quarter, a narrower gap of about $183.0 billion is anticipated. This would be a bullish development and favor stocks, but the positive implications for the value of the dollar would also benefit the bond market.

Also on Monday, the New York branch of the Federal Reserve will publish its index data on the manufacturing sector of the region. Last month, the overall index came in at 27.37, down slightly from October's 28.75. Any reading over 0.0 indicates a general expansion of activity relative to the month before. November's index represented a thirtieth consecutive monthly expansion. Another expansion reading of about 21.0 is anticipated for this month.

But the New York region is comparatively small though the index provides the first look at the manufacturing sector for the month. The index is also seen as a predictor of the more influential index from its regional neighbor, Philadelphia. But the correlation between the two indicators is not actually all that good. In the last four years, the two have moved in the same direction about 60% of the time.

On Tuesday, the only major release is the report on housing starts for last month. In October's report, the Commerce Department said that the seasonally adjusted, annualized rate of new home construction rose by 3.0% to 1.229 million from September's 1.193 million.

The acceleration surprised forecasters who were looking for a decline to about 1.170 million, but the starts data is notoriously volatile due to such variables as weather and other regionally particular influences. Gains were posted in most areas of the country. The Midwest saw a gain of 21.1%; the Northeast, 8.5%; and the West, 5.8%. The largest regional contributor, the South, stood apart with a decline in its starts pace of 4.6%.

Though the starts rate increased, the pace was still the second lowest since March of 1993. Moreover, the rate of building permit issuance (a gauge of near-term starts) fell by 6.6% to 1.178 million. This was subsequently revised slightly to 1.170 million, a fifth consecutive decline and the lowest reading since June of 1993.

Continued deterioration in the sector is anticipated to be illustrated in November's report. Most predictions call for a 4.0% drop in the rate of starts to 1.180 million. Another decline in the permit issuance rate is also expected.

There are no major releases slated for Wednesday, but a couple of minor ones may have an impact on the markets. The Mortgage Bankers Association of America will release its index data on mortgage applications for this week. Traders are eager to see if the unusually bullish readings of the last couple of weeks were flukes. The index rose moderately last week following a huge upward spike the week before. The latest reading was the highest in two-and-a-half years.

The other minor release on Wednesday is the report on oil inventories for this week. Inventories of crude oil have fallen in eight of the last ten weeks, though gasoline inventories have risen in eight of the last ten. Distillate inventories, which include diesel and heating fuel, have fallen in six of the last ten weeks.

On Thursday, the jobless claims report will highlight the employment situation once again. In yesterday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits fell last week by 7,000 to 333,000 from an upwardly revised 340,000 (originally reported as 338,000) in the previous week. Analysts had been looking for a slight rise since the data series had been swinging back and forth for five weeks and the level in the week ending December 1 had fallen from the preceding week.

But the four-week moving average, which smoothes out some of the short-term volatility, fell by just 2,000 last week to 338,750, the second highest level since October of last year. The average weekly claims reading for the year to date has been 320,653. For all of 2006 it was 312,962.

The report said that continuing claims in the week of December 1 (continuing claims must be at least a week old) rose by 38,000 to 2.639 million. This was the third highest reading since December of last year. The four-week average rose by 18,750 to 2,613,250, the highest reading since last January. The average weekly continuing claims reading for the year to date has been 2,539,250. For all of 2006 it was 2,458,519.

After two week's of declines, a slight increase in the initial claims level is anticipated for this week.

Another early release on Thursday is the final report on gross domestic product (GDP) for the third quarter. GDP is the market value of all final goods and services produced by labor or property in the country in a year’s time. Quarterly data is adjusted and annualized and changes from quarter to quarter indicate the strength and direction of the economy.

In last month's preliminary report, the Commerce Department said that GDP grew by 4.9% in the third quarter, up sharply from the 3.9% reported in October's advance estimate and the 3.8% reading in the second quarter. In fact, it was the highest growth figure since the third quarter of 2003.

The improvement was primarily due to a smaller trade deficit than previously assumed and increased business investment. The strength of the economy is all the more impressive given that the weak residential housing sector subtracted 1.03% from the GDP calculations.

Inflation measures in the report remained soft. The price index rose by 0.9%. While this was up slightly from the advance report of 0.8%, it was still the lowest reading since the second quarter of 1998.

Though the latest report on international trade showed slightly deeper monthly deficits in the July through September period, analysts are predicting that the final GDP figure will not deviate significantly from the preliminary reading.

A little later on Thursday, the Conference Board, an independent research firm, will release its Index of Leading Economic Indicators. In October, the index fell by 0.5%. Adding to the gloomy economic outlook were revisions to past data that changed September's originally reported rise of 0.3% to a gain of just 0.1% and August's previously reported decline of 0.8% to a drop of 0.9%.

Only three of the ten index components saw improvements in October: stock prices, the money supply, and manufacturers' new orders for consumer goods. Of the negative contributors, the three largest were the decline in the rate of building permit issuance, a rise in jobless claims, and a decline in the index of consumer expectations.

Despite a sizeable rebound at the end of the month, stocks were mostly down in November; the consumer confidence data (also from the Conference Board) showed a steep drop in the index of consumer expectations to its lowest level in four years; and the rate of building permit issuance is expected to have fallen again. Consequently, another contraction is anticipated for November's leading indicators index. However, analysts predict a smaller decline of 0.1%.

At noon on Thursday, the Philadelphia branch of the Federal Reserve will release its index on the region's manufacturing sector. Last month, the index came in at 8.2, up slightly from October's 6.8. Like the New York index, any reading above 0.0 indicates growth for the month. Activity stalled in August with a reading of 0.0 but the last contraction reading was in December of last year (-2.3). For this month, a reading of between 7.0 and 8.0 is predicted.

On Friday, the report on personal income and spending will be released. In October's report, the Commerce Department said the seasonally adjusted, annualized level of personal income, the fuel for consumer spending, rose by just 0.2% following a 0.4% rise in September. The increase was half the 0.4% that forecasters had predicted. Personal consumption expenditures (spending) also rose by 0.2%. This followed a 0.3% rise in September and was slightly below the 0.3% analysts were expecting.

Rebounds in both categories are predicted for November's report. Recent projections called for 0.5% increases in both income and spending, but yesterday's stronger than expected retail sales report suggests that the spending prediction may be too low.

The last major economic release of the week is the final read on consumer sentiment for the month from the twice-monthly surveys conducted by the University of Michigan. In the preliminary report, released last Friday, the overall sentiment index came in at 74.5, the lowest reading since October of 2005. The index of current conditions actually rose to 92.1 from November's 91.5, but projections for the future dimmed with the expectations index falling from 66.2 to 63.2 (also the lowest reading since October of 2005). Little change is predicted for December's final index numbers.

10:30 AM EST :

Treasuries are currently hovering around unchanged levels with a negative bias as the losses in the last two days cushioned the market for today's economic data. But inflation fears are weighing heavily on stocks and the major indices are currently in the red.

In today's news, the Labor Department reported that its Consumer Price Index (CPI), a gauge of inflation at the retail level, rose by 0.8% last month. This was the largest jump since September of 2005. While it topped recent predictions of a 0.6% rise, yesterday's stronger than expected rise in the Producer Price Index (a measure of prices at the wholesale level) partially prepared observers for the stronger reading in the CPI.

The rise was primarily due to a 5.7% increase in the energy category, the largest leap since last March. Another large and volatile category is food but its index rose by 0.3%, matching the increase in October. Excluding both food and energy, the so-called core index was up by 0.3% last month, the biggest increase since last January.

Not surprisingly, within the core components the largest gainer was the energy-dependent transportation category. Its index was up by 2.9%, the largest increase since September of 2005. But the index for apparel was up by 0.8%, the biggest rise since April of 1999. And the price index for medical care was up by 0.4%.

On a year-over-year basis, the CPI was up by 4.3%, the biggest increase since June of 2006. The energy index was up by 21.4%, also the biggest increase since June of 2006. And while the month-to-month increase in the price index for food was not too alarming, on a year-over-year basis, it was up by 4.8%, the largest jump since December of 1990. At the core level, the index was up by 2.3% over the previous November, the biggest increase since last April.

The final release of the week contained mixed signals but was generally bullish. The Federal Reserve reported that industrial production -- a gauge of output from the nation's factories, mines, and utilities -- rose in November by 0.3%. The increase was slightly stronger than forecasts of a 0.1% or 0.2% rise, but October's originally reported decline of 0.5% was revised to a contraction of 0.7%. However, production in the large manufacturing sector rose by 0.4%, the biggest increase in four months. Mining output rose by 1.1% while that from utilities declined by 1.3%.

The report said that capacity utilization, the ratio of output to potential output, was 81.5%. While this was slightly higher than October's 81.4%, October's reading was a downward revision from the originally reported 81.7%. November's increase was primarily due to a rise in the mining category from 91.3% to 92.3%. The increase in the manufacturing category was only to 79.9% from 79.7% and utilization in the utilities category fell to 85.2% from 86.4%.

Besides the inflation concerns raised by the CPI numbers, an analyst downgrade of Citigroup has renewed anxiety regarding the financial sector and is weighing on stocks this morning. The downgrade came after yesterday's announcement by Citigroup that it was bailing out seven structured investment vehicles (SIVs) it sponsors. SIVs are investment funds that profit from the yield curve by issuing short-term debt to buy higher-yielding longer-termed investments. SIVs have been troubled lately due to the inclusion of mortgage-related products in the investment mix.

5:00 PM EST :

Treasuries tanked today but the catalyst was not the stock market since the indices barely moved. A number of market commentators blame today's solid employment report for dimmed any expectations of a half-point rate cut by the Fed next week. In late trading, the 10-Year Treasury Note was down by 26/32, raising its yield to 4.11%; the Dow was up by 5.69 points to 13,625.58; and the Nasdaq was down by 2.87 points to 2,706.16.

Nonfarm payrolls rose more than the forecasts of a couple days ago. But recent speculation had observers looking for a strong report and bonds lost considerable ground on Wednesday and Thursday because of those concerns. Apparently, the preparation was inadequate and Treasuries took an even larger plunge today.

The other economic news of the day was bond-friendly but failed to make an impression on the market. The preliminary read on consumer sentiment for the month reflected the lowest level of optimism in two years.

The jobs news did not spark a rally in stocks. Nor did a retreat in oil futures today. The price of a barrel of light, sweet crude oil for next month delivery falling by $1.95 on the New York Mercantile Exchange to settle at $88.28. After Wednesday's close of $87.49, this was the second lowest for a front-month contract since October 24.

By the end of stock trading, the Dow posted a nominal gain on the day of 0.04%, the S&P 500 slipped by 0.18%, and the Nasdaq lost 0.11%. Despite today's performance, all three indices made good gains for the week. The Dow rose by 1.90%, the S&P 500 by 1.59%, and the Nasdaq by 1.70%. In contrast, the yield of the benchmark 10-Year Treasury Note rose by 17 basis points following five consecutive weeks of declines. Yields rise when the price falls. Today's closing yield was the highest since November 16.

Next week has a heavy slate of market influences but it starts off on Monday with only one major economic release. This is the report on pending home sales from the National Association of Realtors and the report is of secondary importance since its value is as an indication of subsequent, actual home sales that will be reported later this month.

The report for September said that the NAR's seasonally adjusted index of pending home sales rose by 0.2% that month, although forecasters were looking for a decline of 1.0% or 2.0%. Yet, the improvement is only modestly bullish as it comes off a record low in August.

The data series was first published in 2005 with data going back to 2001. The index is a measure of contract activity and the NAR asserts that 80% of contracts become sales within two months and a large portion of the rest, two months thereafter.

On Tuesday morning, trade is apt to be subdued as participants await the results of the day's meeting of the Federal Open Market Committee (FOMC), the central bank's monetary policy arm. There is only one major economic release in the morning and it will probably get scant attention. This is the report on wholesale inventories for October.

Even without the FOMC meeting, the release is not usually a market-mover since the data is somewhat dated and it does not give a complete overview of the inventory situation (last Wednesday's factory orders report revealed levels of manufacturer inventories, but the situation in the retail sector is still missing).

The report for September was more bullish than expected. The Commerce Department reported that the seasonally adjusted level of wholesale inventories rose by 0.8%. Not only was this much higher than the 0.1% that forecasters had predicted, but August's originally reported gain of 0.1% was revised up to an increase of 0.7%.

Rising inventories are often a bullish indicator since they may represent efforts to stock up for rising demand. And September's report showed that demand was strong then with sales rising by 1.3%. August's originally reported increase of 0.4% was revised to 0.8%.

The combination of inventory levels and sales produced a record low inventory-to-sales (I/S) ratio of 1.10. The I/S ratio is the value of stocks on hand at the end of a month divided by the value of sales for the month. It indicates how many months it would take to entirely deplete existing inventory at the prevailing sales pace. A low figure indicates high turnover and high pressure to replenish supplies.

For October, wholesale inventory levels are expected to have risen by about 0.5%.

The FOMC policy statement will be released at about 2:15 PM Eastern Time. Most observers are expecting the committee to cut its target for the overnight borrowing rate between banks (federal funds rate) and the rate banks must pay for loans directly from the Fed (discount rate).

Between June of last year through early August of this year, the Fed took no rate action but maintained a slightly hawkish (that is, tightening) bias, citing elevated core inflation and concerns that it might not abate as expected. But the troubled housing and mortgage industries began to obstruct credit flows since investors backed away from risky mortgage debt, thereby eroding its value. Consequently, lenders in general tightened loan standards, making it harder to borrow money. In the meantime, holders of mortgage loan products have suffered losses since buyers are scarce. This bottleneck reduces the amount of money flowing through the monetary system and drives up the cost of borrowing.

With the complex network of risk-sharing in the world markets, the credit troubles spread and the Fed finally stepped in and made an emergency 0.50% cut to the discount rate in August. This brought the rate down from 6.25% to 5.75%. In addition, the committee extended the length of time reserves could be borrowed and it made a public relations push to diminish the negative connotations attached to such borrowing (loans from the Fed were typically considered last resort measures).

Nevertheless, short-term commercial debt offerings dried up and investors flocked to the safety of government backed securities. In order to ease the credit situation, the Fed decided in its September meeting to cut the fed funds rate by 0.50%, from 5.25% to 4.75%. This was the first rate cut since June of 2003 and the largest since November of 2002. The policy committee also cut the discount rate again by 0.50% from 5.75% to 5.25%.

Then, in October's meeting, the committee cut both rates once more but by 0.25%, bringing the fed funds rate down to 4.50% and the discount rate to 5.00%. But October's policy statement seemed to indicate that the actions taken since August should be enough to offset the flagging economy. "The Committee judges that, after [the latest] action, the upside risks to inflation roughly balance the downside risks to growth."

Another aspect of the meeting that unnerved some bond traders was the fact that the rate cut decision was not unanimous. Kansas City Fed President, Thomas Hoenig, voted against it.

But the Chairman of the Federal Reserve, Ben Bernanke, raised expectations for another cut last month. In congressional testimony, he laid out the Fed's economic projections. He said, "Growth was seen [by the monetary policy committee at the last meeting] as remaining sluggish during the first part of next year, then strengthening as the effects of tighter credit and the housing correction began to wane."

However, he noted the possibility that the economy might not recover as expected. "Should the rate of foreclosure rise proportionately, communities as well as individual borrowers would be hurt because concentrations of foreclosures tend to reduce property values in surrounding areas. A sharp increase in foreclosed properties for sale could also weaken the already struggling housing market and thus, potentially, the broader economy."

While this seemed to hint that more monetary accommodation was in the works, the thrust of the argument was blunted somewhat by the threat of inflation. Mr. Bernanke said that though price stability is expected to remain within acceptable limits, high price of oil and other commodities, along with the weak dollar, could boost overall inflation.

A stronger than expected revision to third quarter gross domestic product and today's relatively strong employment report have also weakened the rate cut argument. Furthermore, yesterday's official unveiling of a plan to cushion the fallout rate of subprime mortgage loans has reduced the expected impact on the economy and credit market from the housing situation.

Currently, though, Fed watchers still believe that the policy committee will cut the fed funds and discount rates again by 0.25% when it meets next Tuesday.

Wednesday brings a couple of trade-related reports. The main one is the report on international trade for October, the first month of the fourth-quarter. In the last report, the Commerce Department said that the seasonally adjusted value of imports exceeded that of exports by $56.5 billion in September. The deficit figure was much lower than the $58.0 billion that analysts had predicted. Moreover, August's originally reported trade gap of $57.6 billion was revised to a deficit of $56.8 billion.

The deficit figures have narrowed in each of the last four report months and in five of the last six. The latest was the lowest since May of 2005. The declining value of the dollar is the primary reason. The weaker dollar makes U.S. goods cheaper to foreign buyers, thereby boosting sales.

The trade report said the value of imports rose in September by 0.6% but this followed a 0.7% decline in August. Exports rose by 1.1%, the seventh consecutive increase. The value of exports was a record high and the value of imports was at its second highest monthly level.

For October, analysts foresee only a slightly wider monthly gap of about $57.0 billion.

The other release on Wednesday morning is the report on import and export prices for November. In the last report, the Labor Department said its seasonally adjusted index of import prices rose by 1.8% in October, the largest jump since May of 2006. Forecasters had been expecting a rise of about 0.8%. The fact that September's originally reported increase of 1.0% was trimmed to 0.8% did not cushion their surprise.

As expected, the largest contributor to the increases has been from petroleum products. The index for that sector rose by 6.9% in September, the largest since last March. Yet, even excluding petroleum, prices were up by 0.5%, the biggest increase since last May. Ex-petroleum prices were down by 0.2% in September and were unchanged (0.0%) in August.

The report said that export prices were up by 0.9% last month, the largest increase since April of 1995. A large but volatile export category is agricultural products and its price index was up by 3.9% following a 4.1% increase in September. Excluding the category, prices were up by 0.5%, the largest increase in six months.

Oil prices surged last month so forecasters are looking for another jump in the overall import price index of 2.0%. This would be the largest increase since April of 2006.

On Wednesday afternoon, the Treasury will release its budget figures for last month. In November of 2006, outlays exceeded receipts by $75.6 billion. Forecasts for last month call for a slightly smaller deficit of $75.0 billion. This would bring the total for the first two months of the 2008 fiscal year to a deficit of $130.6 billion, a deeper shortfall than the $122.4 billion of the first two months of the 2007 fiscal year. Higher deficit figures are a negative for bonds since they mean the Treasury will not have to issue more debt securities (Treasuries) in the future.

On Thursday, the jobless claims report will once again address the employment situation. In yesterday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits fell last week by 15,000 to 338,000. The decline was not unexpected as the data series has been swinging back and forth lately with a rise of 24,000 in the week of November 24, a decline of 12,000 in the week of November 17, and a rise of 22,000 in the week of November 10.

Despite the latest move, the recent underlying trend has been up. The four-week moving average, which smoothes out some of the short-term volatility, rose last week by 4,750 to 340,250, the highest reading in over a year. The average weekly claims figure for the year to date is 320,354. For 2006, the average was 312,962. The rising claims levels suggest a slack labor market, but any reading below 400,000 is generally considered a sign that hiring is outpacing layoffs.

Yesterday's report said that the level of continuing claims for the week ending November 24 (continuing claims must be at least a week old) fell by 59,000 to 2.599 million. Again, however, the underlying trend has been up. The four-week average rose by just 6,000 to 2,593,750 but this was the highest reading since last January. The average weekly continuing claims level for the year to date is 2,537,064. For 2006, the
average was 2,458,519.

A key inflation indicator comes out on Thursday. This is the Producer Price Index (PPI), a gauge of price changes at the wholesale level. October's report said the index rose by just 0.1% following a 1.1% energy-related spike in September. The index of energy prices fell by 0.8% in October following a 4.1% rise. The headline increase was largely attributable to a 1.0% increase in the index for another volatile
category: foods. Excluding energy and foods, the so-called core index showed virtually no change at all (0.0%). This followed a core increase in September of only 0.1%. Forecasters had predicted an overall PPI increase of 0.2% in October and a same-sized move at the core level.

Another energy-related surge is expected for November with predictions that the overall index rose by 1.5%. But at the core, the index is expected to have risen by just 0.2%.

Another major release on Thursday besides the PPI is the report on retail sales for last month. In October's report, the Commerce Department said the seasonally adjusted level of sales rose by 0.2%. This was in line with forecasts though September's originally reported increase of 0.6% was revised up slightly to 0.7%. Excluding the large but volatile auto category, sales were also up by 0.2%, a slightly weaker gain than analysts had predicted. Furthermore, September's originally reported ex-auto increase of 0.4% was revised down to 0.3%.

For November, forecasters are predicting an overall increase of 0.2% and a 0.5% rise excluding autos.

A little later, the Commerce Department will release its report on business inventories for October. The seasonally adjusted level rose by 0.4% in September. By the time October's report is released, observers will already have a fairly broad view of the inventory situation since the last factory orders report indicated that manufacturers' inventories rose by 0.1% that month and the wholesale inventories report will have been released, which is predicted to show a 0.5% increase.

The only unknown is the retail category. The average monthly change in this category has been an increase of 0.3%. If these values are plugged into the category weightings for the overall business figure, it produces an unremarkable rise of 0.3%.

Another item in the report that will be watched is the inventory-to-sales (I/S) ratio. This is the value of inventories divided by the values of sales for the month. The result shows how many months it would take to entirely deplete the stocks on hand at the prevailing sales pace. A low reading means that pressure is high on the production process to replenish supplies.

Sales increased by 0.6% in September and the combination of factors left the inventory-to-sales (I/S) ratio at 1.27. This was not far from the record low of 1.25. October's ratio is also expected to have remained relatively low.

New supply will be weighing on the bond market on Thursday morning as the Treasury will be auctioning an additional amount of last month's 10-Year Note issue. The arrival of new supply usually keeps bond prices down until the market has a chance to begin digesting the inventory. Traders who will be making bids refrain from pushing prices up prior to an auction in order to keep yields up (bids are for yield -- the higher, the better for the auction participants). Other traders also avoid purchasing the soon-to-be off-the-run issue since the new one will have greater liquidity. They also assume a wait-and-see posture until the results of the sale are known.

In the last such 10-Year Note reopening in September, demand was fairly strong. Bids exceeded the $8 billion offer amount by 2.95 to 1, the highest bid-to-cover ration since the current issue cycle (an initial and reopening auction each quarter) began in 2003. Noncompetitive bids -- a gauge of individual investor demand -- totaled $18 million, which was below the average of $21 million for the twelve reopenings prior to September's.

Foreign demand was strong for a reopening with indirect competitive bids, which include those from foreign central banks, receiving 22.4% of the issue. This was about twice the twelve-reopening average of 11.7%.

Last month's initial issue for the quarter was mixed with a decent bid-to-cover ratio of 2.34 on the $13 billion offering versus the twelve (initial) auction average of 2.30. Noncompetitive bids totaled $137 million versus the twelve auction average of $86 million. However, foreign demand was weak. Indirect competitive bids garnered just 28.2% of the issue, the weakest award for a new 10-Year issue since February of 2005.

Thursday's offering is expected to have a face amount of $8 billion, the same as in the last ten such reopenings. The deadline for competitive bids is 1:00 PM Eastern Time.

On Friday, an even more influential inflation indicator will be released. This is the Consumer Price Index (CPI), a gauge of inflation at the retail level. It rose by 0.3% in October, matching the increase in September. While the monthly release is often a market-mover, October's number was right in line with forecasts.

The largest contributor to the overall advance was a 1.4% rise in the energy category following a 0.3% rise in September. The index in the other volatile category, food, rose by 0.3% following a 0.5% rise in September. Excluding these two categories, the core index was up by 0.2% -- also as expected and also matching September's increase.

Energy is expected to have pushed the overall index up by about 0.6% last month, which if accurate would be the largest jump in six months. But the core index is expected to have risen by 0.2%, making it the sixth consecutive same-sized increase.

The final major economic release of the week is the report on industrial production from the Federal Reserve. Industrial production -- a gauge of output from the nation's factories, mines, and utilities -- fell in October by 0.5%, the largest decline since last January. This followed weak increases in August and September of 0.1% and 0.2%, respectively. And October's weakness was broad-based. The utilities category is usually the most volatile due to weather and, as might be expected, it showed the largest change with a decline of 1.6%. But the largest category, manufacturing, saw a 0.4% drop and mining experienced a decline of 0.6%.

The report said that capacity utilization, the ratio of output to potential output, fell to 81.7% from 82.2% (originally reported as 82.1%). This was the lowest reading since last May. The figure indicates that there is more slack in the production process. Significantly, utilization in the manufacturing sector fell from 80.5% to 80.1%, also the lowest reading since May. More slack translates to a more favorable inflation situation since high utilization can lead to bottlenecks that prevent demand from being met, thereby pushing up prices.

Not much progress is predicted for November with predictions of a 0.1% increase in industrial production. Capacity utilization is expected to have remained at 81.7%.

10:30 AM EST :

Was the employment report too strong or too weak? The stock indices are bobbing around unchanged levels as traders there have yet to make up their minds on the jobs numbers. In contrast, bond traders are looking at the report as a positive assessment of the economy, which reduces the argument for aggressive interest rate cuts by the Federal Reserve. Treasuries began the day underwater and they have fallen further since the release of the employment report.

The Labor Department reported this morning that the seasonally adjusted level of nonfarm payrolls rose in November by 94,000. While this was above last week's predictions of 75,000, it was at the low end of recent predictions of between 90,000 and 150,000.

October's gain was revised up slightly from 166,000 to 170,000 but August's previously reported rise of 93,000 was trimmed to 44,000.

The goods producing sector continued to slide with construction payrolls losing 24,000 last month and manufacturing payrolls, 11,000. In the services sector financial services payrolls fell by 20,000, information services lost 6,000, and utilities lost about 200. The big gainers were professional and business services (+30,000), education and health services (+28,000), and leisure and hospitality services (+26,000). Government payrolls grew by 30,000.

The report said that the unemployment rate, the portion of the active workforce without jobs, remained at 4.7% for a third consecutive month. Forecasters had predicted a slight increase to 4.8%.

One item in the report that provides no support for either stocks or bonds is a jump in average hourly earnings of 0.46%, the highest increase since June. But it follows an exceptionally mild increase in October of 0.06%.

A second-tier economic release was bearish -- normally a plus for bonds, but the news had no impact on the market. According to news sources, the preliminary read on consumer sentiment for the month from the twice-monthly University of Michigan surveys produced an overall index reading of 74.5, its lowest level since October of 2005.

The index of current conditions actually rose to 92.1 from November's 91.5, but projections for the future dimmed with the expectations index falling from 66.2 to 63.2 (also the lowest reading since October of 2005).

Although the bond market's reaction to today's data seems puzzling, traders are also looking ahead to a heavy slate of events next week that includes a Fed policy meeting and a 10-Year Treasury Note auction. The economic release calendar includes the key inflation indicators: the Producer Price Index and the Consumer Price Index. It also includes the monthly retail sales report and the report on industrial production.

Market Overview: Friday, November 30, 2007

5:00 PM EST :

Treasuries pared earlier losses as the stock indices fell from their morning highs and both markets finished narrowly mixed. In late trading, the 10-Year Treasury Note was down by 2/32, leaving its yield at 3.94%; the Dow was up by 59.99 points to 13,371.72; and the Nasdaq was down by 7.17 points to 2,660.96.

Once again, the news of the day was not the principal driver behind the moves in the bond market. Though the Chicago PMI was somewhat stronger than anticipated this month, personal income and spending rose less than expected last month, and the rate of construction spending fell more sharply than predicted with the aid of a still stronger deceleration in the residential sector.

Treasuries swung wildly this week with a huge rally on Monday, followed by two day's of deep losses, and then a rebound yesterday. Some end-of-month positioning helped offset profit-taking pressure on Treasuries today. The benchmark 10-Year Treasury Note had been down by as much as 25/32 in morning trading action.

For the week, the yield of the 10-year fell by 6 basis points (yield falls when the price rises). This was the fifth consecutive week in which the yield has fallen and the sixth in the last seven weeks. Over that time, the net loss to the yield has been 74 basis points or 2-10/32.

Profit-taking was also a problem for stocks today, but suggestions this week by Fed Vice Chair Donald Kohn on Monday and Fed chief Ben Bernanke yesterday that the Fed is poised to make more interest rate cuts have eased worries concerning the credit market. Talk of a plan between the Treasury and mortgage lenders to temporarily freeze interest rates on some existing subprime mortgage loans also encouraged traders.

And another solid retreat in oil futures also benefited stocks. The price of a barrel of light, sweet crude oil for January delivery fell by $2.30 on the New York Mercantile Exchange to settle at $88.71. This was the fourth decline this week for a net decline of $9.47 since last Friday. Today's close was the lowest for a front-month contract since October 24th. Lower energy prices help the economy because they leave businesses and consumers with more money to spend on other things.

By the end of stock trading, the Dow was up by 0.45% and the S&P 500 by 0.78%. The Nasdaq fell by 0.27%. But all three indices made strong gains for the week. The Dow gained 390.84 points or 3.1%, the S&P 500 rose by 2.81%, and the Nasdaq closed today 2.48% higher than last Friday's close.

Next week, the economic calendar is relatively light but it includes a couple of potential market-movers. The first is the national gauge of manufacturing activity, the purchasing managers' index from the Institute for Supply Management (ISM). In October, the index came in at 50.9. Any reading above 50.0 reflects a general increase in activity relative to the preceding month but October's index showed the least amount of growth in seven months.

Between June of 2003 and October of last year, the overall index posted forty-one straight expansion readings. But the extent of growth declined throughout last year until the index indicated slight contractions in November and then last January. The index strengthened after that, hitting a fourteen month high of 56.0 in June. But each of the four reading since then has been weaker than the one before.

Although October's weak growth indicator was a plus for bonds the inflation measure in the data was not as bond-friendly. The prices index rose to 63.0 from September's 59.0. September's index, however, was the lowest in seven months.

For November, the ISM index is expected to come in near October's level. Current forecasts call for a reading of about 50.5.

On Wednesday, the Labor Department will release its revised report on productivity for the third quarter. According to the preliminary report, released on the 7th of this month, the seasonally adjusted level of nonfarm business productivity (output per worker per hour) rose by 4.9% in the third quarter following a 2.2% rise in the second quarter (revised down from 2.6%). The jump was much larger than the 3.0% that analysts had predicted.

The report said that output rose by 4.3% while hours worked shrank by 0.5%. Hourly compensation rose by 2.7%, but unit labor costs (ULC; cost per unit of output) fell by 0.2%. The decline in ULC was the first in five quarters.

Strong productivity is usually a positive influence on the markets. The increased output per hour is seen by stock traders as a bullish economic development: more efficiency and therefore better corporate earnings. And the efficiency often translates into reduced unit labor costs which have a salutary effect on inflation pressures -- a plus for both stocks and bonds.

Recent forecasts of the final read on productivity have called for an improved gain of about 5.5%. But yesterday's strong revision to third quarter gross domestic product (4.9% from the advance estimate of 3.9%) suggests even stronger productivity growth.

Later on Wednesday, the report on factory orders for October will be released. In September's report, the Commerce Department said the seasonally adjusted level of orders rose by 0.2%. Many forecasters had predicted a decline of about 0.8% because of a soft durable goods orders report for the month. What they were not counting on was a 2.1% surge in the nondurable category, the largest increase since last March. Factory orders fell in August by 3.5%.

Excluding the volatile transportation category, orders were up by 1.4% in September as the order level in transportation fell by 6.2%. Orders in the defense sector are not governed by standard market forces so orders excluding the sector are seen as a better representation of underlying demand on production. Ex-defense orders were up by 1.3% in September as defense saw a 33.9% decline due primarily to a 37.2% drop in aircraft orders.

In the category of ex-defense capital goods minus aircraft, orders were up by 0.6%, a third consecutive monthly increase. The category is seen as a measure of core business demand.

Last Wednesday's report on durable goods orders for October showed a weaker than expected 0.4% decline. But analysts feel that orders for nondurables will again buoy the headline number. However, they see only a slight overall gain of about 0.1% or 0.2%.

Also out on Wednesday morning is the ISM Index on the non-manufacturing, or services, sector of the economy. In October, the index came in at 55.8. This was up from September's reading of 54.8 and was higher than the 54.0 that analysts were expecting. Like the manufacturing index, any reading over 50.0 indicates growth and October's was a fifty-fifth consecutive expansion indicator. Another, but slightly less forceful growth reading of about 55.0 is anticipated for November.

Though the services sector is much larger than the manufacturing sector, the services index data does not carry the same clout as the manufacturing data. One reason for this is the very size of the services sector. It is so large that extremes offset one-another and broad-based changes are necessary to make a significant impact on the overall index. Another reason is that the services data series is relatively young (begun in 1997 vs. 1948 for the manufacturing series).

The only major release on Thursday is the jobless claims report. In yesterday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits rose last week by 23,000 to 352,000. The jump was the largest in six weeks and the level was the highest since early last February.

While the jump suggests a slackening labor market, market veterans are withholding judgment until a trend can be confirmed. An additional adjustment had to be made to last week's raw data to account for the Thanksgiving closure of labor offices. A faulty adjustment factor would have skewed the results. The report said that the four-week moving average, which smoothes out some of the short-term volatility, rose by 5,750 to 335,250. The weekly average claims figure for the year to date is about 320,000.

Continuing claims for the week ending November 17 (continuing claims must be at least a week old) rose by 112,000 to 2.665 million. The increase was the largest since February and the claims level was the highest since last December. The four-week average rose by 20,500 to 2,589,250. The average weekly continuing claims reading for the year to date is 2,535,848.

Following such a large move last week, a partially compensating decline is expected in this week's initial claims figure.

Though the holiday-related swings may cause observers to view the claims data with suspicion, the report will be significant as a reminder that the monthly employment report is looming. This is often a market mover and it comes out on Friday. In the last report, the Labor Department said that the seasonally adjusted level of nonfarm payrolls rose in October by 166,000. The gain was much higher than the 90,000 that analysts were predicting and was the biggest jump since last May when payrolls increased by 188,000. The downward revision to September's originally reported gain of 110,000 to 96,000 was not much compensation to those who were looking for a weaker gain in October.

As expected, the report said that the unemployment rate, the portion of the active workforce without jobs, held at 4.7% for a second month. Though this level was the highest since August of last year, it was still relatively low. A positive in the report for both markets was news that average hourly earnings rose in October by just 0.2%, the smallest increase since last April.

Forecasts for November call for a smaller increase in nonfarm payrolls of between 70,000 and 80,000. The unemployment rate is expected to have edged up to 4.8%, the highest since July of last year.

The final release of the week is the preliminary read on consumer sentiment for December from the University of Michigan. November's final sentiment index was 76.1, up from the preliminary read of 75.0 but down from October's final reading of 80.9. In fact, November's final reading was the lowest in two years. High energy prices, stock and home price losses, and soft economic data suggest that sentiment is continuing to decline. Estimates for December run from 75.0 to 76.0.

10:30 AM EST :

Volatility continues to be the hallmark of this week's market activity as Treasuries have retreated this morning following yesterday's rally while stocks have continued the strong surge seen on Tuesday and Wednesday after a breather yesterday that produced only modest gains.

The economic data released today was largely bond-friendly; that is, bearish. The Commerce Department reported that the seasonally adjusted, annualized level of personal income, the fuel for consumer spending, rose by just 0.2% in October following a 0.4% rise in September.

The increase was half the 0.4% that forecasters had predicted. Personal consumption expenditures (spending) also rose by 0.2%. This followed a 0.3% rise in September and was slightly below the 0.3% analysts were expecting for last month as well.

Later, in a separate report, the Commerce Department said that the seasonally adjusted, annualized pace of construction spending fell in October by 0.84%, the largest contraction since September of last year. A decline of about 0.2% had been forecast for last month. The rate rose by 0.2% in September (revised from a 0.3% increase).

Of particular interest was a 1.96% decline in the rate of residential construction spending. This was a twentieth consecutive monthly contraction and October's pace was the lowest in four years.

The final release of the day was somewhat more bullish than expected. The Chicago branch of the National Association of Purchasing Management (now known nationally as the Institute for Supply Management or ISM) said today that its Purchasing Managers Index (PMI) came in at 52.9 this month. This was up from October's 49.7 and was stronger than the 50.5 that analysts had predicted. Any reading over 50.0 indicates a general expansion of activity in the region relative to the preceding month.

The Chicago index is considered an important gauge of manufacturing since the region is highly-industrialized. But although the Chicago PMI is perceived as a predictor of how the national index may have moved, in the last twelve months the indices have moved in the same direction six times. The ISM's national index for November will be released on Monday. It came in at 50.9 in October and little change is anticipated in this month's index reading.

Helping to generate renewed enthusiasm for stocks were comments by Federal Reserve Board Chairman Ben Bernanke yesterday evening. Speaking before the Charlotte, North Carolina Chamber of Commerce, he outlined the Fed's recent rate easing and the reasons for it. He then noted that since the last monetary policy meeting the outlook for the economy has been impacted by the turbulence in the financial markets.

"Investors have focused on continued credit losses and write-downs across a number of financial institutions, prompted in many cases by credit-rating agencies’ downgrades of securities backed by residential mortgages. The fresh wave of investor concern has contributed in recent weeks to a decline in equity values, a widening of risk spreads for many credit products (not only those related to housing), and increased short-term funding pressures. These developments have resulted in a further tightening in financial conditions, which has the potential to impose additional restraint on activity in housing markets and in other credit-sensitive sectors. Needless to say, the Federal Reserve is following the evolution of financial conditions carefully, with particular attention to the question of how strains in financial markets might affect the broader economy."
(BERNANKE SPEECH)

These comments have bolstered speculation that the Fed will cut rates (the short-term borrowing rate between banks and the rate charged to banks for loans directly from the Fed) when the policy committee meets on December 11. Lower rates are a plus for bonds but they also stimulate the economy and this is the current focus for stock traders. At present, the inter-market dynamics and other technical factors are guiding Treasuries.

Market Overview

5:00 PM EST :

Stocks gyrated through large swings today and Treasuries were thrown around in the wake. In late trading, the 10-Year Treasury Note was down by 7/32, raising its yield to 4.17%; the Dow was up by 66.74 points to 13,176.79; and the Nasdaq was up by 18.73 points to 2,637.24.

Today's major market-related news release favored bonds in its role in supporting further rate cuts to stimulate economic activity. Industrial production unexpectedly fell last month by the largest amount in nine months. A welcome inflation item within the report was a drop in capacity utilization. It was also the biggest drop in nine months and the level was the lowest in five months.

The news was not helpful for stocks nor was a rise in oil prices. The price of a barrel of light, sweet crude oil for next month delivery rose by $1.82 on the New York Mercantile Exchange to settle at $95.25, the highest close since last Friday and was not too far from the record closing high of $96.70 posted on Tuesday of last week.

And sentiment in the stock market continues to suffer from concerns about the credit situation. But following losses in the last two days, traders ultimately leaned toward the buy side by the end of today's session. The Dow, which had been up by about 100 points and down by about 60 points, finished the day with a 0.51% gain. The S&P 500 rose by 0.52% and the Nasdaq, by 0.72%.

Despite sizeable losses on Wednesday and Thursday, all three indices made progress for the week. The Dow gained 1.03% while both the S&P 500 and the Nasdaq rose by 0.35%. The gain this week represents a partial recovery from heavy losses suffered last week and by additional losses for the Dow and S&P 500 the week before.

The bond market also gained this week with the yield of the benchmark 10-Year Note falling by 5 basis points (price moves inversely to yield). This is the third consecutive weekly yield decline for a combined total of 23 basis points. Four weeks ago, the yield only gained 1 basis point. In the week before that (the week ending October 19), the yield fell by 29 basis points. And even though the yield rose today, the close was still the second lowest since September 22, 2005.

Next week has a light economic release schedule. There are no major reports slated for Monday but Tuesday brings the report on housing starts for last month. In the last report, the Commerce Department said that the seasonally adjusted, annualized rate of new housing starts fell in September by 10.2% to 1.191 million. The pace was much lower than analyst predictions of 1.285 million. The decline was the largest in eight months and the start rate was the lowest since March of 1993.

Not only was the starts data weaker than expected, but the outlook for the near-term is also bleaker. The report said that the rate of building permit issuance fell from 1.322 million to 1.226 million. While September's pace has subsequently been revised to 1.261 million, it is still the lowest since March of 1995.

For October, forecasters predict that the rate of starts fell by 1.8% to 1.17 million. A steep decline in the rate of building permit issuance to about 1.190 million is anticipated.

Wednesday will be busy since traders from all markets will be positioning for a long weekend despite the fact that the market will be open on Friday. One strategy for those who will be sidelined is to shift into the relative safety of Treasuries to avoid event risk while they are gone.

But bond trading will quickly thin on Wednesday as the Securities Industry and Financial Markets Association (formerly the Bond Market Association) has recommended an early close (2:00 PM Eastern instead of 3:00). Light trading volumes mean less liquidity and that can lead to erratic price moves.

On Wednesday morning, the Labor Department will release its weekly report on jobless claims. In yesterday's report, observers were surprised by an unexpected, 20,000 drop in the seasonally adjusted level of initial claims for state unemployment benefits. At 339,000, the level tied with the week of October 13 as the highest since mid-April.

However, the four-week moving average, which smoothes out some of the short-term volatility, was unchanged last week at 330,000. For the year to date, the weekly average initial claims level is 319,000.

The report said that continuing claims for the week ending November 3 (continuing claims must be at least a week old) fell by 7,000 to 2.568 million. The four-week average rose by 11,000 to 2,562,250 and the weekly average for the year to date is 2,532,614.

After last week's drop, a moderate rebound in this week's initial claims figure would not be unexpected.

A little later on Wednesday, the Conference Board, an independent research firm, will release its Index of Leading Economic Indicators for last month. The index rose by 0.3% in September, slightly lower than forecasts for a 0.4% increase. Moreover, August's originally reported decline of 0.6% was revised to a drop of 0.8%.

The largest contributors to the rise in September were slower vendor performance (a sign of increased demand), rising stock prices (higher wealth levels), and a projected rise in manufacturers' new orders for nondefense capital goods after a sharp decline in August.

The negative components were the decline in building permit issuance and a drop in the spread between the effective fed funds rate and the yield of the 10-Year Treasury Note. The average monthly interest rate spread has been negative -- a bearish economic indicator -- since July of 2006 and September's was the most negative in four months.

The steep losses in the stock market and a rise in initial jobless claims point to a decline in October's index. Current forecasts call for a decline of 0.4%.

The final read on consumer sentiment for the month from the University of Michigan will also be released on Wednesday morning. In last Friday's preliminary release, the overall sentiment index came in at 75.0, down sharply from October's final reading of 80.9 and the lowest reading in two years. The expectations index fell to 64.7 from 70.1 and the index of current conditions fell to 91.0 from 97.6. The drop in optimism reflected rising energy prices, falling stocks, and declining home values. With little news since then to boost optimism, the final reading is expected to be little changed.

Two minor releases will also get some attention on Wednesday. These are the Mortgage Bankers Association of America's index data on mortgage applications for this week and the weekly report on oil inventories from the Energy Department.

The U.S. markets will be closed on Thursday in observance of Thanksgiving. The markets are open on Friday but the bond market will once again be closing early. There are no major economic releases scheduled. The combination of thin trading volumes and no economic guidance could make for some turbulence; though barring an unforeseen influence, traders will attempt to keep the markets on an even keel.

10:30 AM EST :

The first impulse of bond traders this morning was to cash in on some of yesterday's hefty gains and stock traders were inclined to pick up bargains after market declines in the last two days. But the economic news released this morning was more bearish than expected, pressuring stocks and lending support for bonds.

In recent trading, short-term Treasuries were up and the longer-dated maturities had pared earlier losses and were near unchanged levels. The stock indices, after opening with gains, were all in negative territory with the Nasdaq leading the way.

In today's only major economic release, the Federal Reserve reported that its index of industrial production -- a gauge of output from the nation's factories, mines, and utilities -- fell last month by 0.5%.

Although data revisions revealed slightly more strength in August and September (0.1% and 0.2% respective increases instead of 0.0% and 0.1%); Octobers decline, the largest since last January, was much weaker than analysts' predictions of a 0.1% increase.

And the weakness was broad-based. The utilities category is usually the most volatile due to weather and, as might be expected, it showed the largest change with a decline of 1.6%. But the largest category, manufacturing, saw a 0.4% drop and mining experienced a decline of 0.6%.

The report said that capacity utilization, the ratio of output to potential output, fell to 81.7% from 82.2% (originally reported as 82.1%). This was the lowest reading since last May. The figure indicates that there is more slack in the production process. Significantly, utilization in the manufacturing sector fell from 80.5% to 80.1%, also the lowest reading since May. More slack translates to a more favorable inflation situation since high utilization can lead to bottlenecks that prevent demand from being met and thereby pushing up prices.

Another negative for stock is a rise in oil prices this morning. In recent trading, the price of a barrel of crude oil for next month delivery was up by $1.67 on the New York Mercantile Exchange to $95.10. High energy costs mean businesses and consumers have less to spend in other areas of the economy.

Stock traders were also dismayed by negative earnings guidance issued by FedEx and Starbucks.

Traders in both markets are looking ahead to next week, which is likely to contain volatile action due to a light economic calendar and holiday disruption. The releases are expected to favor bonds, however. Tuesday's report on housing starts is predicted to show continued weakness in the sector. Thursday's release of the Index of Leading Economic Indicators for last month is expected to have contracted. And the final index on consumer sentiment (also a Wednesday release) is not expected to reveal any improvement from the two-year low posted earlier this month.

The markets will be closed next Thursday in observance of Thanksgiving and there are no major economic releases slated for Friday. Trading volumes are expected to be light around the holiday, leaving prices vulnerable to erratic moves because of the reduced liquidity.

Market Overvies November 9, 2007

5:00 EST :

Stocks fell sharply again today and Treasuries looked more attractive by comparison. In late trading, the 10-Year Treasury Note was up by 16/32, lowering its yield to 4.22%; the Dow was down by 223.55 points to 13,042.74; and the Nasdaq was down by 68.06 points to 2,627.94.

The economic news of the day was not the guiding factor for the markets. The trade gap in September was the smallest in over two years and revisions narrowed August's originally reported deficit. The trade report is good economic news but it argues against more rate cuts by the Federal Reserve.

Another obstacle to further rate cuts is inflation pressure and today's report on import / export prices indicated an increased threat coming from international trade.

The last release of the day favored cutting rates but it is considered a second-tier indicator. The Reuters / University of Michigan initial read on consumer sentiment for the month showed a big decline in optimism, though sentiment does not always correlate with spending behavior.

Stock traders overlooked the bullish trade gap news and focused instead on the ongoing deterioration of the financial sector. Following a string of earnings misses and negative guidance from major companies in the sector, Wachovia warned today of massive write-downs stemming from mortgage-related problems. Apart from the financial sector, the tech sector also saw large losses. Negative guidance from Qualcomm was a major contributing factor.

Of course, high oil prices continue to weigh against stocks. A barrel of light, sweet crude oil for next month delivery rose by $0.86 on the New York Mercantile Exchange to settle at $96.32, not far from Tuesday's record high close of $96.70.

By the end of stock trading, the Dow had lost 1.69%; the S&P 500, 1.43%; and the tech-heavy Nasdaq, 2.52%. All three took huge hits for the week. The Dow fell by 4.06% and the Nasdaq by 3.71%. The Nasdaq was the worst performer with a loss of 6.49%.

In contrast, Treasuries rose. The yield of the benchmark 10-Year Note fell by 10 basis points this week after falling by 8 basis points last week (yield moves inversely to price). And though the yield gained 1 basis point in the week ending October 26, it fell the week before that by 29 basis points. Today's closing yield was the lowest in over two years.

Next week, the bond market will be closed on Monday in observance of Veterans Day though the stock market will be open. The economic calendar kicks off on Tuesday with the report on pending home sales for September. In August's report, the National Association of Realtors said that its index of pending home sales fell by 6.5% from the previous month to a record low. This followed a 10.7% drop in July. On a year-over-year unseasoned basis, pending sales were down by 21.3%.

The data series was first published in 2005 with data going back to 2001. The index is a measure of contract activity and the NAR asserts that 80% of contracts become sales within two months and a large portion of the rest, two months thereafter. Confirming this thesis is the report (also by the National Association of Realtors) that the seasonally adjusted, annualized pace of existing home sales fell in September to its lowest level since September of 2001.

September's pending sales report is expected to show further weakness with a monthly decline of 1.0% to 2.0%.

On Tuesday afternoon, the Treasury will release its budget figures for October, the first month of the 2008 fiscal year. September was a heavy tax receipt month so a surplus (more receipts than outlays) was anticipated, but the actual surplus figure of $111.6 billion was much higher than the $100 billion that analysts had predicted. The variance may have been due to calendar issues so the deficit in October is expected to be higher than the $49.3 billion posted in October of last year. Recent estimates range from a shortfall of $55.0 billion to $60.0 billion.

The higher the deficit figure, the worse it is for Treasuries since it translates into a greater need for the issuance of more government securities to cover Federal debts and operation expenses.

Wednesday brings a couple of heavyweight releases. The Producer Price Index has clout because it is a gauge of inflation at the wholesale level. In September's report, the Labor Department said the PPI rose 1.1%, the largest increase since February.

Though a bounce was expected after August's 1.4% oil-related plunge (the largest since October of last year), September's increase was larger than the 0.5% that analysts had predicted. On a year-over-year basis, the index was up by 4.4%, the largest Y/Y margin since June of 2006.

But energy was a major factor in the overall move. The energy index rose by 4.1% in September, the biggest increase since last November. This followed a 6.6% decline in August, the largest drop since April of 2003. Foods, another volatile category, also jumped more than expected last month. The index for that category, after four months of declines, rose by 1.5%, the largest increase since March.

Excluding foods and energy, the so-called core index rose by just 0.1%. On a year-over-year basis, the core index was up by 2.0%. This is still somewhat elevated but an improvement from August's Y/Y margin of 2.2% and July's 2.3%. Price pressures further down the production pipeline were also relatively tame. The index for prices at the intermediate stage of production rose by 0.4% following a 1.2% decline in August. At the initial, or crude, stage of production, the price index rose by 0.1% following a 3.0% decline.

Consensus forecasts call for increases of about 0.2% for both the overall and core PPI. But this morning's report in import/export prices indicated a larger than expected increase in imported oil prices last month so the headline PPI number could be higher.

The other heavyweight release on Wednesday is the report on retail sales. The report for September was stronger than expected. In it, the Commerce Department said the seasonally adjusted level of sales were up by 0.6% after a 0.3% increase in August. Auto sales, a volatile category that makes up about a quarter of all sales, were up by 1.2% after a 3.3% increase in August. Excluding the category, sales rose by 0.4% following a 0.4% decline.

For obvious reasons, another volatile category is sales at gasoline stations. Sales there were up by 2.0% in September following a 2.6% decline the month before. Excluding both the auto and gas station categories, sales were up by 0.2% following a 0.1% decline in August.

A weaker report is predicted for October. Overall sales are expected to have risen by 0.2% and ex-auto sales by about 0.3%.

Later on Wednesday morning, the report on business inventories for September will be released. The report is not likely to get as much attention as the PPI and retail sales report since previous releases have already disclosed the inventory change in the manufacturing and wholesale categories. The only unknown is the retail sector.

The last factory orders report said that manufacturers' inventories rose by 0.6% in September and the report on wholesale inventories showed a 0.8% increase there. The average monthly change in retail inventories for the year through August has been an increase of 0.4%. If this is plugged into the estimate equation, then overall business inventories rose in September by 0.6%. A weaker retail gain of as little as 0.1% would produce an overall increase of 0.5%.

In August, business inventories reportedly rose by 0.1% but this is likely to be revised slightly higher in Wednesday's release. The last report also said that sales fell by 0.4%, pushing the inventory to sales (I/S) ratio up to 1.27 from July's 1.26.

The I/S ratio is the value of inventories divided by the values of sales for the month. The result shows how many months it would take to entirely deplete the stocks on hand at the prevailing sales pace. A low ratio means pressure is high on the production process to replenish supplies. Despite the increase in August, the ratio is still considered low by historical standards (the record low is 1.25). September's is expected to also come in at 1.27.

On Thursday, the jobless claims report spotlights the employment situation once again. In yesterday's report, the Labor Department said that the seasonally adjusted level of initial claims for state unemployment benefits fell by 13,000 last week to 317,000. This was a third consecutive week of declines totaling 22,000 but it followed a spike of 30,000 in the week ending October 13. The four-week moving average, which smoothes out some of the week-to-week volatility, was little changed, rising by 2,000 to 329,750. The weekly average claims level for the year to date is 318,523.

The report said that the level of continuing claims for the week ending October 27 (continuing claims must be at least a week old) declined by just 4,000 to 2.579 million. But this followed a 60,000 increase the week before. The four-week average rose by 16,000 to 2,552,250. The average weekly continuing claims level for the year to date is 2.532 million.

Following last week's decline in the initial claims level, a slight increase would not be too surprising in this week's figure.

An even more influential inflation indicator than the PPI comes out on Thursday morning. This is the Consumer Price Index, a gauge of price changes at the retail level. In September, it rose by 0.3%, the biggest increase since last May. The energy index rose by 0.3% and the index of food prices rose by 0.5%. Excluding these categories, the core index rose by an in-trend 0.2%. But, despite the tame core reading, the broad-base of the increase could be seen in the fact that there were no declines in any major category.

For October, forecasters are looking for a repeat of September's headline figures with a 0.3% overall increase and a 0.2% rise at the core level.

Also out on Thursday morning is the index data from the New York branch of the Federal Reserve on manufacturing activity in the region for the month. October's index came in at a remarkably strong 28.8, up from 14.7 in September. Any reading over 0.0 indicates a general expansion of activity relative to the preceding month and October's index represented a twenty-ninth consecutive monthly expansion.

But the attention-grabber was the strength of October's expansion. The index was the highest since July of 2004 and surprised forecasters who were looking for a weaker reading than September's. A modestly weaker growth reading of about 20.0 is predicted for November.

The New York region is comparatively small but the index provides the first glimpse of manufacturing activity for the month. The index is also seen as a predictor of the more influential index from its regional neighbor, Philadelphia. But the correlation between the two indicators is not actually all that good. In the last four years, the two have moved in the same direction about 60% of the time.

The predictive aspect of the New York index will be short-lived this month as the Philadelphia index is scheduled to be released at noon on Thursday. It came in at 6.8 in October, down from September's reading of 10.9. As is the case with the New York index, any reading of the Philadelphia index over 0.0 indicates growth. Activity stalled in August with a reading of 0.0 but the last contraction reading was in December (-2.3). Analysts predict that the index will come in at about 6.0 this month.

On Friday, the only major release is the report on industrial production for last month from the Federal Reserve. September's report said that industrial production -- a gauge of output from the nation's factories, mines, and utilities -- rose by 0.1%.

The increase was right in line with predictions but the report revised August's originally reported gain of 0.2% to a flat reading (0.0%). Revisions also increased July's previously reported gain of 0.5% to 0.6% but this was offset by a downward revision of June's 0.6% gain to 0.5%.

The static level of industrial activity in August and September translated into a slight slackening in the ratio of output to potential output. The name of this ratio is capacity utilization and August's originally reported 82.2% was trimmed to 82.1% and September's ratio held at that level. Despite the slight decline, the level in August and September was the second highest after July's 82.2% since August of last year. High utilization raises inflation concerns. It means less slack in the production process which can lead to bottlenecks; and when demand cannot be met, prices rise.

But October's report is expected to once again show little advancement. Production is expected to have increased by another 0.1% and the utilization statistic is expected to be unchanged at 82.1%.

10:30 AM EST :

The economic data released this morning was largely unfavorable for bonds but Treasuries are finding support from further shifts out of the stock market. Huge losses projected by Wachovia have stirred credit concerns once again, thus keeping stock traders in a bearish mood.

The Commerce Department said this morning that the seasonally adjusted value of imports exceeded that of exports by $56.5 billion in September. The deficit figure was much lower than the $58.0 billion that analysts had predicted. Moreover, August's originally reported trade gap of $57.6 billion was revised to a deficit of $56.8 billion.

The deficit figures have narrowed in each of the last four report months and in five of the last six. The latest was the lowest since May of 2005. The declining value of the dollar is the primary reason. The weaker dollar makes U.S. goods cheaper to foreign buyers, thereby boosting sales.

The trade report said the value of imports rose in September by 0.6% but this followed a 0.7% decline in August. Exports rose by 1.1%, the seventh consecutive increase. The value of exports was a record high and the value of imports was at its second highest monthly level.

The news is bullish and therefore unfavorable to bonds since it weakens the case for more Fed rate cuts. Net exports are calculated into gross domestic product (GDP) and the smaller trade deficit in September is a positive contributor. The advance report of third quarter GDP, released last week, said the annualized rate of economic growth increased by 3.9% in the July through September period.

The other early release of the day sounded an inflation alarm which is not good for stocks or bonds. The Labor Department reported that its seasonally adjusted index of import prices rose by 1.8% in October, the largest jump since May of 2006. Forecasters had been expecting a rise of about 0.8%. The fact that September's originally reported increase of 1.0% was trimmed to 0.8% did not cushion their surprise.

But, as expected, the largest contributor to the increases has been from petroleum products. The index for that sector rose by 6.9% last month, the largest since last March. Yet, even excluding petroleum, prices were up by 0.5%, the biggest increase since last May. Ex-petroleum prices were down by 0.2% in September and were unchanged (0.0%) in August.

The report said that export prices were up by 0.9% last month, the largest increase since April of 1995. A large but volatile export category is agricultural products and its price index was up by 3.9% following a 4.1% increase in September. Excluding the category, prices were up by 0.5%, the largest increase in six months.

The final release of the day was the most bond-friendly; that is, bearish. According to news sources, the preliminary index on consumer sentiment for the month from the University of Michigan came in at 75.0, down sharply from October's final reading of 80.9 and the lowest reading in two years. The expectations index fell to 64.7 from 70.1 and the index of current conditions fell to 91.0 from 97.6. The drop in optimism reflects rising energy prices, falling stocks, and declining home values.

The bond market will be closing early today (2:00 PM Eastern Time) and will be closed all day Monday in observance of Veterans Day. With the long weekend ahead for the bond market, some traders may be inclined to cash in on some recent gains but so far the performance of the stock market is dominating the trading action in
bonds.