Wednesday, 06/27/07, 5:00 PM EDT :
Another bearish economic indicator helped lift the bond market this morning and a relatively successful Treasury auction kept prices in the green, though caution ahead of tomorrow's Fed statement kept gains modest. Stocks struggled against the economic news and the Fed factor, but following three losing sessions, including a nosedive last Friday, bargain hunters sent prices steadily higher throughout the day and the major indices posted respectable gains. In late trading, the 10-Year Treasury Note was up by 2/32, holding its yield to 5.08%; the Dow was up by 90.07 points to 13,427.73; and the Nasdaq was up by 31.19 points to 2,605.35.
The news of the day was that orders for durable goods were weaker than expected last month, suggesting that the recovery in manufacturing activity may be meeting some resistance in the near term. Such news is welcomed by bond traders since it furthers the argument for lower interest rates.
Today's 5-Year Treasury Note issue met with decent demand. Bids exceeded the $13 billion offer amount by 2.73 to 1, the highest bid-to-cover ratio for the maturity since September of last year. Noncompetitive bids, a gauge of individual investor demand, totaled $187 million, the largest amount since last August. Foreign demand was relatively strong. Indirect competitive bids received 32.3% of the issue, up from last month's award portion of 19.3% and a bit better than the average of 29.3% in the twelve auction's preceding today's.
Stocks got off to a slow start but the opinion that recent losses had been overdone and a strong earnings report from Oracle helped generate buying interest. The upward move came notwithstanding the durable goods news and a rise in oil prices.
The Energy Department reported today that inventories of crude oil rose last week by 1.562 million barrels (one barrel equals forty-two gallons). Supplies were 3.9% higher than they were a year earlier, the best Y/Y margin since early last December. But inventories of gasoline fell for the first time in eight weeks, losing 749,000 barrels. On a year-over-year basis, gasoline inventories were down by 5.5%. The report said that inventories of distillates, which include diesel and heating fuel, fell by 2.275 million barrels and were 5.9% lower than they were a year earlier.
Despite the rise in crude oil, the gasoline and distillate figures sent oil futures up. A barrel of light, sweet crude oil for August delivery rose by $1.20 on the New York Mercantile Exchange to settle at $68.97. However, by the end of stock trading, the Dow had gained 0.68% on the day; the S&P 500, 0.90%; and the tech-heavy Nasdaq, 1.21%.
Tomorrow, the primary influence on the markets will be the conclusion of the Federal Reserve's meeting on monetary policy. Between June of 2004 and June of last year, the policy committee (the Federal Open Market Committee or FOMC) hiked short-term interest rates seventeen times in quarter-percent increments from a forty-six year low of 1.00% to 5.25%. Since then, the committee has made no further rate changes but its position has been that inflation risks remain dominant.
Sluggish economic growth over the last four quarters had stirred hopes that the Fed would cut rates this year but recent comments by Fed officials, including board chairman Ben Bernanke, have suggested that the policy committee is satisfied with its current position. The change in trader expectations has battered the bond market.
No rate change is anticipated tomorrow but the policy statement could move the markets. Any perceived shift in position will cause a sharp response and even if there is no difference in the statement from the one issued in May, this would be interpreted as a sign that no change is forthcoming in the months ahead.
The statement is usually issued at around 2:15 PM Eastern Time. The uncertainties associated with the release will keep traders in a defensive posture in the morning and the response to the statement will color market action in the afternoon.
The economic releases slated for tomorrow morning are likely to get scant attention. The jobless claims report will address the employment situation. In last Thursday's report, the Labor Department said that the seasonally adjusted level of initial claims for state unemployment benefits rose in the previous week by 10,000 to 324,000.
Though analysts were looking for an upward move, they were not expecting as large a jump. The four-week moving average, which smoothes out some of the short-term volatility, rose last week by 2,500 to 314,500. The average weekly figure for the year to date is 318,917. For last week, a decline in the claims level is anticipated.
The other major release is the final report on gross domestic product for the first quarter and it is not expected to differ greatly from last month's preliminary report. 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 seasonally adjusted and annualized and changes from quarter to quarter indicate the strength and direction of the economy.
The initial or advance report, released in April, said GDP grew by 1.3% in the first quarter following a 2.5% rise in the fourth quarter of last year. Last month, with additional economic data, the Commerce Department said the first quarter grew by just 0.6%, the weakest progress since the fourth quarter of 2002.
The inflation indicators in the report were not market-friendly but they were not much different from those in the advance report. There was no revision to the initially reported increase in the price index of 4.0%, the biggest jump since the first quarter of 1991. The index for personal consumption expenditures (PCE or consumer spending) was trimmed to a gain of 3.3% from the initial estimate of 3.4% but the core PCE reading (excluding the volatile categories of food and energy) remained at 2.2%.
