Friday: 06/22/07 5:00 PM EDT :
Treasuries climbed out of the red today to make respectable gains as stocks took a nosedive. Volatility was heightened by the fact that there was no new economic data released today. In late trading, the 10-Year Treasury Note was up by 14/32, lowering its yield to 5.14%; the Dow was down by 185.58 points to 13,360.26; and the Nasdaq was down by 28.00 points to 2,588.96.
Commentators note that stock traders are concerned with the recent increase in Treasury security yield levels which makes corporate borrowing more expensive. They are also wary of the heights the stock market has attained following a steeply rising trend over the last year-and-a-half that was only seriously disrupted by consolidations in May through July of last year and in late February and early March of this year.
Rising oil prices also weighed on stocks today. A barrel of light, sweet crude oil for August delivery rose by $0.49 on the New York Mercantile Exchange to settle at $69.14, the highest front-month contract close since September 1 of last year. By the end of stock trading, the Dow had lost 1.37%; the S&P 500, 1.29%; and the Nasdaq, 1.07%. For the week, the Dow fell by 2.05%; the S&P 500, 1.98%; and the Nasdaq, 1.44%. The bond market fared better on the week with the yield of the benchmark 10-Year Treasury Note falling by 2 basis points (yield moves inversely to price).
Next week's events calendar is heavy but there is only one major release on Monday. The National Association of Realtors will be reporting on existing home sales for last month. April's report indicated a 2.6% decline in the seasonally adjusted, annualized rate of sales to 5.99 million. The pace was the lowest since June of 2003. Because of the decline in sales, the number of homes on the market at the end of the month rose by 10.4% to 4.20 million, representing 8.4 months worth of inventory at April's sales pace. In March, the inventory reflected 7.4 months of sales. Analysts predict that May's sales pace will be little changed from April's.
The Commerce Department's report on new home sales comes out on Tuesday. The last report surprised observers. It showed an unexpected spike of 16.2% in the sales pace (seasonally adjusted, annualized) to 981,000. The gain was the strongest in fourteen years and the pace was the highest since last December. On a year-over-year basis, sales were down by 8.0% but that was an improvement from a 25.0% Y/Y decline in March. In fact, the gap was the smallest since January of 2006. Another bullish item was that inventories of new homes on the market at the end of the month were 1.5% smaller than at the end of March and in combination with the surge in sales, inventories constituted 6.5 months worth of sales, down from 8.1 months worth in March. But on a bearish note, the report said that the average price of new homes fell by $25,600 to $299,100 and the median price fell by $28,500 to $229,100.
A partial reversal of April's gain is anticipated for May. Current estimates call for a 5.7% decline to a 925,000 rate but traders would not be too surprised if the decline was somewhat deeper.
Also on Tuesday: the Conference Board, an independent research firm, will release its Consumer Confidence Index data for last month. The overall index has been generally steady so far this year, averaging 108.8. It came in at 108.0 in May, up from April's 106.3. The news release said that the index of future expectations came in at 89.2 versus April's 88.2 and the index of present conditions rose to 136.1 from 133.5.
Lynn Franco, Director of the Board's Consumer Research Center, assessed the results this way: "The bounce-back in Confidence was due primarily to a more upbeat assessment of present-day business conditions. Consumers' view of the job market, both present and six months from now, was little changed and did not provide a boost in confidence. The short-term outlook remains cautious, and rising gasoline prices are having a negative impact on consumers' inflation expectations. All in all, confidence levels continue to suggest growth, albeit at a slow pace."
Analysts predict a decline in consumer optimism with an index reading of about 106.0. Recent gyrations in the stock market may have caused some concern despite an ease in gasoline prices. The rise in bond yields has caused a general increase in borrowing rates and this is another negative pressure.
Although the economic data scheduled for Tuesday is expected to be bond-friendly (that is, bearish), the market will have to contend with new supply as the Treasury will be conducting its monthly auction of 2-Year Treasury Notes. The issue will have a face value of $18 billion, the same as in the last four offerings. As always, overall demand and the level of foreign participation will be closely watched.
Last month's auction was not very successful. Bids exceeded the offer amount by 2.53 to 1, the lowest bid-to-cover ratio in five months. Moreover, foreign demand was weak. Indirect competitive bids, which include those from foreign central banks, garnered just 21.7% of the issue, the lowest award portion since last August. Not all of the auction news was bleak, however. Non-competitive bids, a gauge of individual investor demand, totaling $938 million, the highest amount since last August and at 5.2% of the offer amount, the strongest demand percentage in five years.
On Wednesday, the only major news release is the report on durable goods orders for May. 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. Consequently, the trend in orders provides some insight regarding upcoming production activity and the effect interest rates may be having on the process.
In the last report, the Commerce Department said orders rose by 0.6% in April. This was subsequently revised to a gain of 0.8% in the factory orders report. This followed a spike of 5.1% in March. For May, the order level is expected to have fallen off by between 1.0% and 2.0%. Much of the decline is expected to come from the category of transportation because aircraft orders reportedly slumped last month. Because transportation orders are so volatile, the level of orders excluding the category will also be closely watched. Orders excluding the defense sector will also get close attention since defense needs are not governed by standard market forces. Another important category is non-defense capital goods minus aircraft. Orders there are seen as a gauge of core business demand for capital goods.
Supply will continue to be a concern on Wednesday as the Treasury will be selling $13 billion in 5-Year Notes. May's auction had mixed success. Overall demand was strong with a bid-to-cover of 2.60, the highest for that security since last September. Individual demand was also strong. Non-competitive bids totaled $186 million, the largest amount since last August. But foreign demand was weak. Indirect competitive bids received 19.3% of the issue, down from 38.2% in April's auction and below the 29.5% average for the twelve auctions preceding last month's.
Adding to the uncertainty for both of next week's auctions is the effect the Fed's monetary policy meeting might have on the markets. The meeting actually starts on Wednesday but it will not conclude until Thursday. Between June of 2004 and June of last year, the Federal Open Market Committee (FOMC, the monetary policy arm of the central bank) 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. Despite this week's minor advance, bonds posted losses in the six preceding weeks.
No rate change is anticipated on Thursday 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.
There are a couple of economic releases slated for Thursday morning, though, due to the Fed meeting, they will probably have a smaller impact on the markets than they otherwise might. The jobless claims report will address the employment situation. In yesterday's report, the Labor Department said that the seasonally adjusted level of initial claims for state unemployment benefits rose last week by 10,000 to 324,000 and the previous week's originally reported level of 311,000 was revised up slightly to 314,000.
Though analysts were looking for an upward move, they were not expecting as large a jump since the data available prior to yesterday's report showed average changes of only 2,000 in the preceding three weeks. 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. Since last week's increase was larger than expected, an offsetting decline is predicted for this week's claims level.
Yesterday's report said that the level of continuing claims for the week of June 9 (continuing claims must be at least a week old) rose by 39,000 to 2.523 million. The four-week average rose by 250 to 2.500 million. The weekly average for the year is currently 2,516,043.
The other major release on Thursday 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%.
On Friday, the report on personal income and spending for last month will be released. In April, personal income, the fuel for consumer spending, contracted by 0.1% following an increase of 0.8% in March. April's decline was the first since August of 2005 and forecasters are looking for a bounce in May of about 0.6%. Personal consumption expenditures (consumer spending) rose by 0.5% in April following a 0.4% rise in March. Last week's strong retail sales report for May suggests that personal expenditures rose by about 0.7% last month.
Friday also brings the report on construction spending for last month. In April, the seasonally adjusted, annualized rate of overall construction spending rose by 0.1%. But not unexpectedly, the residential category continued to show weakness with its spending rate falling by 0.9% in April after a same-sized decline in March. This was the twelfth time in thirteen months that the residential spending rate declined and April's level was the lowest since June of 2004.
Another increase in overall construction spending is predicted with forecasts calling for a 0.2% rise. However, another decline is expected in the residential sector.
The Chicago branch of the National Association of Purchasing Management (now known nationally as the Institute for Supply Management or ISM) will be releasing its Purchasing Managers Index on Friday. The index is a gauge of manufacturing activity in the heavily-industrialized region and it came in at 61.7 in May, up from 52.9 in April. Any reading over 50.0 indicates a general expansion of activity relative to the preceding month and May's reading, along with a same-sized reading in March, indicate a strong rebound following back-to-back contraction readings of 48.8 and 47.9 in January and February.
Though a modestly weaker reading of 58.0 is predicted for June, this would still reflect substantial growth and strong readings in the New York and Philadelphia indices suggest that the national index, slated for release the following Monday, will also reflect a healthy rebound in the manufacturing sector.
The last major release of the week is the final read on consumer sentiment for the month from the University of Michigan. In the preliminary read, the overall sentiment index came in at 83.7, down from May's final reading of 88.3 and the lowest reading in ten months. The wobbly stock market, rising interest rates, and high gas prices were cited as reasons for the increased gloom. Forecasters are not expecting much change in the final index.
10:30 AM EDT : Treasuries have shrugged off early losses and are now up slightly as stocks have failed to extend yesterday's gains. There are no major economic releases today so technical factors, including inter-market influences, are having a larger than usual impact on the bond market.
Stocks fell sharply on Wednesday and partially recovered yesterday. With no support from economic data today, the market is trending lower once again.
Helping to put stock traders in a selling mood is a rise in oil futures this morning. In recent trading, the August contract for crude oil was up by $0.31 to $68.96. Rising energy costs sap resources from businesses and consumers that could have been applied elsewhere.
A negative for both markets is the approach of next week's heavy economic calendar. Releases include the Consumer Confidence Index, the Chicago Purchasing Managers Index, the home sale reports (existing and new) reports on durable goods orders, personal income and spending, and construction spending.
Moreover, the Federal Reserve will be meeting on Thursday to deliberate on monetary policy. No rate change is expected but the policy statement could have a significant impact. If the statement shows no shift in the Fed's position, it would be received as another piece of evidence that the policy committee will not be cutting interest rates this year.
In addition to these uncertainties, bond traders will also be facing supply pressure from the monthly 2-Year Note auction on Tuesday and the monthly 5-Year offering on Wednesday. On the plus side, next week is the final week of the June and this is the time portfolio managers rebalancing their holdings. The process usually entails the purchase of Treasuries as a regulating mechanism for such portfolio characteristics as risk, yield, and return horizon . . . .
