Private residential construction spending still weak but showing relative improvement in the last three months.Source: U.S. Census Bureau
Tuesday, July 31, 2007
Construction Spending (Private Residential)
Private residential construction spending still weak but showing relative improvement in the last three months.Source: U.S. Census Bureau
Friday, July 27, 2007
Market Overview July 27, 2007
5:00 PM EDT :
A number of market influences clashed today. Bond traders were looking to take back some of yesterday's profits and stock traders hoping that a round of bargain hunting would offset some of yesterday's losses. The economic news of the day was mixed but had positive aspects for both markets. Yet, recent gains in oil prices and fears that the weak housing sector would drag on future economic growth continued to plague stocks and after an early recovery attempt, the indices fell for the rest of the day to end at their session lows. Treasuries swung several times between positive and negative territory but managed to end up in the green. In late trading, the 10-Year Treasury Note was up by 4/32, lowering its yield to 4.76%; the Dow was down by 208.10 points to 13,265.47; and the Nasdaq was down by 37.10 points to 2,562.24.
The principal economic news of the day was that second quarter gross domestic product rose by the largest amount in five quarters. Good economic news is a plus for stocks but not usually for interest-rate sensitive bonds. However, the report said that the overall price index rose less than in the first quarter and the core index (ex-food and energy) for personal consumption expenditures increased by the smallest percentage amount in four years.
The other major release was the final read on consumer sentiment for the month. Though it indicated a reduction in optimism from the preliminary number released two weeks ago, the index remained higher than the final index for June.
Aside from the technical pressure on stocks (the indices have been trending higher since the latter part of 2005), the market continued to be weighed down by recent weak housing data and increased concerns that subprime mortgage debt problems would spill over into other forms of credit. And the rise in energy prices -- a brake on economic activity -- was underscored today as a barrel of light, sweet crude oil for September delivery rose by $2.17 on the New York Mercantile Exchange, settling at $77.12, a new record high close for a front-month contract.
By the end of stock trading, the Dow had lost 1.54%; the S&P 500, 1.60%; and the Nasdaq, 1.43%. For the week, the Dow lost 585.61 points or 4.23%; the S&P 500 lost 4.90%; and the Nasdaq lost 4.66%. In contrast, the yield on the benchmark, 10-Year Treasury Note fell by 19 basis points this week following a 15 basis point drop last week and an 8 basis point decline the week before (yield moves inversely to price). Today's closing yield level for the 10-Year Note was its lowest in two months.
Next week the economic calendar contains the two early-month heavyweights; the national index of manufacturing and the employment report. But the release schedule is blank on Monday and the first two days of the week will see some end-of-month portfolio adjusting. This is the process whereby managers rebalance their portfolios on the basis of such characteristics as risk, yield, and return horizon. Treasuries provide an exceptionally good means of making these adjustments so the process usually entails the purchase of the (credit) riskless government securities.
Tuesday is a busy news day. The Employment Cost Index (ECI) for the second quarter will provide a gauge of labor-related inflation for the April through June period. The ECI is a more comprehensive gauge of labor costs than the wage data contained in the monthly employment reports because it also incorporates salaries and employer costs for non-cash employee benefits.
For the first quarter the Labor Department said the seasonally adjusted level of compensation costs for all civilian workers rose by 0.8% following three quarters of 0.9% increases. Wages and salaries rose by 1.1% following a 0.7% rise in the fourth quarter while benefit costs rose by just 0.1% after a 1.1% increase. Despite the improvement in the headline figure, the report did raise an inflation alarm in its year-over-year data. The index was up by 3.5% versus the first quarter of last year. This was the largest Y/Y increase since the first quarter of 2005.
For the second quarter, analysts believe benefits costs probably returned to trend with a gain of 0.9%, 1.0%, or perhaps higher. Even if wage and salary growth decelerated a little last quarter, the overall index is still expected to have risen by 0.9% or 1.0%. A 1.0% gain would be the largest since the first quarter of 2005.
The report on personal income and spending also comes out on Tuesday. In the last one, the Commerce Department said that personal income, the fuel for consumer spending, rose in May by 0.4%, a weaker increase than the 0.6% that analysts had predicted. Moreover, April's originally reported decline of 0.1% (the first decline in twenty months) was revised to a 0.2% contraction. The report said that personal consumption expenditures (PCE or consumer spending) rose by 0.5%. This was also a weaker increase than the 0.7% that had been predicted. PCE rose by 0.5% in April as well.
Income is expected to have risen by about 0.5% in June. But, due to the weak retail sales report for last month, spending is expected to have risen by just 0.1%. This spending gain would be the smallest since last September's flat reading (0.0%).
Later on Tuesday morning, the Conference Board, an independent research firm, will release its Consumer Confidence Index for July. June's index from May's 108.5 to 103.9, the biggest drop and the lowest reading since last August. A rebound to about 105.0 is predicted for this month but it would still be the second lowest reading since last November.
The report on construction spending for June is also slated for Tuesday. While the overall pace of construction has been edging up since February, the pace of residential construction spending has fallen in each of the last fifteen months. The overall pace (seasonally adjusted, annualized) rose by 0.9% in May, the biggest increase since February of 2006. But spending in the residential category fell by 0.8% to its lowest pace since April of 2004.
With the slumping trend in new home sales, there is no reason to expect a pickup in residential construction spending last month. Consensus predictions for the overall spending pace are for a gain of 0.3%
Also on Tuesday, the Chicago branch of the National Association of Purchasing Management (now known nationally as the Institute for Supply Management or ISM) will release its index figures on manufacturing activity in the heavily-industrialized region for the month. In June, the Purchasing Managers Index came in at 60.2, down from May's reading of 61.7.
Despite the weaker reading, any over 50.0 reflects a general expansion of activity relative to the preceding month and June's reading reflected strong growth. The reading for July is expected to once again indicate a slight deceleration but to a still-strong 59.0.
On Wednesday, the only major release is the national manufacturing index from the ISM. The index trended down from late October of 2005 to the beginning of this year, posting slight contraction readings last November and then again in January -- the first since May of 2003. But the sector has been recovering and June's reading of 56.0 was the strongest in fourteen months. Current estimates of July's reading range from a slight decline to 55.5 to a slight increase to 56.5.
On Thursday, the jobless claims report will spotlight the employment situation and because the data comes a day before the employment report, it may get more than usual attention. In yesterday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits fell by 2,000 last week to 301,000 but the previous week's originally reported level of 301,000 was revised up by 2,000 to 303,000.
Last week's decline was the third in as many weeks, the fourth in the last five weeks, and the reading was the lowest in the last ten weeks. The four-week moving average, which smoothes out some of the short-term volatility, fell by 4,000 last week to 308,500, the lowest reading in seven weeks. The average weekly reading for the year to date is 317,483.
The report said that continuing claims for the week ending July 14 (continuing claims must be at least a week old) fell by 19,000 to 2.545 million. This was the lowest reading in four weeks but the four-week average rose by 15,000 to 2,555,500, the highest reading in over four months.
If only due to the statistical noise factor, a gain in this week's initial claims figure is anticipated.
Also out on Thursday is the report on factory orders for June. In May's report, the Commerce Department said the seasonally adjusted value of new manufacturing orders fell by 0.5% after a 0.5% rise in April. It said durable goods orders fell by 2.4% (revised in yesterday's durable goods orders report to 2.3%) and nondurable goods orders rose by 1.6%. In the volatile category of transportation, orders were down by 6.9% but if the category is factored out, orders rose by 0.7% in May.
Another closely watched category is orders excluding those in the defense sector since orders there are not governed by standard market forces. While defense orders rose by 6.3% in May, ex-defense orders declined by 0.6%. In the category of ex-defense capital goods minus aircraft, seen as a gauge of core business demand, orders were down by 2.1% following a 2.0% rise in April.
Yesterday's durable goods orders report said they were up by 1.4% in June. Nondurable goods have been averaging a 0.6% rise this year and if that figure is used, the overall change in factory orders would be a gain of 0.9%. But a number of analysts are predicting a stronger gain of between 1.0% and 1.3%.
On Friday, the highly-influential employment will be released. Because the markets have often been jolted by forecast misses, traders often take defensive stances prior to the monthly release. In June's report, the Labor Department said the seasonally adjusted level of nonfarm payrolls rose by 132,000. While this was in line with consensus predictions, May's originally reported increase of 157,000 was revised up to 190,000. The last time payrolls contracted was in August of 2003.
As expected, the unemployment rate, the portion of the active workforce without jobs, remained at 4.5% for a third straight month, matching the monthly average over the last twelve months. Average hourly earnings, a measure of inflation, rose by 0.3%, also matching the average of the last twelve months.
For July, nonfarm payrolls are expected to have risen by about the same amount as in June. The unemployment rate is expected to remain at 4.5% but some forecasters are predicting a slight increase to 4.6%.
The final economic release of the week is the ISM's index on the non-manufacturing, or services, sector of the economy. June's index was 60.7, a fifty-first consecutive expansion indicator and the strongest in fourteen months. As you recall, the manufacturing index also hit a fourteen month high in June. But the services index does not have the same clout as the manufacturing index because it is relatively young (1997 vs. 1948) and the sector is so broad that varying categories tend to cancel each other out.
A slightly less forceful expansion reading of about 59.0 or 59.5 is predicted for July's services index.
10:30 AM EDT :
Technical factors are currently guiding the markets but movement so far has been tentative. Treasuries are down slightly after yesterday's impressive gains. The stock indices are up slightly after a major meltdown yesterday.
In the main economic release of the day, the Commerce Department reported today that, according to its initial calculations, the seasonally adjusted, annualized rate of gross domestic product (GDP) grew in the second quarter by 3.4%. The rise was the largest since the first quarter of 2006 and slightly larger than analyst estimates of 3.2%. But revisions going back to the beginning of 2004 resulted in eleven of the thirteen quarters being revised down. The average quarterly revision to the growth figures over that time span was a reduction of 0.3%. The originally reported final reading for the first quarter of 2007 was trimmed from 0.7% to 0.6%, the smallest increase since the fourth quarter of 2002.
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. Today's advance report was calculated with incomplete data so there will be another (preliminary) report in August and a final report in September.
The progress in GDP growth was due to several reasons. Business investment rose by 8.1%, the biggest increase in five quarters. Exports rose by 6.4% after a 1.1% rise in the first quarter while imports declined by 2.6% following a 3.9% rise. This was the first decline in imports since the first quarter of 2003. Government spending rose by 4.2% last quarter, the largest increase since the first quarter of 2006.
The report indicated that gross domestic residential investment declined by 9.3%. This was a sixth straight quarterly contraction but the smallest since a 0.7% decline in the first quarter of 2006. Moreover, the contractions have been less severe in each of the last three quarters.
As expected, consumer spending was unimpressive last quarter with a gain of just 1.3%, the weakest progress since the fourth quarter of 2005. In the first quarter, spending jumped by 3.7%.
The inflation signals in the report were mixed but a key indicator was particularly encouraging. The overall price index rose by 2.7% last quarter following a 4.2% increase in the first quarter but the price index for personal consumption expenditures (consumer spending) was up by 4.3% following a 3.5% rise. However, the chief contributor to the PCI price index growth was a jump in energy prices. Excluding the volatile categories of food and energy, prices were up by just 1.4% following a 2.4% increase in the first quarter. This was the smallest increase since the second quarter of 2003.
In the last major economic release of the week, news sources report that the final Consumer Sentiment Index reading for the month from the University of Michigan's twice monthly surveys came in at 90.4, down from the preliminary reading of 92.4 but still solidly higher than last month's final reading of 85.3. The expectations index came in at 81.5, down from the preliminary 83.9 but still an improvement from June's final 74.7. But the index of current conditions fell to 104.5 from the preliminary 105.7 figure and down from June's final read of 105.1.
Good Inflation News
Price Index of Personal Consumption Expenditures (PCE : Consumer Spending) Excludingthe Volatile Categories of Food and Energy (Q1 2000 - Q2 2007)
Source: Bureau of Economic Analysis / U.S. Department of Commerce
Residential Investment and Gross Domestic Product
An improvement in residential investment helps increase GDP growth in the second quarter.
Thursday, July 26, 2007
Wednesday, July 25, 2007
Tuesday, July 24, 2007
Friday, July 20, 2007
Market Overview July 20, 2007
5:00 PM EDT :Treasuries rallied today as stocks retreated from yesterday's lofty levels. In late trading, the 10-Year Treasury Note was up by 18/32, lowering its yield to 4.95%; the Dow was down by 149.33 points to 149.33; and the Nasdaq was down by 32.44 points to 2,687.60.
Besides the flow from the stock market, bonds benefited throughout the week by traders seeking a safe haven because of increased concerns about mortage-related debt securities. Recent declines in indices of such debt and analyst downgrades, including another one today from Standard and Poor's, have intensified the shift to the less risky government debt arena.
This week's congressional testimony by Fed Chief Ben Bernanke added fuel to the fire as a considerable portion of his remarks were about the subprime mortgage situation. These loans have been under-performing and diluting the value of the securities backing them.
In the stock market, traders were suffering from a case of altitude sickness after recent gains. Several discouraging earnings releases helped trigger the sell-off. Oil prices edged lower today but remain near historical highs. The price of a barrel of light, sweet crude for August delivery fell by $0.28 on the New York Mercantile Exchange to settle at $75.79. The future expired today so Monday's front-month contract will be for September delivery.
By the end of stock trading, the Dow had lost 1.07%; the S&P 500, 1.22%; and the Nasdaq, 1.19%. And despite the fact that the Dow hit posted its first close above 14,000 yesterday, for the week, the index lost 56.17 points or 0.40%. The S&P 500 also posted a record close yesterday but, due to today's losses, finished the week down by 1.19%. And the Nasdaq posted its best close yesterday since early 2001 but ended the week down by 0.72%. Treasuries advanced on the week with the yield on the benchmark 10-Year Note losing 15 basis points (yield moves inversely to price). Moreover, today's closing yield level for the 10-Year Note was the lowest since June 4.
Next week's economic release schedule is relatively light but a heavy influx of supply will keep the bond market under pressure. Traders avoid buying the soon-to-be off-the-run issue in favor of the more liquid new issue. Traders who will be bidding usually refrain from aggressive buying before the auction in order to keep yield levels high (bids are for yield and bidders want the highest they can get). And many traders keep to the sidelines prior to auctions until the success of the sale is known.
There are no major economic releases slated for Monday or Tuesday. But on Tuesday, the Treasury will be selling an additional $6 billion amount of last January's 20-Year TIPS issue (the face value of the initial offering was $8 billion). TIPS stands for Treasury Inflation Protected Securities. These bonds differ from conventional Treasury securities in that although they have a fixed coupon (interest) rate, but their face value is regularly adjusted according to the Consumer Price Index, so the interest payout amounts fluctuate according to the changes in inflation. At maturity, the greater of the inflation-adjusted principal or the original face value is paid out.
Last July's reopening auction met with strong demand. Bids exceeded the $7 billion offer amount by 2.24 to 1, the best bid-to-cover ratio of all the 20-Year TIPS offerings (initial or reopening) since the security was first issued in July of 2004. Non-competitive bids, a gauge of individual investor demand, totaled $29 million, up from $21 million in the previous July's reopening but down from the $42 million in the initial issue (January 2006).
However, foreign demand was exceptionally strong. Indirect competitive bids, which include those from foreign central banks, accounted for 50.0% of all competitive bids and equaled 111.7% of the issue amount. Of the accepted competitive bids, the indirect bid category received 69.0%, and of the entire issue, it received 68.7%. This was the highest award percentage for the category in all of the 20-Year TIPS offerings to date.
Last January's initial issue met with decent demand. The bid-to-cover ratio for the $8 billion offering was 2.05, up from 1.48 in the previous January's $10 billion issue. Non-competitive bids were light at $25 million, but foreign demand was solid with indirect competitive bids receiving 58.7% of the issue. In January of 2006, the bid category received 55.6%.
On Wednesday, the report on existing home sales will be released. In May's report, the National Association of Realtors said the seasonally adjusted, annualized pace of existing home sales edged down by 0.3% to 5.99 million, the lowest rate since June of 2003.
The report said that inventories rose from 4.220 million to 4.431 million in May, representing an 8.9 month supply at the current sales pace. In April, the supply represented 8.4 month's worth of sales at the pace prevailing then. The median home price rose in May by $3,900 to $233,700 but this was 2.1% lower than May of 2006 when it was $228,500. The average price rose by $3,400 to $271,500 but this was 0.8% lower than the $273,700 average in May of 2006.
For June, another decline in the sales rate is expected. The consensus prediction is for a 1.5% drop to 5.900 million.
Also on Wednesday, the Treasury will be conducting its monthly auction of 2-Year Notes. Last month's auction was mildly successful. The bid-to-cover ratio was 2.80, up from May's 2.53 and above the average of 2.68 for the twelve such auctions preceding June's. Noncompetitive bids totaled $865 million, down from May's $938 million and below the twelve-month average of $894 million. Yet, as a percentage of the offer size, noncompetitive bids totaled 4.8%, a little higher than the 4.5% average of the previous twelve auctions, though down from May's 5.2%.
Foreign demand for the issue was tepid. Indirect competitive bids received 28.8% of all accepted competitive bids and 27.4% of the entire issue. This was up from May's award percentage of 21.7% but below the twelve-month average of 33.3%.
The last five, 2-year issues had a face value of $18 billion and that is the expected size of next week's offering.
On Wednesday afternoon, the Federal Reserve will release its latest edition of its Beige Book. The book is an anecdotal summary of economic conditions in the twelve Fed regions and the monetary policy committee uses it as one of its background resources during its policy deliberations. The next committee meeting is August 7.
Since other reports have already revealed the economic situation for the period covered in the summary, the Beige Book (named for the color of the hard copy cover) rarely has a forceful impact on the markets. However, a particular focus or tone within the report could have a bearing on what traders think the Fed is going to do so the release is always closely scrutinized.
On Thursday, the jobless claims report will be examined for insights on how the employment situation is developing. In yesterday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits fell by 8,000 last week to 301,000, the lowest reading in nine weeks. Analysts had been looking for a mild increase following a decline in the previous week that could have been distorted by the Independence Day holiday disruption. The four-week moving average, which smoothes out some short-term volatility, fell last week by 6,250 to 312,000, the lowest reading in six weeks. For the year to date, the average weekly reading has been 318,000.
But the report indicated that the level of continuing claims for the week ending July 7 (continuing claims must be at least a week old) rose by 20,000 to 2.571 million, the highest reading in three months. The four-week average rose by 13,500 to 2,542,250, the highest reading in four months. The weekly average for the year so far is 2,519,704.
Despite the rising trend in continuing jobless claims, the improvement in the initial claims category suggests that job growth remains healthy. The implication is bullish for the economy. For one thing, the increasing demand for labor indicates a vigorous business environment. Rising employment also points to more consumer spending. The downside for bonds is that greater economic activity increases the threat of inflation which will keep the Federal Reserve in a hawkish stance with regard to interest rates.
Also on Tuesday, the report on durable goods orders for last month will be released. 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 May's report, the Commerce Department said the seasonally adjusted level of the value of durable goods orders fell by 2.8%. Although this was trimmed to 2.4% in the subsequently released factory orders report, it was still the first decline in four months and was larger than analysts had predicted.
Declines in a number of key sub-categories indicated that the contraction was broad-based. Not only did the large but volatile category of transportation see a decline but even excluding the category, the value of orders fell. While defense orders rose in May, the category does reflect follow standard market forces. Excluding defense, orders fell and they also declined if transportation orders were excluded from the ex-defense category. Another important category is ex-defense capital goods minus aircraft, where the trend in orders provides some insight on core business demand. Here too, the data indicated a contraction.
For June, forecasters are looking for a modest rebound in durable goods orders of about 1.7%.
Later Thursday morning, the Commerce Department will release the report on new home sales for last month. May's report said the seasonally adjusted, annualized pace fell by 1.6% to 915,000. April's originally reported sales rate of 981,000 was revised down to 930,000 and the rates in February and March were also revised lower.
But not all of the news was bearish. May's rate was still the second highest since last December. In addition, the supply of homes on the market declined for a second month, though, due to the drop in the sales pace, May's inventory represented 7.1 months worth of sales, up from 7 months in April. Median home prices were up by $3,400 to $236,100 but were 0.9% lower than a year earlier. However, the average price of new homes was up by $13,400 to $313,000, which was 6.5% higher than in May of 2006.
For June, another decline in the sales pace is anticipated. The central-tendency predictions are for a 1.6% decline to a 900,000 rate.
The last Treasury auction of the week will be conducted on Thursday. The issue will be the 5-Year Note and the offering size is expected to be $13 billion, the same size as the last seven monthly issues. Last month's issue met with decent demand. The bid-to-cover ratio was 2.73, the highest since last September's auction. Noncompetitive bids 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 May's award portion of 19.3% and a bit better than the average of 29.3% in the twelve auction's preceding last month's.
On Friday, the major release of the day is the first official accounting of gross domestic product (GDP) for the second 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. Friday's advance report will have been calculated with incomplete data so there will be another (preliminary) report in August and a final report in September.
The final report on first quarter GDP said the economy grew by 0.7% following a 2.5% increase in the fourth quarter of last year. For the April through June period, analysts predict that the economy rebounded by 3.2%. Increased business and government investment are cited as reasons for the assessment.
The last major release of the week is the final read on consumer sentiment for the month from the University of Michigan's twice-monthly surveys. The preliminary report, released last Friday, surprised observers with an overall sentiment index reading of 92.4, the highest since last January's 96.9. It followed June's final reading of 85.3. Analysts feel that the final index for July will reflect a little less optimism with a reading of about 91.0.
10:30 AM EDT :
Treasuries are getting a boost from a sharp decline in stocks this morning. Stock traders are taking back some of the recent gains that allowed the Dow to close at the 14,000 level yesterday. Aside from the technical pressures, a couple of earnings misses are adding to the current stock decline. Google's report after the bell yesterday fell short of analyst predictions and this morning's report from Caterpillar revealed an even larger disparity between the actual earnings and street expectations.
Another item that stock traders will be keeping their eyes on is the price of oil. In recent trading, the price of a barrel of light, sweet crude for next week delivery has been trading in a narrow channel near the $76.00 mark. The record closing high for a front-month contract is $77.03. High energy prices hurt the general economy by channeling business and consumer spending away from other areas.
There are no major economic releases slated for today so the inter-market influence is more pronounced. A possible obstacle for bonds may develop later in the day with traders taking a more defensive stance ahead of next week's heavy influx of supply. Besides the weekly bill auctions and the monthly 2- and 5-Year Note offerings, the Treasury will also be selling an additional amount of last January's 20-Year TIPS issue (Treasury Inflation Protected Securities)
Thursday, July 19, 2007
Market Overview July 19, 2007
5:00 PM EDT :
After spending most of the day in negative territory, Treasuries were able to poke into the green late in the session. The stock indices bounced, more than making up for losses yesterday. In late trading, the 10-Year Treasury Note was up by 2/32, lowering its yield to 5.02%; the Dow was up by 82.19 points to 14,000.41; and the Nasdaq was up by 20.55 points to 2,720.04.
The news of the day was largely favorable for bonds but the releases were not market-movers. The level of initial jobless claims unexpectedly fell last week, but the continuing claims level for the preceding week moved higher. The Index of Leading Economic Indicators fell in June and May's originally reported gain was reduced.
The final release of the day was bond-friendly. At noon, the Philadelphia branch of the Federal Reserve said that its index of the region's manufacturing activity came in at 9.2 this month. A reading over 0.0 reflects a general increase in activity relative to the preceding month and July's reading was a seventh consecutive expansion indicator. But it was well below June's reading of 18.0 and it fell short of analyst projections of 13.0. A deceleration had been expected since June's spike was exceptionally large. The index was 13.8 points higher than May's reading of 4.2. That jump was the largest since November of 2002 and the reading was the highest since April of 2005.
The weaker than expected indicator may have provided some support for bonds but it does not make a convincing case for a softening national sector. Earlier this week, the New York index showed a slight increase this month following a sharp jump in June (the biggest increase in three years). July's index for the heavily-industrialized Chicago reading is not due until the end of the month but those the past few months have indicated strong growth. The national index for July from the Institute for Supply Management will be released on August 1. June's index was the highest since April of last year and July's, even if less forceful, is nevertheless likely to reflect solid growth.
Lastly, the minutes of June's monetary policy meeting were released this afternoon. For the most part, they conformed to other official Fed position statements, including those in Fed Chief Ben Bernanke's just-completed two days of congressional testimony. But Fed watchers were struck by this item in the meeting minutes: "In their discussion of monetary policy for the intermeeting period, members generally regarded the risks to economic growth as more balanced than at the time of the May meeting."
In conjunction with Mr. Bernanke's focus on the fragile housing situation during his testimony, the statement from the minutes suggested that the policy committee might be shifting slightly from its hawkish bias on inflation. It should be noted, however that the overall impression given by the minutes was that the Fed would not be easing rates in the near future.
(FED MINUTES)
A batch of bullish corporate earnings reports spurred the stock market, which rose despite a rise in oil prices. The price of a barrel of light, sweet crude oil for next month delivery rose by $0.87 on the New York Mercantile Exchange to settle at $75.92, the highest close for a front-month contract in eleven months. Yet, the Dow gained 0.59% on the day; the S&P 500, 0.45%; and the Nasdaq, 0.76%. The Dow and S&P 500 both closed with record highs and the Nasdaq posted its highest reading since February 1, 2001.
There are no major economic releases slated for tomorrow so market moves may be more unpredictable than usual. The highs in the stock market may generate some profit-taking while bond traders may begin preparing for a heavy influx of new supply next week. Besides the weekly bill auctions and the monthly 2- and 5-Year Note offerings, the Treasury will also be selling an additional amount of last January's 20-Year TIPS issue (Treasury Inflation Protected Securities).
Wednesday, July 18, 2007
Market Overview Wednesday Morning 07/18/07
10:30 AM EDT :
Treasuries are getting a boost from the opening remarks in today's testimony by Federal Reserve Board Chairman Ben Bernanke before the House Committee on Financial Services. The stock indices began the day in negative territory and they currently remain there.
As expected, Mr. Bernanke depicted an expanding economy that is being constrained somewhat by the weakness in the housing sector. The Fed's prediction for the economy is growth of between 2.25% and 2.50% this year and between 2.50% and 2.75% next year. He said the projections for the current year are 0.25% lower than they were in February due to weaker than expected residential construction activity.
With regard to inflation, he said that the index of personal consumption expenditures shows an elevated year-over-year gain throughout the first five months of the year but recent core indicators (ex-food and energy) have moderated in the last couple of months. He warned, however, that the core data could reflect transitory conditions and that increased resource utilization and a spill-over of high energy prices into other areas could lead to higher levels of inflation.
Aside from the lowered estimate of economic growth for the year, bond traders have noted an emphasis on the subprime mortgage situation. This further rouses fears concerning securities backed by such loans and, therefore, generates an investment flow into the greater safety of the government-backed debt (Treasuries).
This emphasis was evident in the last part of his prepared remarks which addressed the issue of the Fed's role in protecting consumers in financial services transactions, particularly with regard to subprime mortgage lending. He outlined a number of initiatives taken by the Fed individually or in cooperation with other agencies. They include encouraging lenders to work with borrowers, consumer counseling, review and modification of mortgage-related policies in Regulation Z, and compliance reviews of subprime mortgage lenders. (BERNANKE TESTIMONY)
The economic releases of the day generally conformed to Mr. Bernanke's testimony. The Labor Department reported that its Consumer Price Index, a gauge of inflation at the retail level, rose by 0.2% last month following a spike of 0.7% in May. June's gain was slightly higher than predictions of a 0.1% rise but it was still the smallest increase since January. Excluding the volatile categories of food and energy, the so-called core index also rose by 0.2% last month, as expected. The index for food prices rose by 0.5% while the index for energy fell by 0.5%.
The decline in energy prices was reflected in a 0.2% decline in the transportation category. But the largest change came in the price index for apparel. It fell by 0.6%, the fourth consecutive monthly decline.
In the other major economic release of the day, the Commerce Department said that the seasonally adjusted, annualized pace of housing starts rose by 2.3% in June to 1.467 million. Analysts had been looking for a weaker rate of about 1.450 million. But the news was offset somewhat by data revisions that reduced May's rate from 1.474 million to 1.434 million and April's pace from 1.506 million to 1.485 million. And, despite the increase in June, the starts pace was still the third lowest in seven years.
The increase came from the two largest regional contributors. The largest contributor, the South, saw an increase of 2.4% and in the West, the rate increased by 9.0%. In the Midwest, the pace fell by 3.7% and by 2.4% in the Northeast.
A weaker than expected item in the report was a plunge of 7.5% in the rate of building permit issuance to 1.406 million (seasonally adjusted, annualized). The decline was the largest since January of 1995 and the rate was the lowest in ten years. The issuance rate is seen as an indicator of near-term start activity.
In industry news, the Mortgage Bankers Association of America said that its application index edged up last week by 0.9%. The rise came on the back of a 4.9% increase in the refinance index, the first gain in that category in the last five weeks. The purchase index fell by 1.6%, the first decline in three weeks. Refinances accounted for 37.6% of application activity last week, up from 36.2% in the preceding week but still the second lowest portion in almost a year. The news release said average fixed 30- and 15-year mortgage rates declined last week
while rates for adjustable rate mortgages were unchanged.
Treasuries are getting a boost from the opening remarks in today's testimony by Federal Reserve Board Chairman Ben Bernanke before the House Committee on Financial Services. The stock indices began the day in negative territory and they currently remain there.
As expected, Mr. Bernanke depicted an expanding economy that is being constrained somewhat by the weakness in the housing sector. The Fed's prediction for the economy is growth of between 2.25% and 2.50% this year and between 2.50% and 2.75% next year. He said the projections for the current year are 0.25% lower than they were in February due to weaker than expected residential construction activity.
With regard to inflation, he said that the index of personal consumption expenditures shows an elevated year-over-year gain throughout the first five months of the year but recent core indicators (ex-food and energy) have moderated in the last couple of months. He warned, however, that the core data could reflect transitory conditions and that increased resource utilization and a spill-over of high energy prices into other areas could lead to higher levels of inflation.
Aside from the lowered estimate of economic growth for the year, bond traders have noted an emphasis on the subprime mortgage situation. This further rouses fears concerning securities backed by such loans and, therefore, generates an investment flow into the greater safety of the government-backed debt (Treasuries).
This emphasis was evident in the last part of his prepared remarks which addressed the issue of the Fed's role in protecting consumers in financial services transactions, particularly with regard to subprime mortgage lending. He outlined a number of initiatives taken by the Fed individually or in cooperation with other agencies. They include encouraging lenders to work with borrowers, consumer counseling, review and modification of mortgage-related policies in Regulation Z, and compliance reviews of subprime mortgage lenders. (BERNANKE TESTIMONY)
The economic releases of the day generally conformed to Mr. Bernanke's testimony. The Labor Department reported that its Consumer Price Index, a gauge of inflation at the retail level, rose by 0.2% last month following a spike of 0.7% in May. June's gain was slightly higher than predictions of a 0.1% rise but it was still the smallest increase since January. Excluding the volatile categories of food and energy, the so-called core index also rose by 0.2% last month, as expected. The index for food prices rose by 0.5% while the index for energy fell by 0.5%.
The decline in energy prices was reflected in a 0.2% decline in the transportation category. But the largest change came in the price index for apparel. It fell by 0.6%, the fourth consecutive monthly decline.
In the other major economic release of the day, the Commerce Department said that the seasonally adjusted, annualized pace of housing starts rose by 2.3% in June to 1.467 million. Analysts had been looking for a weaker rate of about 1.450 million. But the news was offset somewhat by data revisions that reduced May's rate from 1.474 million to 1.434 million and April's pace from 1.506 million to 1.485 million. And, despite the increase in June, the starts pace was still the third lowest in seven years.
The increase came from the two largest regional contributors. The largest contributor, the South, saw an increase of 2.4% and in the West, the rate increased by 9.0%. In the Midwest, the pace fell by 3.7% and by 2.4% in the Northeast.
A weaker than expected item in the report was a plunge of 7.5% in the rate of building permit issuance to 1.406 million (seasonally adjusted, annualized). The decline was the largest since January of 1995 and the rate was the lowest in ten years. The issuance rate is seen as an indicator of near-term start activity.
In industry news, the Mortgage Bankers Association of America said that its application index edged up last week by 0.9%. The rise came on the back of a 4.9% increase in the refinance index, the first gain in that category in the last five weeks. The purchase index fell by 1.6%, the first decline in three weeks. Refinances accounted for 37.6% of application activity last week, up from 36.2% in the preceding week but still the second lowest portion in almost a year. The news release said average fixed 30- and 15-year mortgage rates declined last week
while rates for adjustable rate mortgages were unchanged.
Tuesday, July 17, 2007
Market Overview July 17, 2007
5:00 PM EDT :
Treasuries remained underwater today as traders await the outcome of tomorrow's testimony by Federal Reserve Board Chairman Ben Bernanke before the House Committee on Financial Services. The uncertainties did not seriously deter stock traders, however. The S&P 500 was the only major index that slipped and it was by less than a point. In late trading, the 10-Year Treasury Note was down by 8/32, raising its yield to 5.08%; the Dow was up by 20.57 points to 13,971.55 and the Nasdaq was up by 14.96 points to 2,712.29.
The news released today contained offsetting items. The PPI unexpectedly declined last month but the core index rose more than had been predicted. Industrial production expanded more than expected in June and capacity usage, another inflation gauge, was higher than anticipated.
A minor release this afternoon had little effect on the markets. The Housing Market Index from the National Association of Home Builders and Wells Fargo fell this month to 24 from last month's 28. This was the fifth consecutive decline and the lowest reading in sixteen-and-a-half years. The index is derived from survey responses regarding current and future sales as well as the current volume of prospective buyer traffic. Readings below 50 indicate that there were more negative than positive responses. The last reading over 50 was in April of last year.
The emotional wave that has been pushing the Dow along pushed the index up to an all-time high of 14,021.95 at mid-afternoon but the swell lost energy in late trading, due in part to deference to tomorrow's Fed testimony. A positive influence was a turnaround in oil futures today. A barrel of light, sweet crude oil for next month delivery fell by $0.13 on the New York Mercantile Exchange to settle at $74.02. It had been up by over $1.00 earlier in the session.
By the end of stock trading, the Dow was up by 0.15% and the Nasdaq by 0.55%. The Dow's close was a fourth consecutive record high and the Nasdaq's close was the highest in almost six-and-a-half years. And while the S&P 500 edged down by 0.01% today after a 0.19% decline yesterday, its close was the third highest on record.
Tomorrow brings another key inflation indicator, the Consumer Price Index (CPI). Following a 0.7% spike in May, the index is expected to have risen in June by only about 0.1%. Excluding the volatile categories of food and energy, the core index is expected to have risen by an in-trend 0.2%.
The report on housing starts for last month also comes out tomorrow morning. The seasonally adjusted, annualized rate fell in May by 2.1% to 1.474 million and a further decline of 1.6% is forecast for June, bringing the rate down to 1.450 million. The pace of starts has rebounded somewhat since hitting a nine-and-a-half year low of 1.403 million in January, but it is still well below the almost thirty-three year high of 2.292 million in January of 2006.
The rate of building permit issuance is expected to decline by 1.3% to 1.50 million following a 4.3% increase in May. Despite the increase, this would still be the second lowest pace after April's 1.457 million since December of 1997.
A major event tomorrow is Mr. Bernanke's testimony. He is expected to stick to the position that the economy is expected to continue growing at a moderate pace and that although inflation pressures will likely ease over time, the monetary policy committee continues to hold a hawkish bias in case pressures do not abate as expected.
But, even if he stays on message, any perceived shift in emphasis or tone will be interpreted as a deliberate signal and the markets could be sharply impacted. Early trading activity will, therefore, likely be muted despite the economic data. Any fireworks will get underway at around 10:00 AM Eastern Time when Mr. Bernanke begins to deliver his prepared remarks. The text will also be published on the Federal Reserve website and will be linked here.
Even if the prepared remarks fail to generate waves, following his address there is a question and answer period so market participants will continue to be on their toes. He will also be appearing before the Senate Banking Committee on Thursday but unless he feels his speech before the House Committee was misinterpreted, the prepared portion of his testimony will probably be unchanged.
10:30 AM EDT :
Treasuries are lower this morning as rising stocks are in the limelight. The economic news of the day was a mixed bag for bonds and preparation for tomorrow's testimony by the head of the Federal Reserve is adding to the downward pressure. In the stock market, the Dow quickly moved higher at the open and briefly breached the 14,000 mark. Technical resistance is currently holding it back.
Today's inflation data sent conflicting signals. The Labor Department reported that its Producer Price Index (PPI), a gauge of inflation at the wholesale level, fell in June by 0.2% following a rise in May of 0.9%. The decline was the first since January and surprised forecasters who had predicted a slight increase of 0.1% or 0.2%.
But the effect of the news was offset by a larger than predicted increase of 0.3% in the so-called core index, which factors out the volatile categories of food and energy. This was the largest rise since February and topped predictions of a 0.2% increase. Moreover, May's originally reported increase of 0.1% was revised slightly higher to 0.2%.
The report indicated that the price index for foods fell by 0.8% after a 0.2% decline in May. The energy index declined by 1.1% last month after a 4.1% rise the month before. An encouraging sign was a weakening in price pressure further down the production pipeline. At the intermediate stage of production, the price index rose by 0.5%, the smallest rise since a decline in January. At the initial or crude stage of production, the price index was up by 0.3% following a 2.0% increase in May.
On a year-over-year basis, the PPI was up by 3.3% following a 4.1% Y/Y increase in May. But at the core level, the index was 1.8% higher than a year earlier, the largest Y/Y increase since a same-sized margin in February.
In the second major release of the day, the Federal Reserve reported that industrial production -- a gauge of output from the nation's factories, mines, and utilities -- rose last month by 0.5%, on the high side of recent predictions. A slight offset to the gain was a revised decline of 0.1% in May instead of the originally reported flat (0.0%) reading. Manufacturing output increased by 0.6% in June, the largest increase in three months. Mining output rose by 0.5%, the largest increase in six months. Output from the highly-volatile utilities category rose by 0.3% following a 1.6% decline in May.
A disturbing feature of today's IP report was the level of capacity utilization, the ratio of output to potential output. It rose to 81.7%, the highest reading since last October. Moreover, the readings for the previous three months were revised higher: March's from 81.2% to 81.4%, April's from 81.5% to 81.6%, and May's from 81.3% to 81.4%. The Fed is concerned with the level of utilization since reduced slack in the production process (indicated by higher CU numbers) increase the possibility of bottlenecks that prevent demand from being met. The result is that the relative scarcity of output drives up prices.
Tomorrow's congressional testimony by Fed chief Ben Bernanke has the potential to shake up the markets so bond traders are expected to remain in a defensive posture. The uncertainty should also keep stocks in check but the positive trader sentiment has trumped all negative influences so far. Another downside factor for stocks is the ongoing rise in oil prices -- a development that threatens to crimp business and consumer spending in other areas of the economy. In recent trading, the price of a barrel of light, sweet crude oil for August delivery was up by $1.05 on the New York Mercantile Exchange to $75.20.
Producer Price Index
The overall index of inflation at the wholesale level declined in June by 0.2% but excluding the volatile categories of food and energy, the so-called core index rose by 0.3%. On a year-over-year basis, the core index was up by 1.8%.Source: Bureau of Labor Statistics
Monday, July 16, 2007
Market Overview : July 16, 2007
5:00 PM EDT :
Treasuries rose today as more signs of weakness in subprime mortgaged-backed debt sent investment flows into the more secure government-backed arena. The stock indices finished in mixed fashion but the Dow hit another record high. In late trading, the 10-Year Treasury Note was up by 15/32, lowering its yield to 5.04%; the Dow was up by 43.73 points to 13,950.98; and the Nasdaq was up by 9.67 points to 2,697.33.
The main economic item of the day was largely overlooked. The New York regional manufacturing index was stronger than expected this month. Recent manufacturing data has been strong but last Friday's retail sales report for June was surprisingly weak. The housing sector is also in a slump so bond traders did not take today's news as overly bullish.
Last Tuesday, the bond market got a significant lift on news that Standard and Poor's was lowering the credit rating on a portion of subprime debt. The market dropped on Wednesday and Thursday when S&P reported that the size of the debt pool was significantly smaller than originally reported. But concerns about mortgage debt remain and indices on the sector are falling. Consequently, traders are shifting into Treasuries.
In the stock market, rumors of a huge, $160 billion bid by Vodaphone for Verizon Communications added to the growing string of mergers and acquisitions news that has energized the market. But the subprime situation weighed against the market as did the fact that the earnings report season is heating up.
Another negative for the market was a rise in oil futures. The price of a barrel of light, sweet crude oil for August delivery rose by $0.22 on the New York Mercantile Exchange to settle at $74.15, the highest close for a front-month contract in eleven months. Nevertheless, the Dow gained 0.31%. The S&P 500 eased back by 0.19% today and the Nasdaq by 0.36%.
Tomorrow brings the first major inflation indicator of the month, the Producer Price Index (PPI). This gauge of price pressures at the wholesale level rose by 0.7% in May but was up by only 0.2% if the volatile categories of food and energy are factored out. A tame 0.2% overall increase is predicted as well as another 0.2% rise at the core level.
The second release of the day is also considered a first-tier indicator. This is the report on industrial production. Following a flat (0.0%) reading in May, a bounce of 0.4% or 0.5% is anticipated for June according to recent predictions. Capacity utilization, the ratio of output to potential output, is expected to have increased to 81.6% from 81.5%.
The upside may be blocked tomorrow as stock and bond traders begin to prepare for Wednesday's testimony from Fed chief Ben Bernanke. Another inflation indicator, the Consumer Price Index, is also slated for release on Wednesday as is the first major housing indicator of the month, the report on new construction starts in June.
Friday, July 13, 2007
Market Overview July 13, 2007
5:00 PM EDT :Friday the 13th was lucky for the markets today. Treasuries struggled but managed to keep a positive bias throughout much of the session and finished with modest gains. The stock market continued its winning ways with the Dow and S&P 500 hitting new record highs. The Nasdaq reached a new six-plus-year high. In late trading, the 10-Year Treasury Note was up by 5/32, lowering its yield to 5.10%; the Dow was up by 45.52 points to 13,907.25; and the Nasdaq was up by 5.27 points to 2,707.00.
The news of the day had conflicting market implications and each market, apparently focused on the aspects that they found most beneficial. An extremely weak retail sales report for June was a plus for bonds and a negative for stocks. The inflation news was a plus for both markets: Import prices rose solidly last month but excluding oil, they were only up a little. A couple of lesser releases were damaging to bonds and good for stocks. Business inventories and sales rose more than expected in May and remaining supply levels were extremely lean. And consumer sentiment perked up in the first part of July to its strongest level in six months.
Yesterday's rally in the stock market continued to encourage traders and while today's action was much more subdued, the indices finished in the green. A spate of mergers and acquisitions activity has helped provide lift even as the corporate earnings report season is just getting underway. Another sign of the emotional fuel that is driving the market is the fact that gains are being made despite rising oil prices. A barrel of light, sweet crude oil for August delivery rose today by $1.50 on the New York Mercantile Exchange to settle at $74.00, the highest close for a front-month contract since last August 11.
But by the end of stock trading, the Dow was up by 0.33%, the S&P 500 by 0.31%, and the Nasdaq by 0.20%. For the week, the Dow gained 295.57 or 2.17% after a 203.06 point gain last week. The S&P 500 rose by 1.44% this week following a 1.80% jump. And the Nasdaq added 1.52% this week after a rise of 2.43% last week.
Treasuries also made progress this week. The yield on the benchmark 10-Year Note fell by 8 basis points following a 15 basis point rise last week (yield moves inversely to price).
Next week, the economic release calendar starts off on Monday with the New York branch of the Federal Reserve's index on the region's manufacturing activity for the month. Last month, the index of general business conditions came in at 25.75, the highest reading in a year. Any reading over 0.0 indicates a general expansion of activity relative to the preceding month and June's index represented a twenty-fifth consecutive expansion. But the data series had been weak in the preceding three months -- coming in at 1.85 in March, 3.80 in April, and 8.03 in May. For July, analysts foresee a less forceful expansion reading of 17.0.
The release is not usually a market-mover since the data series is relatively young and the region is small. But the New York release is the first manufacturing indicator of the month and since the New York area adjoins the Philadelphia region, the index is perceived (erroneously) as a predictor of how the more-influential Philadelphia index will move.
A couple of more highly influential releases are slated for Tuesday and defensive positioning may hold bonds back on Monday afternoon. The first release on Tuesday is the Producer Price Index (PPI), a gauge of inflation at the wholesale level. In the last report, the Labor Department said that the PPI rose by 0.9% in May following a 0.7% rise in April. The reading was above trend as the average change in the twelve months prior to May was 0.3%.
A key contributor was rising energy prices, the index for which rose by 4.1% in May following a 3.4% rise in April. On a year-over-year basis, the index was up by 4.1%, the largest Y/Y increase since last June.
Aside from the indices at the finished level, pressures were also seen further down the production pipeline. At the intermediate stage of production, prices were up by 1.1%, the largest increase since the preceding May. And the index of initial or crude prices rose by 2.0% in May following a 1.5% contraction in April.
But the news was not all bad. The so-called core index, which excludes the volatile categories of food and energy, rose by a tame 0.2% following back-to-back flat readings (0.0%). The index for food fell by 0.2%, the first decline since last October.
For June, the key indices are expected to reflect benign inflation pressures. The overall index is expected to have risen by only 0.1% and the core index by 0.2%.
Later, the Federal Reserve will release its report on industrial production -- a gauge of output from the nation's factories, mines, and utilities. May's report said that production was unchanged (0.0%) and April's originally reported increase of 0.7% was revised down to a gain of 0.4%. A bounce of about 0.3% is predicted for June.
May's report said that capacity utilization, the ratio of output to potential output, was 81.3% and April's originally reported ratio of 81.6% was trimmed to 81.5%. For June, the ratio is expected to have edged up again to 81.5%. The Fed is concerned with the level of utilization since reduced slack in the production process increase the possibility of bottlenecks that prevent demand from being met. The result is that the relative scarcity of output drives up prices. However, while the current level is above the monthly average of 76.3 for the years 2001 - 2004, it is below the six-year high of 82.4% posted last July and August.
An even more influential inflation indicator comes out on Wednesday. This is the Consumer Price Index (CPI), the gauge of price changes at the retail level. The CPI rose in May by 0.7%, the biggest jump in twenty months. As anticipated, the increase was largely confined to a single category of energy. The energy price index rose by 5.4% in May, the second highest increase after March's 5.9% jump since September of 2005. But excluding the volatile categories of foods and energy, the core index rose by just 0.1%. The food price index rose by 0.3%. Within the core components, the largest gainer was in transportation and that was also due to the increase in energy prices.
Like the PPI estimates, the CPI numbers are also expected to be market-friendly. The overall index is expected to have risen by 0.1% and the core index by 0.2%.
Also due out on Wednesday morning is the report on housing starts. In May's report, the Commerce Department that that the seasonally adjusted, annualized rate of starts fell by 2.1% to 1.474 million. The level was not only lower than forecaster estimates of 1.490 million, but April's originally reported level of 1.528 million was trimmed to 1.506 million. A decline in the starts pace had been predicted following three months of modest gains. The rate has been trending down since hitting a thirty-three year high of 2.292 million in January of 2006. It hit an almost nine-and-a-half year low of 1.403 million last January. May's reading was the third lowest since July of 2000. Another decline is anticipated for June. Forecasts are calling for a decline of
1.6% to 1.45 million.
May's report said that the annualized rate of building permit issuance rose by 3.0% to 1.501 million and this was subsequently revised up to 1.520 million, a 4.3% rise from April's 1.457 million. But the increase followed a 7.1% decline in April and May's pace was the second lowest since December of 1997. A decline of about 1.3% is predicted for June, putting the issuance rate at 1.500 million.
On Thursday, 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 fell last week by 12,000 to 308,000. The extent of the move surprised forecasters who had predicted a slight decline. Instead, the drop was the largest in ten weeks and the level was the lowest in eight weeks. But the four-week moving average, which smoothes out some of the short-term volatility, fell by just 1,500 to 317,750. The trend has been flat for the year so far despite the usual swings. The average weekly figure has been 318,556.
The report said that continuing claims for the week ending June 30 (continuing claims must be at least a week old) fell by 4,000 to 2.554 million. This was still the second highest reading since the week ending April 14. The four-week average rose by 17,500 to 2,528,500, the highest reading since the week of April 28. Another sign that the level is elevated is that the average reading for the year to date is 2,517,692
The data continue to suggest that hiring is outpacing layoffs and adding to nonfarm payrolls. This is good for the economy as it reflects expanding business demand for labor and increased spending by a growing number of employed consumers. But bonds are sensitive to interest rate projections and bullish economic data puts an upward pressure on rates.
Later on Thursday morning, the Conference Board, an independent research firm, will release its Index of Leading Economic Indicators. In May, the index rose by 0.3% following a same sized decline in April. The data series has not provided a sustained guidance signal lately as the average index change in 2006 was 0.0% and the average for 2007 so far is -0.1%. For June, another flat (0.0%) or nearly flat reading is predicted.
At noon on Thursday, the Philadelphia branch of the Federal Reserve releases its index data on the region's manufacturing activity for the month. June's reading came in at a surprisingly strong 18.0 after a 4.2 reading in May and back-to-back 0.2 readings in March and April. Like the New York index, any reading over 0.0 reflects growth and June's indicated the strongest expansion since April of 2005.
Lastly, at 2:00 PM Eastern Time, the Federal Reserve will release the minutes of its last monetary policy meeting in late June. Earlier in the month, traders who had been holding out hope of a rate cut by the end of the year were disappointed when Fed Chairman Ben Bernanke suggested that the policy committee was satisfied with its current position. Consequently, the market adjusted to the new perspective and it was able to absorb the fact that the meeting statement also gave no signs of a shift in stance. As expected, there was no rate change but there were some differences in the wording used in the latest policy statement.
With regard to inflation pressures, June's statement said, "Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures."
May's statement said, "Core inflation remains somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures."
At the time, traders concluded that the variances were distinctions without a difference. But observers will be interested to see whether the minutes shed any light on the reasons behind the rhetorical changes.
10:30 AM EDT :
The economic news of the day was mixed but the bearish aspects of the data and a technical bounce following losses yesterday have lifted Treasuries this morning. The bullish aspects of the news is providing some support for stocks but the indices are currently narrowly mixed as traders are tempted to take some of the gains made in yesterday's powerful rally.
A key release of the day was bond-friendly; that is, bearish, which eases interest rate pressure. The Commerce Department said that the seasonally adjusted level of retail sales fell last month by 0.9%. Not only was this a surprise to analysts who had predicted a rise of 0.3%, but it was the largest contraction since August of 2005.
A large contributor was the auto sector where sales declined by 2.9%, the largest drop in sixteen months. But even excluding the sector, sales were down by 0.4%, the largest decline since last September.
Another volatile category is sales at gasoline stations. The category saw a decline of 1.1%, the first drop since last October. Yet, excluding the auto and gas station components, sales fell by 0.3% in June -- the largest drop since April of 2004.
Other sectors showing the largest weakness were home-related. Sales at furniture and home furnishings stores fell by 3.0% and sales at building material and garden equipment and supplies dealers fell by 2.3%. Both declines were the largest since February of 2003.
The news on inflation stemming from the trade situation was somewhat deceptive. The Labor Department said that its index of import prices rose by 1.0% last month. The increase was stronger than the 0.5% that forecasters had predicted and May's originally reported increase of 0.9% was revised up to 1.1%. But a couple of details have offset the effect of the headline numbers. For one thing, following a ten-month high jump of 1.6% in March, the increases have been getting smaller. But the most important item is that, excluding the volatile category of petroleum products (imported oil), prices rose by just 0.2% in June -- the smallest increase since February's flat reading (0.0%). Petroleum product prices rose by 4.7%.
Export prices showed little movement. Overall prices rose by 0.3% in June after a 0.2% rise in May. Excluding the large but volatile category of agricultural products, prices were up by only 0.1% following a 0.2% rise in May.
The report on business inventories was released a little later this morning and it turned out to be more bullish than expected. The Commerce Department said the seasonally adjusted level of inventories rose by 0.5% in May, a larger increase than the 0.4% that had been predicted and the largest since a 0.6% rise last August. The extra push came from a 0.6% rise in the retail sector, the largest monthly gain there since last June. The 0.3% gain in the manufacturing sector and the 0.5% rise in the wholesale category had been announced in previous
reports.
A rise in inventories is often a positive economic indicator since it can reflect preparation for increased demand. This was confirmed by the fact that the level of inventory outflows rose more than the rise in inventories. Overall sales were up by 1.3%, leaving the inventory-to-sales (I/S) ratio at 1.26, down from April's 1.27 and only slightly higher than the record low of 1.25. The I/S ratio is the value of remaining inventory divided by the value of sales for the month. The result indicates how many months it would take to entirely deplete the stocks on hand at the prevailing sales pace. A low ratio means that inventories are lean and pressure is high on the production process.
In the last economic release of the day was also more bullish than expected. According to news sources, the preliminary index on consumer sentiment for the month from the University of Michigan was 92.4, the highest reading since last January's 96.9. The index was much stronger than last month's final reading of 85.3 and contrasted sharply with analyst expectations of little change. Consumers were more optimistic about both current conditions and expectations for the future. The index of present conditions rose from June's final reading of 101.9 to 105.7. The expectations index rose from 74.7 to 83.9.
Retail Sales
The seasonally adjusted level of retail sales unexpectedly fell sharply in June. Declines were broad-based with big losses in autos, gas station sales, furniture & home furnishings, and building materials & garden supplies.It should be noted, however, that sales are still expanding on a year-to-year comparative basis as can be seen in the second chart (deseasoned data).
Source: U.S. Census Bureau
Thursday, July 12, 2007
Market Overview July 12, 2007
5:00 PM EDT :
Treasuries lost ground today as bonds were overshadowed by an extraordinary rally in the stock market. In late trading, the 10-Year Treasury Note was down by 13/32, raising its yield to 5.13%; the Dow was up by 283.86 points to 13,861.73; and the Nasdaq was up by 49.94 points to 2,701.73.
The bond market not only faced the competition from rising stocks this morning but pressure from new supply coming to market. The news released this morning was largely overlooked: The trade gap for May met projections and though the level of initial jobless claims fell a little more strongly than expected last week, the effect of the news was diminished by the fact that the Independence Day holiday may have skewed the data.
The 10-Year TIPS issue was well-received. Bids exceeded the $8 billion offer amount by 1.97 to 1, the best bid-to-cover ratio for an initial offering of the security since January of 2004. Noncompetitive bids, a gauge of individual investor demand, totaled $71 million, the largest amount in an initial offering since last July. And indirect competitive bids, which include those from foreign central banks, garnered 43.4% of the issue, the largest portion of an initial sale since January of 2006.
In other news, the Treasury reported this afternoon that receipts exceeded government outlays last month by $27.5 billion. The surplus was larger than the $20.5 billion posted in June of last year but it fell short of predictions of $30.0 billion. Receipts rose by 4.6% relative to June of last year while outlays rose by just 2.1%.
For the current fiscal year to date (begun last October) the running total is a deficit of $121.0 billion. This is a smaller deficit than the $206.5 billion posted for the same period in the 2006 fiscal year. In fact, it is the smallest for the nine-month period in five years.
The rise in stocks was unanticipated as there were no major obvious influences that can easily explain the leap. The easing of concerns about subprime mortgage debt, ongoing merger and acquisitions news, and upbeat sales reports for last month from a number of retailers were all pluses. A turnaround in oil prices also helped. After being up by more than a dollar earlier in the session, the August contract on a barrel of light, sweet crude ultimately ended down by $0.06 on the New York Mercantile Exchange to settle at $72.50.
But these positive influences -- especially coming at the beginning of the earnings report season -- hardly explain today's trading action. By the end of the session, the Dow had risen by 2.09%, the S&P 500 by 1.91%, and the Nasdaq by 1.88%. The Dow's surge was the largest point gain since mid-October of 2002 and the close topped the last record high by 185.41 points. The S&P's close was also a record high. The Nasdaq's was the highest since the first day of February 2001.
Tomorrow is a busy news day. The release likely to get the most attention is the retail sales report. The report for May was stronger than predicted. The Commerce Department said the seasonally adjusted level of sales rose by 1.4%, more than twice the 0.6% increase that had been forecast. In fact, the increase was the strongest since January of 2006 and April's originally reported decline of 0.2% was revised slightly to a contraction of just 0.1%. Surprisingly, the large but volatile category of auto and auto parts sales reportedly rose by 1.8% in May, the biggest increase since last July. But even excluding that category, sales were up by 1.3%, also the biggest jump since January of 2006. Forecasters were predicting a 0.7% ex-auto increase.
Another volatile category is sales at gasoline stations. Because of high gas prices, sales there rose by 3.8% in May, the biggest rise since April of last year. Excluding both the auto and gas station categories, sales were up by 1.0%, the largest increase since January of 2005.
A slight overall increase of about 0.2% is predicted for June's sales level. Excluding autos, sales are expected to have risen by 0.3% or 0.4%.
The report on import and export prices for last month will also be released tomorrow morning. In May's report, the Labor Department reported that its price index of imports rose by 0.9% following a 1.4% rise in April and a 1.6% rise in March. Oil prices have been a key factor in the increases with jumps of 2.7% in May, 6.6% in April, and 8.7% in March. But even excluding oil, import prices rose by 0.5% in May, the largest increase in five months.
For June, analysts expect a further deceleration of overall import price growth. The consensus prediction is for an increase of 0.5%.
Also slated for release tomorrow morning is the report on business inventories. This broad category (which includes manufacturing, wholesale, and retail) has been showing modest increases or flat readings since last October. A 0.4% rise reported for April was the largest in seven months. Sales rose by a larger 0.7% and the inventory-to-sales ratio fell to 1.27 from 1.28. While it was still higher than the record low of 1.25, it was the lowest reading since last August and suggested that pressure on the production process is high.
The last factory orders report said that manufacturers' inventories rose by 0.3% in May and the report on wholesale inventories said they rose by 0.5%. A modest rise in retail inventories of 0.2% or 0.3% would result in an overall inventory rise of 0.3% or 0.4%. As with the wholesale report, analysts expect a solid gain in sales so the I/S ratio may edge down to 1.26.
The final release of the week is the initial read on consumer sentiment for July from the twice-monthly surveys conducted by the University of Michigan. The index has been trending down this year after hitting a two-year high of 96.9 in January. The final reading for June came in at 85.3, down from 88.3 in May and the lowest since last August. Forecasters do not foresee much change in the preliminary reading for July. Gasoline prices have retreated but remain high; the economy seems to have improved following a near-stall in the first three months of the year but the housing sector remains a problem.
The bond market not only faced the competition from rising stocks this morning but pressure from new supply coming to market. The news released this morning was largely overlooked: The trade gap for May met projections and though the level of initial jobless claims fell a little more strongly than expected last week, the effect of the news was diminished by the fact that the Independence Day holiday may have skewed the data.
The 10-Year TIPS issue was well-received. Bids exceeded the $8 billion offer amount by 1.97 to 1, the best bid-to-cover ratio for an initial offering of the security since January of 2004. Noncompetitive bids, a gauge of individual investor demand, totaled $71 million, the largest amount in an initial offering since last July. And indirect competitive bids, which include those from foreign central banks, garnered 43.4% of the issue, the largest portion of an initial sale since January of 2006.
In other news, the Treasury reported this afternoon that receipts exceeded government outlays last month by $27.5 billion. The surplus was larger than the $20.5 billion posted in June of last year but it fell short of predictions of $30.0 billion. Receipts rose by 4.6% relative to June of last year while outlays rose by just 2.1%.
For the current fiscal year to date (begun last October) the running total is a deficit of $121.0 billion. This is a smaller deficit than the $206.5 billion posted for the same period in the 2006 fiscal year. In fact, it is the smallest for the nine-month period in five years.
The rise in stocks was unanticipated as there were no major obvious influences that can easily explain the leap. The easing of concerns about subprime mortgage debt, ongoing merger and acquisitions news, and upbeat sales reports for last month from a number of retailers were all pluses. A turnaround in oil prices also helped. After being up by more than a dollar earlier in the session, the August contract on a barrel of light, sweet crude ultimately ended down by $0.06 on the New York Mercantile Exchange to settle at $72.50.
But these positive influences -- especially coming at the beginning of the earnings report season -- hardly explain today's trading action. By the end of the session, the Dow had risen by 2.09%, the S&P 500 by 1.91%, and the Nasdaq by 1.88%. The Dow's surge was the largest point gain since mid-October of 2002 and the close topped the last record high by 185.41 points. The S&P's close was also a record high. The Nasdaq's was the highest since the first day of February 2001.
Tomorrow is a busy news day. The release likely to get the most attention is the retail sales report. The report for May was stronger than predicted. The Commerce Department said the seasonally adjusted level of sales rose by 1.4%, more than twice the 0.6% increase that had been forecast. In fact, the increase was the strongest since January of 2006 and April's originally reported decline of 0.2% was revised slightly to a contraction of just 0.1%. Surprisingly, the large but volatile category of auto and auto parts sales reportedly rose by 1.8% in May, the biggest increase since last July. But even excluding that category, sales were up by 1.3%, also the biggest jump since January of 2006. Forecasters were predicting a 0.7% ex-auto increase.
Another volatile category is sales at gasoline stations. Because of high gas prices, sales there rose by 3.8% in May, the biggest rise since April of last year. Excluding both the auto and gas station categories, sales were up by 1.0%, the largest increase since January of 2005.
A slight overall increase of about 0.2% is predicted for June's sales level. Excluding autos, sales are expected to have risen by 0.3% or 0.4%.
The report on import and export prices for last month will also be released tomorrow morning. In May's report, the Labor Department reported that its price index of imports rose by 0.9% following a 1.4% rise in April and a 1.6% rise in March. Oil prices have been a key factor in the increases with jumps of 2.7% in May, 6.6% in April, and 8.7% in March. But even excluding oil, import prices rose by 0.5% in May, the largest increase in five months.
For June, analysts expect a further deceleration of overall import price growth. The consensus prediction is for an increase of 0.5%.
Also slated for release tomorrow morning is the report on business inventories. This broad category (which includes manufacturing, wholesale, and retail) has been showing modest increases or flat readings since last October. A 0.4% rise reported for April was the largest in seven months. Sales rose by a larger 0.7% and the inventory-to-sales ratio fell to 1.27 from 1.28. While it was still higher than the record low of 1.25, it was the lowest reading since last August and suggested that pressure on the production process is high.
The last factory orders report said that manufacturers' inventories rose by 0.3% in May and the report on wholesale inventories said they rose by 0.5%. A modest rise in retail inventories of 0.2% or 0.3% would result in an overall inventory rise of 0.3% or 0.4%. As with the wholesale report, analysts expect a solid gain in sales so the I/S ratio may edge down to 1.26.
The final release of the week is the initial read on consumer sentiment for July from the twice-monthly surveys conducted by the University of Michigan. The index has been trending down this year after hitting a two-year high of 96.9 in January. The final reading for June came in at 85.3, down from 88.3 in May and the lowest since last August. Forecasters do not foresee much change in the preliminary reading for July. Gasoline prices have retreated but remain high; the economy seems to have improved following a near-stall in the first three months of the year but the housing sector remains a problem.
Wednesday, July 11, 2007
Market Overview July 11, 2007
5:00 PM EDT :Upcoming data and supply sapped any follow-through on yesterday's bond rally and Treasuries fell back today. Stocks bounced following a plunge yesterday. In late trading, the 10-Year Treasury Note was down by 12/32, raising its yield to 5.09%; the Dow was up by 76.17 points to 13,577.87; and the Nasdaq was up by 12.63 points to 2,651.79.
A couple of Fed officials (Fed Governor Kevin Warsh and Philadelphia Fed President Charles Plosser) addressed concerns over mortgage-related debt by saying that the economy and the markets were well disposed to absorb the negative impact of the situation. Yesterday, Treasuries spiked following news that Standard and Poor's might lower the credit rating on $12 billion in subprime mortgage backed securities.
The flight-to-safety flow reversed course somewhat today. New supply coming to market tomorrow and a heavier data release schedule in the next couple of days also tempered enthusiasm for bonds.
In the stock market, more merger and acquisition news helped spur buying. Items included a buyout of Chaparra Steel by Gerdau Ameristeel and word that Canadian aluminum company Alcan is in talks with mining concern Rio Tinto in an effort to avoid being bought by Alcoa. On Monday, investment banking company Putman Lovell NBF Securities reported that M&A activity worldwide was up by a record 30% in the first six months of the year compared to the same period last year. Such news is encouraging to stock traders since it reflects economic
confidence by high-power dealmakers.
Another plus for stocks today was a modest retreat in oil prices. One reason for the retreat was a generally upbeat inventories report. The Energy Department said that inventories of crude oil fell last week by 1.462 million barrels (one barrel equals forty-two gallons). Despite this first decline in six weeks, supplies were 5.1% higher than they were a year earlier. This was the second best year-over-year margin (after the previous week's 5.2%) in seven months.
Inventories of gasoline rose by 1.143 million barrels, the ninth increase in the last ten weeks following twelve weeks of consecutive declines. Supplies were still 3.8% lower than a year earlier, but this was the smallest year-over-year shortfall in fourteen weeks.
The report indicated a 760,000 barrel increase in distillate inventories, which include diesel and heating fuel. But supplies were 6.8% lower than a year earlier, the worst margin in sixteen weeks. Fortunately, demand for heating oil is rather limited in July.
By the end of commodities trading, the price of a barrel of light, sweet crude oil for next month delivery was down by $0.25 on the New York Mercantile Exchange to settle at $72.56. By the end of stock trading, the Dow was up by 0.29%; the S&P 500, 0.23%; and the Nasdaq, 0.19%.
Tomorrow, the economic release calendar heats up. As always, the jobless claims report will spotlight the employment situation. In last Thursday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits rose by 2,000 the week before to 318,000 from an upwardly revised 316,000 a week earlier (originally reported as 313,000). The four-week moving average, which smoothes out some of the short-term volatility, rose by 1,750 to 318,500. Despite a number of strong swings over the last twelve months, the underlying trend has been steady. From late June through December of last year, the weekly average was 317,143. For 2007 so far, the weekly average has been 318,846.
While the initial claims figure failed to make an impression on observers, the report did contain a surprise. It said that continuing claims for the week ending June 23 (continuing claims must be at least a week old) rose by 84,000 to a ten-week high of 2.569 million. Unlike the initial claims data series, the trend in continuing claims has risen slightly relative to last year. The weekly average for the last half of last year was 2,454,571 while the weekly average for this year so far is 2,516,680. Despite the rise in continuing claims, the data still suggest that hiring is outpacing layoffs.
Analysts are looking for a slight decline in last week's initial claims figure but it may be skewed by the fact that state labor offices were closed on the fourth and an adjustment factor will have to be applied to the data to compensate for the gap.
Also tomorrow morning, the Commerce Department will release its report on international trade for May. The last report said that the value of imports exceeded that of exports by $58.5 billion in April. This was below analyst predictions of a $63.0 billion gap. The deficit in March was $62.4 billion, a downward revision from the originally reported $63.9. In fact, data revisions trimmed the deficit figures of the previous twelve months by $8.7 billion.
The report said that the value of imports fell by 1.9% in April while the value of exports rose by 0.2% to a new record high. Surprisingly, the decline in imports was not primarily due to petroleum products. They fell by 0.4% (unadjusted) while non-petroleum products fell by 7.1%.
For May, a wider trade gap of about $60.0 billion is anticipated.
Also tomorrow, the Treasury will be conducting an auction of 10-Year Treasury Inflation Protected Securities (TIPS). TIPS have a fixed coupon (interest) rate, but their face value is regularly adjusted according to the Consumer Price Index, so the interest payout amounts fluctuate according to the changes in inflation. At maturity, the greater of the inflation-adjusted or original redemption value is paid out.
In the current auction schedule (begun in July of 2003) a new 10-Year TIPS issue is offered twice a year but three months after each initial offering, an additional amount of the issue is sold so there are two initial and two reopening auctions each year. Tomorrow's offering is a new issue and will have a face value of $8 billion, $1 billion less than the last four initial offerings. The deadline for competitive bids is 1:00 PM Eastern Time.
The last initial auction was in January and it was coolly received. Bids exceeded the offer amount by 1.67 to 1, down from the bid-to-cover ratio of 1.76 in the previous July's auction. Non-competitive bids, a gauge of individual investor demand, were weak, totaling $58 million, the lowest amount so far for an initial offering in the current issue schedule. Foreign demand was so-so. Indirect competitive bids, which include those from foreign central banks, received 41.3% if the issue, up from July's award portion of 35.8% but below the average of 43.7% for the seven initial offerings preceding January's.
An hour later, the Treasury will release its budget figures for last month. In June of 2006, receipts exceeded government outlays by $20.5 billion. Forecasters predict that last month's bottom line will be a larger surplus of around $30.0 billion. If this is the case, it would result in a $118.5 billion deficit (more outlays than receipts) for the current fiscal year to date (begun last October). This would be an $88.0 billion improvement over the $206.5 billion gap posted for the same period in the 2006 fiscal year. Lower budget deficit figures are a plus for bonds since they mean the Treasury will not have to issue as many debt securities (Treasuries) in the future.
10:30 AM EDT :
Treasuries are currently in shallow, negative territory while the stock indices are up slightly in choppy, early action. There are no major economic releases scheduled for today so technical factors and minor releases will take on greater influence.
The sharp rise in bonds over the last two days has prompted some profit-taking this morning. In addition, traders are taking a more cautious stance in front of a number of economic releases slated for tomorrow and Friday.
Moreover, preparation for new supply is holding the market back. Tomorrow, the Treasury will be auctioning $8 billion in 10-Year inflation protected debt securities known as TIPS (Treasury Inflation Protected Securities).
In the equities arena, stocks are exhibiting a modest technical bounce this morning following yesterday's steep dive. The earnings report season for last quarter is in its initial stages. While many market participants were expecting good reports because of the economic pickup from April through June, and a couple of disappointing reports and projections sent the market down yesterday.
Some bargain hunting is lending support for stocks this morning as is a decline in oil prices. In recent commodities trading, the price of a barrel of light, sweet crude oil for August delivery was selling at $72.30 on the New York Mercantile Exchange, down by $0.51 from yesterday's close. The weekly report on oil inventories is due to be released shortly.
In industry news, the Mortgage Bankers Association of America reported today that its application index rose last week by 1.1%. The move came on the back of a 3.8% rise in the purchase index. The refinance index fell by 3.0% (the sixth decline in the last seven weeks) to its lowest level since the week ending December 22. Refinances accounted for just 20.4% of application activity, the lowest portion in almost a year.
Tuesday, July 10, 2007
Market Overview July 10, 2007
5 :00 PM EDT : Treasuries rallied today while stocks took a nosedive. Declining confidence in subprime mortgage debt helped boost demand for government securities while worries about corporate earnings helped drag down stocks. In late trading, the 10-Year Treasury Note price was up by 31/32, lowering its yield to 5.03%; the Dow was down by 148.27 points to 13,501.70; and the Nasdaq was down by 30.86 points to 2,639.16.
The economic release of the day was basically overlooked by the markets. Wholesale inventories rose more than expected in May while, due to rising outflows, they set a new record for leanness.
Today's speaking engagement by Fed chief Ben Bernanke was a plus for bonds as traders were relieved that his comments did not address the Fed's current assessment of the inflation situation. He confined his comments to how a general overview of how the central bank forecasts inflation.
Stocks tumbled due to a number of factors. Following recent gains which had the Dow flirting with its record high, the Nasdaq at a multi-year high, and the S&P 500 near a multi-year high; many traders felt that the market was overbought -- especially in light of the start of earnings report season for the second quarter. Moreover, the flow into bonds, the negative implications for the economy from the subprime news, a falling dollar relative to foreign currencies, and rising oil prices combined to send the indices sharply lower today.
The price of a barrel of light, sweet crude oil for August delivery fell yesterday by $0.62 and rose by that amount today to settle at $72.81, thus tying with last Friday's close as the highest for a front-month contract since August 15 of last year. By the end of stock trading, the Dow had fallen by 1.09% the S&P 500 by 1.42%, and the Nasdaq by 1.16%.
There are no major economic releases slated for tomorrow, though traders will be watching the weekly reports on mortgage application activity from the Mortgage Bankers Association and on oil inventories form the Energy Department. Aside from these releases, bond traders may be inclined to take back some of the profits made in the last two days.
In addition, defensive maneuvering ahead of a number of releases on Thursday and Friday may restrict any upside momentum. Supply pressure will also bear against the market as the Treasury will be auctioning $8 billion in 10-Year Treasury Inflation Protected Securities (TIPS) on Thursday.
10:30 AM EDT :
Despite a bullish economic release this morning, Treasuries are solidly ahead and stocks are in negative territory. Technical factors are helping provide impetus in both moves as steep losses for bonds last week are attracting bargain hunters while recent gains for stocks are prompting some sales.
In today's economic news, the Commerce Department reported that the seasonally adjusted level of wholesale inventories rose by 0.5% in May. The increase, the largest in four months, was stronger than the 0.3% or 0.4% that analysts had predicted. But, as expected, sales were also strong -- up by 1.3%. This left the inventory-to-sales (I/S) ratio at a record low 1.11.
The ratio is the value of supplies on hand, divided by the value of sales for the month. The result is how many months it would take at the prevailing sales pace to entirely deplete the existing inventory. The low ratio means that pressure to replenish supplies is high -- a bullish economic indicator.
While strong economic news is usually a negative for bonds since it reduces the likelihood of a Fed interest rate cut, traders are focusing instead on a warning from Standard and Poor's that it might cut its credit rating on $12 billion worth of bonds backed by subprime mortgages. The news has sparked a shift from the more risky mortgage sector to government-backed debt (Treasuries).
In the stock arena, the onset of the quarterly earnings report season is exerting a negative pressure. The first Dow component to report was Alcoa after the bell yesterday and the results were weaker than analysts had forecast. Disappointing guidance from Home Depot and Sears this morning is also causing traders to consolidate recent gains. The subprime situation is also bearing on stocks as it rekindles fears that the troubled housing market will further hinder the nation's economic growth.
At 1:00 PM Eastern Time, Federal Reserve Board Chairman Ben Bernanke will be speaking before the National Bureau of Economic Research in Cambridge, Massachusetts. Most observers feel that he will not deviate from the official Fed position that inflation is expected to abate but the monetary policy committee is concerned with the possibility that pressures might not subside as expected.
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