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.
