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.
