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.
