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.
