5:00 PM EDT : Treasuries rose early today and then held to a tight range for the remainder of the session. The stock indices sputtered, with the Nasdaq and S&P 500 even dipping into the red. But all three major indices managed to finish with light gains. In late trading, the 10-Year Treasury Note was up by 10/32, lowering its yield to 5.15%; the Dow was up by 38.29 points to 13,649.97; and the Nasdaq was up by 3.51 points to 2,670.02.
There were no economic releases to provide guidance and much of the gain for bonds came as a technical reaction to losses last week. Stocks were hindered by the pending onset of the quarterly earnings report season but commentators note that traders are generally optimistic about the report results.
Another plus for stocks was a retreat in oil futures after seven winning sessions. A barrel of light, sweet crude oil for August delivery fell by $0.62 on the New York Mercantile Exchange to settle at $72.19. By the end of stock trading, the Dow had gained 0.28%; the S&P 500, 0.09%; and the Nasdaq, 0.13%. The Dow's close was the third highest on record and the S&P 500's was the fifth highest. The Nasdaq's close was the highest in almost six-and-a-half years.
The only major economic release slated between now and Thursday is tomorrow's report on wholesale inventories. The report is not considered first-tier since the news is somewhat dated (May) and the wholesale sector is only one component in the overall inventory situation. The trend in wholesale inventory growth has been weakening in the last twelve report months. Following a contraction in December, the first in over three years, the seasonally adjusted level bounced up by 0.6% in January, followed by 0.4% increases in February and March, and a 0.3% rise in April. For May, another increase of 0.3% or 0.4% is anticipated.
Inventory outflows have been generally strong in the last six report months and this has caused leaner supplies at hand. The inventory to sales ratio is a measure of this and it hit a record-matching low of 1.12 in April. The lower the ratio, the leaner the inventory levels and the higher the pressure to replenish them. Another strong sales figure in May could result in a new record I/S ratio.
10:30 AM EDT :
Treasuries have bounced this morning following three losing sessions. The stock indices are also slightly ahead in early trading, despite the fact that the second quarter earnings release season is about to get underway.
This week's economic calendar gets off to a slow start. There are no major economic releases today and the only one tomorrow is the report on wholesale inventories for May. In April's report, the Commerce Department said that the seasonally adjusted level of inventories rose by 0.3%. This was the weakest increase since a 0.3% decline in December.
But sales were up by 1.3%, pushing the inventory-to-sales ratio down to 1.12, matching the record lows set last June and in October of 2005. The I/S ratio indicates how many months it would take to entirely deplete stocks on hand at the prevailing sales pace. The lower the figure, the more pressure there is on the production process to replenish supplies.
For May, another increase of 0.3% or 0.4% is expected. Another increase in sales (larger than inventory growth) may push the I/S ratio to a new record low.
There are no major releases on Wednesday, 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.
On Thursday, the jobless claims report highlights the employment situation once again. 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 on Thursday 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.
Supply will bear on the bond market on Thursday as 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. Next week's offering is a new issue and the last four initial issues had a face value of $9 billion.
The last initial, 10-Year TIPS 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.
Later Thursday afternoon, 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 (begun last October) to date. 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.
On Friday, the retail sales report will likely garner the most attention. The report for May was stronger than predicted. The Commerce Department said the seasonally adjusted level of sales rose in May 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 Friday 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 on Friday 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 wholesale inventories are expected to have risen by 0.4%. A modest rise in retail inventories of 0.2% or 0.3% would result in an overall inventory rise of 0.3%. 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.
