The Fed cut to the discount rate spurred a rally in stocks today, which put some pressure on the bond market. But short-term maturities also found some support from the Fed news while the long end of the market pared earlier losses for a mixed close. In late trading, the 10-Year Treasury Note was down by 6/32, raising its yield to 4.68%; the Dow was up by 233.30 points to 13,079.08; and the Nasdaq was up by 53.96 points to 2,505.03.
The Fed action eased jitters that liquidity problems stemming from the effects of declining values of certain types of debt securities would cripple the economy and financial markets. It also raised expectations that more-enduring fed funds rate cuts may be forthcoming. But the news caught the markets off-guard and stocks soared in early trading as investors who were betting on further losses had to liquidate their short positions.
The stock indices eased back somewhat following the morning scramble then basically maintained a holding pattern until a late session bump higher. The economic news of the day was largely overlooked. The first of two consumer sentiment indices to be released this month indicated a larger erosion of optimism since the end of last month than had been forecast, but the recent turmoil in the stock market suggested that this might be the case.
Stocks were also not hindered by a rise in oil futures today. A barrel of light, sweet crude oil for next month delivery rose by $0.98 on the New York Mercantile Exchange to settle at $71.98. By the end of stock trading, the Dow had gained 1.82% on the day; the Nasdaq, 2.20%; and the S&P 500, 2.46%. All three were lower for the week, however, with the Dow losing 1.21% and the Nasdaq, 1.57%. The S&P 500 fared better with a loss for the week of only 0.53%. The Dow is down by 6.6% from its record closing high of 14,000.41 posted on July 19. The S&P 500 is down by 6.9% from its record high of July 19. And the Nasdaq is down by 7.9% from its six-and-a-half year closing high, also set on July 19.
The yield of the benchmark 10-Year Treasury Note closed only 1 basis point higher than yesterday for its second lowest close since May 10 (yield moves inversely to price). On the week, the yield fell by 14 basis points after a 13 bp rise last week.
Next week, the economic calendar is extremely light so volatility is apt to remain high as the markets may be buffeted by additional news items regarding the credit situation. On Monday, the only scheduled release is the Index of Leading Economic Indicators for last month. In the last release, the Conference Board, an independent research firm, said the index fell in June by 0.3%, the fourth decline of the year to date and the largest since February.
The decline surprised analyst who were expecting a slight increase. Moreover, the originally reported 0.3% rise in May was revised to 0.2%. The heaviest pressures on the index in June came from a decline in building permit issuance, an increase in jobless claims, and a decline in consumer expectations (the Consumer Confidence Index is compiled by the Conference Board).
Although the rate of building permit issuance continued to decline in July, the average level of initial jobless claims declined, and the consumer expectations index rose to its highest level in seven months. The sharp drop in stocks constitutes a negative influence on the index, but analyst still believe that it will show a rebound of about 0.3% from June's reading.
There are no major economic indicators scheduled until Thursday so Wednesday's minor releases may get more than their usual share of attention. These are the Mortgage Bankers Association of America's report on mortgage application activity for this week and the weekly report from the Energy Department on oil inventories.
The only release on Thursday is the jobless claims report. Yesterday's said that the seasonally adjusted level of initial claims for state unemployment benefits rose by 6,000 last week to 322,000, the highest reading since the week ending June 16. This is slightly above the weekly average for the year to date of 317,375. The report said continuing claims for the week ending August 4 (continuing claims must be at least a week old) rose by 17,000 to 2.567 million. The four-week average rose by 1,000 to 2.548 million, in-line with the weekly average for the year so far of 2.523 million.
Despite the recent elevations, the data still suggest that hiring is outpacing layoffs and adding to nonfarm payrolls. In addition, following three weeks of increases, a slight decline in this week's initial claims level would not be too much of a surprise in next Thursday's release.
The heaviest news day next week is Friday with two releases. The first is the report on durable goods orders for July. Durable goods are defined as items meant to last three years or more. They are usually labor-intensive to produce, expensive, and therefore often financed. Because of this, the trend in orders provides some insight regarding upcoming production activity and the effect interest rates may be having on the process.
In the report for June, the Commerce Department said the seasonally adjusted value of new orders for durable goods rose by 1.4% June following a 2.3% decline in May. June's increase was revised to 1.3% and May's decline was revised to 2.4% in the subsequent release of the factory orders report. The gain came from a strong jump in the volatile category of transportation, and specifically in the category of orders for commercial aircraft. Excluding transportation, orders were down by 1.0% following a 0.3% decline in May (these and the figures cited below are from the revised data which came out after the last durables report).
Another category that is closely watched is orders excluding those from the defense sector since defense orders are not governed by standard market forces. Defense orders fell by 6.8%, leaving ex-defense orders with a gain of 1.8%. But further excluding the commercial aircraft component, orders were down by 0.3% in June.
The category of ex-defense capital goods minus aircraft is also highly-regarded since it provides some insight on core business demand. Orders were flat (0.0%) in June following a 1.5% decline in May.
For July, durable goods orders are expected to have increased again by about 1.0%.
The last major economic release of the week is the report on new home sales for last month. In June, the seasonally adjusted, annualized pace of new home sales fell by 6.6% to 834,000, the second lowest reading since December of 1997 (March's pace was 830,000). The decline was the fifth in the first six months of the year and the largest since January. Moreover, May's originally reported pace of 915,000 was revised down to 893,000 and April's 930,000 was revised down to 913,000.
Inventory of new homes on the market edged up by 0.2% to 537,000. At sales pace prevailing in June, this represented 7.8 months worth of supply, up from May's 7.4 month turnover rate. The average home price rose by $5,400 to $316,200 but the median price fell by $3,100 to $237,900. On a year-over-year basis, the average price was up by 3.7% but the median price was down by 2.2%.
Most forecasts call for little change in the overall rate of home sales in July but another decline is a clear possibility.
