5:00 PM EDT :Prices of Treasuries maintained altitude and stocks took steep losses on today's weak employment news. In late trading, the 10-Year Treasury Note was up by 32/32, lowering its yield to 4.38%; the Dow was down by 249.97 points to 13,113.38; and the Nasdaq was down by 48.62 points to 5,565.70.
Nonfarm payrolls fell in August for the first time in four years and the news was seen as helping pave the way for a Fed rate cut. While a rate cut would also lower corporate borrowing costs, the negative economic consequences of the payroll number weighed on stocks. Adding to the bleak economic outlook was a weaker than expected report on wholesale inventories for July.
Another negative for stocks was today's fifth straight move higher in oil futures. A barrel of light, sweet crude for next month delivery rose by $0.40 on the New York Mercantile Exchange to settle at $76.70, the highest close for a front-month contract since August 2.
By the end of stock trading, the Dow had lost 1.87%; the S&P 500, 1.69%; and the Nasdaq, 1.86%. All three fell on the week with the Dow losing 1.83%; the S&P 500, 1.39%; and the Nasdaq, 1.18%. In contrast, the yield of the benchmark 10-Year Treasury Note fell for a fourth straight week and has fallen in eight of the last nine weeks (yield moves inversely to price). The yield fell by 15 basis points in the last week and closed today at its lowest level since January 23, 2006.
Next week, the economic calendar is back weighted. It kicks off on Tuesday with the report on international trade for July. In June's report, the Commerce Department said the seasonally adjusted value of imports exceeded that of exports by $58.1 billion. This was well short of the $61.0 billion deficit figure that analysts were predicting. Moreover, May's originally reported trade gap of $60.0 billion was revised down to $59.2 billion. The lower gap numbers help explain the upward revision to second quarter gross domestic product from initial estimates of a 3.4% gain to a preliminary reading of 4.0%.
For the first month of the third quarter, the trade report is expected to show a wider gap of between $59.0 billion and $59.4 billion.
There are no major releases on Wednesday but the weekly oil inventories report and the Mortgage Bankers Association application index data will get close attention. Oil inventory levels affect prices and high energy prices act as a brake on the economy. The state of mortgage applications will throw additional light on the mortgage and housing situations.
On Thursday, the jobless claims report will once again address the state of the labor market. Yesterday's report said that the seasonally adjusted level of initial claims for state unemployment benefits fell last week by 19,000 to 318,000 from 337,000 the week before (originally reported as 334,000). A decline had been expected following five weeks of increases and a week of no change. The reading is in line with the underlying trend for the year to date. The average weekly reading in that time has been 318,200.
But the actual decline was stronger than anticipated and seemed to contradict other signs of faltering job growth. Yet, not all of the claims data was bullish. The four-week moving average of initial claims, which smoothes out some of the short-term volatility, rose by 500 to 325,750, the highest level in four months.
The report also showed that the level of continuing claims for the week of August 25 (continuing claims must be at least a week old) rose by 25,000 to 2.598 million, the highest reading since the week ending February 17. The four-week average rose by 12,000 to 2,571,500, the highest reading in over a year-and-a-half. The average weekly reading of continuing claims for the year to date is 2,527,500.
With today's employment report indicating a much gloomier jobs picture, a significant increase in this week's initial claims level would not be unexpected. But this week's data may have been distorted by the closure of state labor offices on Monday. An adjustment factor, derived from past data, will have to be applied to the claims numbers to make up for the missing day. A faulty adjustment factor could skew the claims figure.
Supply will bear on the bond market on Thursday as the Treasury will be auctioning an additional amount of last month's 10-Year Note issue (making the actual maturity 9-years and 11-months). The offer size is expected to be $8 billion, the same as in the last nine such reopening auctions. The last reopening in June drew mixed demand. Bids exceeded the offer amount by 2.55 to 1, down from the 2.64 bid-to-cover ratio in the previous reopening sale in March.
Noncompetitive bids, a measure of individual investor demand, totaled $32 million, up from $12 million in March and the largest amount in a 10-year reopening since June of 2006. But foreign demand was weak. Indirect competitive bids, which include those from foreign central banks, garnered just 10.9% of the issue, down from 15.1% in March and the smallest award portion since March of last year.
The bidding deadline for competitive bids is 1:00 PM Eastern Time. An hour later, the Treasury will release its budget figures for August. In August of last year, the value of government outlays exceeded that of receipts by $64.7 billion. Forecasters predict that last month's deficit will be a larger $85.0 billion or more. An $85.0 billion figure would make the running total for the fiscal year to date (begun last October) to a deficit of $242.3 billion. This would still be an improvement over the $304.4 billion deficit total for the same period in the 2006 fiscal year.
Friday is the busiest news day. Of the three earliest releases, the most influential will be the report on retail sales for last month. In July's report, the Commerce Department said the seasonally adjusted value of sales rose by 0.3%. While this was slightly lower than the 0.4% that forecasters had predicted, June's originally reported decline of 0.9% was trimmed to a decline of 0.7% and May's previously reported increase of 1.5% was revised up to 1.6%. Excluding the large but volatile category of motor vehicles and parts, sales rose by 0.4% in July after a 0.2% decline in June.
Another volatile category is sales at gasoline stations. Because of declining gasoline prices, sales there were down by 0.8% following a 1.3% decline in June. Excluding both the categories of auto and gasoline stations, sales were up by 0.6% in July following no change (0.0%) in June.
Auto sales rebounded in August but gasoline prices declined. Current estimates call for a 0.5% rise in overall retail sales but excluding autos, sales are expected to have risen by 0.2% or 0.3%.
The report on import / export prices may shed some light on the inflation picture stemming from international trade. In July's report, the Labor Department said its import price index rose by 1.5%. The report indicated that imported petroleum prices rose by 7.0% in July following a 4.4% increase in June. Excluding this volatile category, prices were up by just 0.2%. Average spot oil prices declined in August and the import price index is expected to have risen by 0.5%. If this is the case, it will be the smallest increase since February.
The current account balance for the second quarter also comes out on Friday. The figure is the difference between dollars leaving and entering the country and includes investment income and unilateral transfers (foreign aid and government pensions sent abroad) so the report is broader than the monthly reports on international trade of goods and services.
In the last report, the Commerce Department said today that the current account balance for the first quarter showed a deficit of $192.6 billion. This was a wider gap than the fourth quarter's $187.9 billion but that figure was a downward revision from the originally reported deficit of $195.8 billion. In fact, revisions for the eight quarters of 2005 and 2006 trimmed a total of $82.0 billion from the previously reported gap figures. The deficit in the first quarter was better than the $202.5 billion that analysts had predicted. A slightly narrower gap of $192.0 billion is predicted for the second quarter.
Later on Friday morning, the Federal Reserve will release its report on industrial production; a gauge of output from the nation's factories, mines, and utilities. According to the last report, industrial production rose in July by 0.3%. Revisions moved June's originally reported gain of 0.5% to 0.6% but May's previously reported decline of 0.1% became a decline of 0.2%. Manufacturing output rose by 0.6% for a second consecutive month and mining output rose by 0.7%, its largest increase of the year so far. The volatile category of utilities saw a 2.1% decline in output
Some inflation concerns were roused by the capacity utilization statistic. This is the ratio of output to potential output. It rose from 81.8% in June to 81.9% in July. Cap utilization in the manufacturing sector was 80.7%, its highest reading since June 2000, and mining's utilization was 91.0% in July, its highest of the year so far. Utilities saw a drop in its utilization figure to 83.6% from 85.5%. High utilization numbers mean there is less slack in the production process, which could lead to bottlenecks that drive up prices.
For August, another 0.3% increase is expected in industrial production but capacity utilization is expected to have edged up to a ten-month high of 82.0%
Also out on Friday is the report on business inventories for July. June's report indicated a 0.4% rise. Sales fell by 0.3%, the first decline since January. The rise in inventory and decline in sales pushed the inventory-to-sales (I/S) ratio up slightly to 1.27 from May's 1.26. 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. Despite June's increase, the level was still not far from the record low of 1.25 and it still indicated high pressure on the production process to replenish supplies.
Recent predictions have called for a 0.3% rise in inventories but today's report on wholesale inventories was weaker than predicted. With increases of 0.2% in the manufacturing sector (according to the last factory orders report) and the wholesale sector, the only unknown is the retail sector.
The last economic release of the week is the initial read on consumer sentiment for the month from the twice-monthly surveys conducted by the University of Michigan. August's final sentiment index was 83.4, up slightly from the preliminary reading of 83.3. Despite the nominal increase, the index was still down sharply from July's final reading of 90.4. In fact, it was the lowest reading since the final reading in August of 2006. Though little change is expected in the preliminary index for August, recent indicators have clouded the economic picture and a further decline in optimism could show up in Friday's index.
10:30 AM EDT :
Treasuries are sharply higher as the employment report for August turned out to be much weaker than anticipated. The stock indices are currently deep in the red.
The Labor Department said the seasonally adjusted level of nonfarm payrolls fell last month by 4,000, the first decline since August of 2003. Not only was this much weaker than the 120,000 increase that analysts had predicted.
Many observers were expecting a weaker than predicted report based on several, recently released minor reports. But the extent of payroll weakness was greater than even these lowered expectations. Moreover, July's originally reported gain of 92,000 was revised down in today's report by 24,000 to 68,000 and June's previously reported gain of 126,000 was revised down by 57,000 to 69,000.
The goods producing sector saw the biggest gains with construction payrolls falling by 22,000 and manufacturing by 46,000. The decline in manufacturing payrolls was the largest in four years and it marked a fourteenth consecutive month of contractions.
On the services side, the biggest gainer was education and health. Payrolls there grew by 63,000. But the next largest gainer was retail trade with only a 12,500 increase. The category of leisure and hospitality saw a gain of 12,000. The large category of professional and business services saw a gain of only 6,000 and financial services saw no change. Payrolls in the information category declined by 7,000 and in transportation by 4,200. Government payrolls fell by 28,000 following a 52,000 drop in July.
The news is a plus for the bond market because it provides strong evidence that the economy is faltering and gives the Fed more of a reason to cut interest rates. Many Fed watchers are already convinced that the monetary policy committee will cut its target for the fed funds rate at the September 18 meeting. And a growing number of observers are speculating that the cut will be 0.50% rather than 0.25%. This would push the rate down from its current 5.25% to 4.75%.
The fed funds rate is the rate banks charge one another for short-term loans necessitated by daily reserve requirements. The banks actually set the rate but the Fed can make adjusts to the amount of reserves in the banking system, thereby maneuvering the rate to conform to the central bank's policy goals.
Not all of the news was bearish. Despite the dramatic fall off in payrolls, the unemployment rate -- the portion of the active workforce without jobs -- held steady at 4.6%. Though the rate was lower from February through June, the latest level is still considered low by historical standards. The payroll data is derived from a survey of businesses while the unemployment rate is calculated from information obtained from a household survey.
The inflation data in the report was relatively mild. Average hourly earnings rose by 0.3% in August, matching July's gain. On a year-over-year basis, earnings were up by 3.9% following a 4.1% Y/Y increase in July.
The second economic release of the day was also bond-friendly; that is, more bearish than expected. The Commerce Department said that the seasonally adjusted level of wholesale inventories rose by 0.2% in July. This was lower than the 0.4% or 0.5% increase that forecasters were calling for. Moreover, June's previously reported gain of 0.5% was revised down to 0.3%.
Sales also slowed in July, growing by just 0.1% after a 0.4% increase in June. Yet, inventories remained lean. The inventory-to-sales (I/S) ratio came in at a record low 1.11 for a third consecutive month. 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 stocks on hand. A low ratio indicates strong pressure to replenish supplies.
But the report does not give a complete picture of the inventory situation since it does not include the manufacturing and retail sectors. A report on business inventories, which covers all of these components, will be released next Friday.
