5:00 PM EDT : In today's bond trading activity, Treasuries managed to recoup some of the losses they suffered in the last few days. Stocks, after taking minor losses yesterday, resumed their climb of the previous two days. In late trading, the 10-Year Treasury Note was up by 19/32, lowering its yield to 4.62%; the Dow was up by 53.49 points to 13,820.19; and the Nasdaq was up by 16.93 points to 2,671.22.
Heavy losses in the bond market since Tuesday's rate cut by the Fed at last reached a level where Treasuries looked attractive once again. Today's gains were not propelled by data as there were no major economic releases.
Bullish earnings reports from Oracle and Nike helped lift stocks. A decline in oil prices also lent support. A barrel of light, sweet crude oil for November delivery fell by $0.16 on the New York Mercantile Exchange to settle at $81.62. This was the first decline in a front-month contract closing price in five sessions. The price was down by $1.70 from yesterday's record $83.32 close of the now-expired October contract.
By the end of stock trading, the Dow had gained 0.39%; the S&P 500, 0.46%; and the Nasdaq, 0.64%. The Dow and Nasdaq closed at their highest levels since July 23 and the S&P 500 closed at its second highest level since that date. All three made solid gains for a second week with the Dow up by 2.81%, the S&P 500 by 2.80%, and the Nasdaq by 2.66%. Over the last two-week period, the Dow has gained over 700 points or 5.39%; the S&P 500, 4.97%; and the Nasdaq, 4.11%.
In contrast, the yield of the benchmark, 10-Year Treasury Note gained 16 basis points this week following a gain of 8 basis points last week (yield moves inversely to price).
Next week is the last trading week of the month and quarter and period close-out activity may benefit Treasuries. Since the securities have no credit risk and a fixed maturity, they serve as good adjustment mechanisms in portfolio rebalancing -- the process of resetting holdings according to such parameters as risk, yield, and return horizon. The process usually entails the purchase of Treasuries.
On Monday, the markets will continue to be driven by technicals as there are no economic releases scheduled. On Tuesday, the release calendar kicks off with the Consumer Confidence Index and the report on existing home sales.
The Conference Board, an independent research firm, puts out its index results from consumer surveys. In the release for August, the overall Consumer Confidence Index came in at 105.0. Although this was higher than forecasts of 104.0, July's originally reported reading of 112.6 was revised down to 111.9. July's was still a six-year high but August's was the lowest in a year.
Lynn Franco, Director of the Board's Consumer Research Center, assessed the results this way, "A softening in business conditions and labor market conditions has curbed consumers' confidence this month [August]. In addition, the volatility in financial markets and continued sub-prime housing woes may have played a role in dampening consumers' spirits. But, despite less favorable conditions and in spite of all the recent turmoil, consumers still remain confident. And, current Index levels suggest further economic growth in the months ahead."
For September, the index is expected to have dipped to about 104.5, but if the Fed rate cut and the rally in stocks are captured in the survey, the confidence reading could be higher than last month's.
The last report on existing home sales showed continued weakening but there were a couple of mildly bullish details. The National Association of Realtors said that the seasonally adjusted, annualized rate of sales edged down in July by 0.2% to 5.75 million. Despite the fact that July's decline marked a fifth consecutive monthly fall and the pace was the lowest since March of 2003, analysts were predicting a lower rate of 5.70 million. Moreover, the only region that declined was the Midwest, where the pace fell by 2.2%. The largest regional component, the South, saw no change in its sales rate. The Northeast saw a 1.0% increase and the West (the second largest regional contributor to overall sales) saw a gain of 1.8%.
The report said that inventories of homes on the market rose by 5.1% and June's originally reported decline of 4.2% was revised to a decrease of just 0.2%. The heavy inventory and slow sales pace translated into a 9.6 month turnover rate, up from 9.1 months in June.
Home prices were virtually unchanged with the average home price declining by $500 and the median price rising by $300. On a year-over-year basis, the average price was up by 0.2% and the median price was down by 0.6%.
Forecasters are looking for a deeper drop of about 4.3% in August's sales pace to 5.50 million. This would be a five-year low.
On Wednesday, the major release is the report on durable goods orders for last month. 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 July's report, the Commerce Department said that the seasonally adjusted level of orders rose by 5.9% and this was subsequently revised to 6.0% in the factory orders report (all following data is derived from the revisions released after the last durable orders report). June's previously reported increase of 1.3% was also ultimately revised up to 1.8%. A large portion of July's gain came from an 11.0% rise in the volatile transportation category, but even excluding that sector, orders were up by 3.8%, the biggest ex-transportation increase since August of 2005.
Another category that can skew the overall picture is defense since orders there are not governed by standard market forces. Defense orders were up by 31.2% but excluding the category, orders were still up by 5.0%. Further excluding commercial aircraft from the ex-defense figures showed a gain in orders of 4.2% in July, the biggest jump since March of 2004.
And another closely watched category is ex-defense capital goods minus commercial aircraft. This category is seen as a proxy for core business demand on the production process. It saw an increase of 1.7%, the first increase in three months.
Estimates of August's new orders for durable goods items cover a wide range: from a decline of 3.0% to an increase of 4.5%.
A couple of minor releases on Wednesday may get some attention. These are the Energy Department's weekly oil inventory report and the Mortgage Bankers Association report on application activity.
New supply hits on Wednesday with the Treasury's auction of 2-Year Notes. The arrival of new supply usually keeps bond prices down until the market has a chance to begin digesting the inventory. Traders who will be making bids refrain from pushing prices up prior to an auction in order to keep yields up (bids are for yield: the higher, the better for the auction participants). Other traders also avoid purchasing the soon-to-be off-the-run issue since the new one will have greater liquidity. They also assume a wait-and-see posture until the results of the sale are known.
Last month's 2-Year Note auction was well-received. Bids exceeded the $18 billion offer amount by an exceptionally high 3.97 to 1. The average ratio for the last twelve, 2-year auctions before August's was 2.77. Noncompetitive bids, a gauge of individual investor demand, totaled $856 million, up from $698 million in July and higher than the twelve-month average of $839 million. And foreign demand was decent, if not overwhelming. Indirect competitive bids, which include those from foreign central banks, garnered 31.0% of the issue, the biggest award portion in the last four issues but below the twelve-month average of 32.8%.
Tuesday's issue is also expected to have a face value of $18 billion, the same as in the last seven, 2-year issues. The deadline for competitive bids is 1:00 PM Eastern Time.
On Thursday, the jobless claims report highlights the employment situation once again. In yesterday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits fell last week by 9,000 to 311,000, the lowest reading in seven weeks. The four-week moving average, which smoothes out some of the short-term volatility, declined by 3,500 to 320,750. For the year to date, the average weekly level has been 317,973.
The report said that continuing claims in the week ending September 8 (continuing claims must be at least a week old) fell by 53,000 to 2.544 million -- also the lowest reading in seven weeks. But the previous week's originally reported level of 2.585 million was revised up by 12,000 to 2.597 million, the highest reading in twenty-nine weeks. The four-week average fell by 5,500 to 2,576,500. The average weekly reading for the year to date is 2,592,722.
The net decline of 26,000 in initial claims over the past three weeks suggests that the employment situation is not as worrisome as the last monthly jobs report indicated. The employment data for August jolted observers with a 4,000 drop in nonfarm payrolls, the first decline in four years.
Thursday also brings the final report on gross domestic product for the second quarter. 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.
The initial or "advance" report came out in July and indicated a 3.4% increase in GDP versus the first quarter. This was revised up in last month's preliminary report to 4.0%. The gain was the largest since the first quarter of 2006. In contrast, the first quarter gain of 0.6% was the weakest increase since the fourth quarter of 2002.
The inflation measures in the preliminary report were also little changed from the advance report, though what changes there were were for the better. The overall GDP price index was up by 2.7%, the same as in the advance report. But the price index for personal consumption expenditures (PCE; consumer spending) was trimmed to an increase of 4.2% from the originally reported 4.3% and the core PCE index, which excludes the volatile categories of food and energy, was trimmed to a 1.3% gain from 1.4%.
Since the preliminary report captured most of the economic data for the period, little change to the last figures are expected in the final report. The release also loses clout by its age. With the third quarter coming to a close, traders are more concerned with its GDP figures and those of the upcoming quarter. Estimates for the current quarter range from gains between 2.0% and 2.5%.
The report on new home sales also comes out on Thursday. July's report surprised observers who were expecting a decline. Instead, the Commerce Department said that the seasonally adjusted, annualized pace of sales rose by 2.8% to 870,000. In addition, June's originally reported pace of 834,000 was revised up to 846,000 pace.
The report said that the inventory of homes on the market fell by 0.9% to 533,000. This was the fourth consecutive monthly decrease and the lowest level since January of last year. Combined with the increased sales pace, this inventory represented 7.5 months worth of sales, down from 7.7 months worth of inventory at the end of June.
The average new home price fell to $300,800 from June's $304,900 but the median price rose to $239,500 from $230,600. The average price was down by 3.4% on a year-over-year basis and the median price was up by 0.6%.
For August, analysts predict that the rate of sales fell by 4.6% to 830,000. This would be the largest percentage decline since February and tying March for the lowest pace since June of 2000.
More supply comes to market on Thursday as the Treasury conducts its monthly auction of 5-Year Notes. Last month's issue had a mixed reception. Overall demand was high. The bid-to-cover ratio was 2.74, the highest since last September. Non-competitive bids totaled $198 million. This represented 1.5% of the issue, the highest percentage since August of last year. But foreign demand was relatively weak. Indirect competitive bids garnered 22.5% of the issue. While this was up from July's award portion of 19.7%, it was well below the 30.2% average for the twelve auctions prior to last month's.
Thursday's offer size is expected to be $13 billion, the same as the last nine.
On Friday, the report on personal income and spending will be released. According to the Commerce Department personal income, the fuel for consumer spending, rose in July by 0.5%, the largest increase since March. Personal consumption expenditures (PCE or consumer spending) rose by 0.4%, up from a 0.2% increase in June. Both readings were right in line with the monthly averages of the previous twelve months. For August, both income and spending are expected to have increased by 0.4%.
An important manufacturing indicator is slated to be released on Friday. This is the Chicago Purchasing Managers Index, a gauge of manufacturing activity in the highly-industrialized region. August's index came in at 53.8, up from July's reading of 53.4. Any reading over 50.0 reflects a general increase of activity relative to the preceding month. Analysts predict that September's index will come in somewhere between 54.0 and 55.0. The national index for September will be released on the following Monday.
The last release of the week is the final read on consumer sentiment from the University of Michigan's twice monthly surveys. The preliminary index for the month, released last Friday, came in at 83.8, up slightly from August's final reading of 83.4 but still below the average reading of 89.5 for the last twelve months. Little change is expected in September's final reading; however, as with the Consumer Confidence Index, if the survey includes responses following the Fed rate cuts, the sentiment index may be higher.
10:30 AM EDT :
Treasuries have finally bounced following three losing sessions that pushed the yield of the benchmark 10-Year Note up by 24 basis points (yield moves inversely to price). In recent trading this morning, the yield had shed about 5 basis points. This morning's move is largely technical in nature -- bargain hunting by those who feel the sell-off was overdone. In the stock market, the indices are currently up once again following a breather yesterday after two days of strong gains.
There are no economic releases slated for today so technical factors will continue to dominate trade. The expiration of options and futures may add to volatility to price moves in the stock market.
Oil prices continue to climb but the October contract for crude oil expired yesterday at $83.32 per barrel. The November contract closed yesterday at $81.78 and was up to $82.03 in recent trading.
Of course, the markets are still reacting to Tuesday's Fed rate cuts. Atypically, Treasuries plunged following the cuts on heightened inflation concerns and the unwinding of previously acquired safe-haven positions. Stocks rallied on the lowered rates since they will stimulate economic activity as consumers and businesses can obtain cheaper loans.
Looking ahead to next week, position squaring as the month and quarter come to a close may bolster Treasuries, especially since prices have fallen so sharply this week. But supply may present some downward pressure as the Treasury will be conducting its monthly auctions of 2- and 5-Year Notes.
The home sales reports come out next week (both for existing and new homes) as does the final report on gross domestic product for the second quarter. Other economic releases include the Consumer Confidence Index, the Consumer Sentiment Index (final), the report on durable goods orders, the report on personal income and spending, and the Chicago Purchasing Managers Index.
