5:00 PM EDT :Month and quarter close-out activity in the bond market faded during the day and Treasuries finished in the red. Stocks also took modest losses. In late trading, the 10-Year Treasury Note was down by 5/32, raising its yield to 4.59%; the Dow was down by 17.31 points to 13,895.63; and the Nasdaq was down by 8.09 points to 2,701.50.
The economic news of the day was mixed. Personal income rose less than expected last month but personal spending rose by more than expected. The price indices for spending were tame, however. The rate of construction spending rose slightly last month though forecasts had called for a slight decline. Yet, residential construction spending continued its decline. The Chicago PMI was a little stronger than anticipated, reflecting better manufacturing growth in the region than last month. But an inflation measure in the Chicago report was encouraging. And lastly, the final Consumer Sentiment Index for September was a bit weaker than the preliminary reading and matched August's as the lowest since August of 2006.
Apart from the economic data, both markets were unnerved by comments from St. Louis Fed President William Poole. Answering a question following a speech in New York, he said that the markets should not assume that the Fed is going to continue to make rate cuts.
Another negative influence on the markets was the continuing decline of the dollar, which obviously dilutes the value of dollar-denominated investments. But the fall in the dollar also bore on oil prices, which made a U-turn today. After crude oil for November delivery rose as high as $83.76 per barrel, profit-takers moved in and the price eventually closed at $81.66, down by $1.22 from yesterday's close.
By the end of stock trading, the Dow had slipped by 0.12% on the day while both the S&P 500 and Nasdaq lost 0.30%. All three made gains on the week with the Dow up by 0.55%; the S&P 500, 0.07% and the Nasdaq, 1.13%. They all made large gains for the month. The Dow finished September with a gain of 1.03%; the S&P 500, 3.58%; and the Nasdaq, 4.05%. For the quarter the Dow gained 3.63%; the S&P 500, 1.56%; and the Nasdaq, 3.77%.
The benchmark, 10-Year Treasury Note fell by 3 basis points this week but was up by 6 basis points on the month (yield moves inversely to price). But for the quarter, the yield was down by 44 basis points.
Next week, the economic calendar is relatively light but there are a couple of heavyweight releases that have market-moving potential. The first of these is the only major release slated for Monday. This is the index figures on the nation's manufacturing sector for September from the Institute for Supply Management (ISM). In the release for August, the overall index came in at 52.9 following a 53.8 reading in July. Any reading over 50.0 indicates a general expansion of activity relative to the preceding month and August's marked a seventh consecutive expansion.
The data series had lost altitude 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. Since February,
activity has been expanding and June's index reading of 56.0 was the strongest in fourteen months. But the last two readings have been less forceful and August's was the weakest in five months. Little change is anticipated in September's reading with most predictions ranging from 52.5 to 53.0.
Aside from the softer than expected headline figure, August's release revealed another bond-friendly detail. The prices index, an inflation gauge, came in at 63.0. While still showing price growth, the reading was the lowest in six months. Traders are hoping that today's pull-back in the Chicago PMI prices paid index will be mirrored in another decline in the national release.
On Tuesday, the National Association of Realtors will release its latest Pending Home Sales Index data. July's index fell by 12.2%, the biggest plunge in the history of the data series (2001) and the index was the second lowest in the series (the lowest was in September 2001). In the first seven months of the year, the index has fallen five times. July's especially large decline suggested a significant decline in the actual sales pace in subsequent months. The index is a measure of contract activity and the NAR asserts that 80% of contracts become sales within two months and a large portion of the rest, two months thereafter.
The only major release on Wednesday is the ISM index on the non-manufacturing or services sector. Though the services sector is much larger than the manufacturing sector, the data series does not carry the same clout as the manufacturing data. One reason for this is the very size of the services sector. It is so large that extremes offset one-another and broad-based changes are necessary to make a significant impact on the overall index. Another reason the services data is less market moving than the manufacturing information is that the services data series is relatively young (begun in 1997 vs. 1948 for the manufacturing series).
In August's release, the index came in at 55.8, matching July's reading. Like the manufacturing index, any reading over 50.0 indicates growth and August's marked a fifty-third consecutive expansion of activity. The inflation data in the release was tame. The prices index came in at a six-month low of 58.6, down from July's 61.3. For September, the overall index is expected to come in at around 55.0 but some analysts are looking for a stronger reading of up to 57.0.
Traders will also be attending to the minor releases of the day, the Energy Department's weekly oil inventory report and the application index data from Mortgage Bankers Association.
On Thursday, the jobless claims report may get added attention since it heralds the approach of the other heavyweight release of the week, Friday's employment report. The data collection periods for the two reports do not coincide so the claims numbers will have no direct bearing on the employment numbers but the trend in claims is seen as an indicator of what is happening in the labor market. Yesterday's report said that the seasonally adjusted level of initial claims for state unemployment benefits fell by 15,000 last week to 298,000, the lowest reading in nineteen weeks. The four-week moving average, which smoothes out some of the short-term volatility, fell by 9,750 to 311,500. Both readings are down from the average weekly level for the year to date of 317,500.
But continuing claims remained elevated. Yesterday's report said that the level for the week ending September 15 (continuing claims must be at least a week old) rose by 11,000 to 2.551 million. The four-week average slipped by 5,500 to 2.570 million but this was still up from the average weekly level for the year to date of 2.530 million. It is also up from the average reading in 2006 of 2.459 million.
Because initial claims have suffered a net loss of 39,000 in the last four reports, analysts are looking for an upward correction of about 10,000 in this week's figure.
Also out on Thursday is the report on factory orders for August. In the report for July, the Commerce Department said that the seasonally adjusted level of orders rose by 3.7%. The rise was the largest in four months and June's originally reported increase of 0.6% was revised up to 1.0%. A hefty gain had been expected because of the previously released, strong report on durable goods orders.
The volatile category of transportation saw a gain of 11.0% in July, but even excluding them, orders were up by 2.4% following a 0.4% decline in ex-transportation orders in June. Another significant category is orders excluding those in the defense sector because defense needs are not governed by standard market forces. While defense orders soared by 31.5% in July, the biggest jump since last November, orders outside the category still increased by 3.2%. And even if commercial aircraft orders were further excluded from the ex-defense category, orders were still up by 2.7%.
Interested observers also look at the category of ex-defense capital goods minus aircraft since it provides a gauge of core business demand on the manufacturing process. Orders there rose by 1.7% in July following a 0.2% decline in June and a 1.5% decline in May.
The month-to-month readings on orders are notoriously volatile and a weak report is almost a certainty for August. Wednesday's durable goods orders report (durable goods are items meant to last three years or more and represent more than half of all factory orders) showed a 4.9% decline last month, the weakest reading since a 6.1% decline in January. The average monthly change in non-durable goods orders this year has been a gain of 0.6% and if this is plugged into the calculation, then total factory orders will have declined by 2.4% last month. This would be the weakest reading since a 4.2% decline in January.
The most influential release of the week is Friday's employment report for September. August's report was much weaker than analysts had predicted. The Labor Department said the seasonally adjusted level of nonfarm payrolls fell by 4,000, the first decline since August of 2003. Moreover, July's originally reported gain of 92,000 was revised down by 24,000 to 68,000 and June's previously reported gain of 126,000 was revised down by 57,000 to 69,000.
Not all of the news was bearish in August. 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 in the months from February through June, August's reading was still 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 decline in initial jobless claims is one of the reasons analysts are looking for a stronger reading for September. Current estimates are for an expansion in payrolls of about 110,000 and August's decline could be revised to a modest increase. But the unemployment rate is expected to have risen to 4.7%, putting it at its highest level since August of last year.
10:30 AM EDT :
Treasuries are currently up this morning despite economic data that on the whole was somewhat stronger than expected. End of period (month / quarter) portfolio adjusting may be lending support. In the stock market, the indices have fallen into negative territory.
Today's news was not strong enough to sink bonds or lift stocks. In the first release of the day, the Commerce Department reported that the seasonally adjusted, annualized rate of personal income, the fuel for spending, rose in August by 0.3%, the smallest increase since a flat reading (0.0%) in April. Growth in each of the three months prior to last month was 0.5%.
While August's increase was slightly less than the 0.4% that analysts had predicted, today's report said that personal consumption expenditures (PCE or consumer spending) rose by 0.6%, up from July's 0.4% and higher than the 0.4% that had been forecast.
A plus for both markets were tame inflation measures in the report. The PCE price index fell by 0.1%, the first decline since last October, and the price index minus the volatile categories of food and energy rose by just 0.1%.
In a separate report, the Commerce Department said that the seasonally adjusted, annualized pace of construction spending rose last month by 0.2%. Although this was stronger than the decline of 0.1% that had been predicted, revisions pushed July's originally reported decline of 0.4% down to 0.5% and June's previously reported gain of 0.1% was revised to a decline of 0.1%.
As expected, the residential category continued to deteriorate. The spending rate there was down by 1.4% in August following a 1.7% decline in July (originally reported as -1.4%) and a 1.0% decline in June (last reported as -0.4%). August's decline was an eighteenth consecutive monthly contraction and the spending rate was the lowest since December of 2003.
The Chicago branch of the National Association of Purchasing Management (now known nationally as the Institute for Supply Management or ISM) said today that its purchasing managers index came in at 54.2 this month, up from 53.8 in August. Any reading indicates a general expansion in manufacturing activity in the highly-industrialized region relative to the preceding month. September's index was slightly stronger than had been predicted and marks a seventh consecutive growth reading following modest contractions in January and February. The national index from the ISM comes out on Monday.
A detail in the news release that mitigates the negative (for bonds) aspect of the headline number was a sharp deceleration in the growth of prices paid by manufacturers. The prices index fell to 59.0 this month from August's 71.8. The combination of the tame PCE price indices and the Chicago prices paid index helps to ease inflation concerns that were intensified by the Fed rate cut last week.
The last major economic release for this week was the final read on consumer sentiment from the twice-monthly surveys conducted by the University of Michigan. According to news sources, the overall index came in at 83.4, down from the preliminary reading of 83.8 and matching August's final figure as the lowest since August of last year.
The expectations index slipped to 74.1 from the preliminary reading of 74.4 but this was still better than August's final read of 73.7. But the index of current conditions fell to 97.9 from the preliminary 98.3 and August's 98.4. The latest current conditions index is the lowest since September of last year.
Today is the last trading day of the month and quarter and affords portfolio managers with their last opportunity to make adjustments for the periods. Much of this activity may already have been performed but certain index-related funds are rebalanced at this time. Since Treasuries have a fixed lifespan and carry no credit risk, they are used as adjustment instruments for regulating such portfolio characteristics as yield, risk, and return horizon. The process, therefore, usually entails the purchase of Treasuries.
In the stock market, the close out activity may be including some profit-taking since the market has rallied this month. As of yesterday's close, the Dow was up on the month by 4.2%, the Nasdaq by 4.4%, and the S&P 500 by 3.9%.
Another negative for stocks is rising oil prices. With Hurricane Lorenzo currently in the Gulf of Mexico region with its oil production and refining facilities, supply worries are pushing oil futures up. In recent commodities trading, the price of a barrel of light, sweet crude oil for November delivery was up by $0.30 to $83.18.
