5:00 PM EDT :Treasuries began the day in negative territory, and though they pared most of the losses by midday, they fell back again this afternoon and finished deep in the red. The stock indices had a choppy session but the action was all in positive territory and they finished with gains for the day. In late trading, the 10-Year Treasury Note was down by 12/32, raising its yield to 4.68%; the Dow was up by 77.96 points to 14,093.08; and the Nasdaq was up by 33.48 points to 2,805.68.
The centerpiece of today's news was a larger than predicted increase in retail sales last month. The other releases had less of an impact on the markets. The PPI was up sharply last month but this followed a sharp plunge the month before. Moreover, the core index, which excludes the volatile food and energy components, was only up slightly in September.
Business inventories were only slightly higher in August but they remained at historically lean levels. Lastly, the first of two Consumer Sentiment Index readings for the month was weaker than anticipated, though survey results are not always reliable indicators of forthcoming consumer behavior.
The retail sales news, last week's sharp upward revision to August's payroll number, and yesterday's report of a smaller than expected trade deficit in August all point to a firmer economic picture than previously thought and reduces the chances of a rate cut by the Federal Reserve at the next monetary policy meeting. The shifting perspective undercut the bond market and although further rate cuts would be good for stocks as well, the economic implications of the recent data have been good enough so far to sustain progress in the stock market.
Besides the retail sales news, stocks got a boost from better than expected earnings reported by McDonalds and positive analyst guidance on Eastman Kodak and Safeway. Mergers and acquisitions activity also brightened trader sentiment. Software maker, Oracle, has made a bid for BEA Systems and video game maker, Electronic Arts, announced that it was buying BioWare and Pandemic Studios. Such aggressive actions are considered bullish since they seem to reflect confidence in the economy on the part of corporate decision makers.
A negative influence on stocks was another rise in oil prices. The price of a barrel of light, sweet crude for next month delivery rose by $0.61 on the New York Mercantile Exchange to settle at $83.69, a new record high for a front-month contract. High energy prices support the energy sector of the stock market but they are generally bearish since they divert business and consumer spending from other areas of the economy.
Nevertheless, by the end of stock trading, the Dow had gained 0.56% on the day; the S&P 500, 0.48%; and the Nasdaq, 1.21%. The Dow's close was the second highest on record and the S&P's was the third. The Nasdaq's close was the second highest in six-and-a-half years. The price of the 10-Year Treasury Note lost ground on the week, pushing its yield up by 5 basis points. Yield moves inversely to price.
Next week's economic calendar is relatively light but it contains a key inflation indicator, an important report on industrial production, a couple of regional manufacturing indices, a look at housing construction, and the
Federal Reserve's latest summary of the economy.
On Monday, the only major release is the New York Fed's report on the region's manufacturing activity for the month. Last month, the index of general business conditions came in at a four-month low of 14.7. This was down from August's reading of 25.1 and was slightly below the lower end of forecasts between 15.0 and 20.0. Any reading over 0.0 indicates a general increase in activity relative to the preceding month and September's was a twenty-eighth consecutive growth indicator. For October, the index is expected to have edged down to about 14.0.
The New York region is comparatively small. The importance of the NY Fed Index comes from the fact that it provides the first glimpse of manufacturing activity for the month. The index is also seen as a predictor of the more influential index from its regional neighbor, Philadelphia. But the correlation between the two indicators is not actually all that good. In the last four years, the two have moved in the same direction about 60% of the time. The Philadelphia index will be released on Thursday.
On Tuesday, 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 August by 0.2%, a little less than the 0.3% that analysts had predicted but July's originally reported gain of 0.3% was revised up to 0.5%. However, two of the components saw contractions in output in August. Manufacturing output fell by 0.3%, the first decline in six months and the largest decline in seven months. Mining output declined by 0.6%, also the largest drop since January. It was only in the volatile category of utilities that output increased. It rose by 5.3%, the biggest jump since last February.
There was a somewhat worrisome inflation indicator in the report. Capacity utilization, the ratio of output to potential output, was 82.2% in August. Not only was this higher than the 82.0% that analysts expected, but July's originally reported 81.9% was also revised up to 82.2%. The last two readings were the highest since August of last year. High utilization means less slack in the production process which can lead to bottlenecks. When demand cannot be met, prices rise.
But a closer look at the utilization data revealed a less dire picture. Once again, the utilities category was the central reason for the high reading. Utilization there rose from 83.6% to 87.9% while the largest category, manufacturing, saw a decline to 80.7% from 81.0% and mining saw a decline to 90.2% from 90.8%.
For September, overall industrial output is expected to have risen by about 0.1%. Capacity utilization is expected to have remained at 82.2%.
Wednesday brings the Consumer Price Index, a gauge of inflation at the retail level. It fell in August by 0.1%, the first contraction since last October. Energy prices constituted the largest component contributing to August's decline with its index falling by 3.2%. Excluding the volatile categories of food and energy, the so-called core index was up by an in-trend and anticipated 0.2%. Food was an upward pressure on the headline number with an index increase of 0.4%.
For September, following two months of virtually no change (01% and -0.1%) a rebound of about 0.2% is anticipated for the overall index. The core index is expected to have risen by 0.2% for a fourth consecutive month.
The report on housing starts is also slated for Wednesday. In August's release, the Commerce Department said that the seasonally adjusted, annualized pace of starts fell by 2.6% to 1.331 million, the lowest rate since June of 1995. Furthermore, July's originally reported rate of 1.381 million was trimmed by 1.0% to 1.367%. The report also said that the rate of building permit issuance, a gauge of near-term starts, also declined, losing 5.9% to 1.307 million. Though this has subsequently been revised to a 4.8% decline to 1.322 million, the pace was still the lowest since June of 1995.
For September, the starts pace is predicted to have fallen another 3.5% to 1.285 million and the rate of permit issuance is expected to have declined once again.
On Wednesday afternoon, the Federal Reserve will release its latest edition of its Beige Book. The Beige Book, so named for the color of the hard copy cover, is an anecdotal summary of economic conditions in the twelve Fed regions and the monetary policy committee uses it as one of its background resources during policy deliberations. The next committee meeting is slated for the 30th and 31st of the month.
The summary is often overlooked because other reports have already revealed the economic situation, but observers will be closely scrutinizing Wednesday's release for any specific emphasis it might place on economic, inflation, and financial market issues. In August, the Fed cut the interest rate it charges to banks for loans (the discount rate). Then, in September it cut the rate again and also the Fed's target rate for short-term loans between banks (the fed funds rate).
These actions were made in an effort to prevent tightening credit conditions from choking off the economy. But they have raised some inflation concerns since prior to the cuts, the Fed had maintained a slightly hawkish stance on rates because of concerns that inflation might not subside in coming quarters as anticipated. Fed watchers are currently not sure if the policy committee will ease rates again at the end of the month.
On Thursday, the jobless claims report will highlight the employment situation. In yesterday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits fell by 12,000 last week to 308,000. A decline of some magnitude had been anticipated due to a larger than expected increase the week before (originally reported as a gain of 16,000 but revised to an increase of 20,000 in yesterday's report). The four-week moving average, which smoothes out some of the week-to-week volatility, declined by just 3,000 to 310,250. The average weekly claims level for the year to date is 317,375. As a rule of thumb, any reading below 400,000 is considered an indication that hiring is outpacing layoffs.
The report said that the level of continuing claims for the week ending September 29 (continuing claims must be at least a week old) fell by 15,000 to 2.521 million, the lowest reading in fifteen weeks. The four-week average fell by 19,000 to 2,535,500. The average weekly level of continuing claims for the year-to-date is 2,529,949.
The latest decline in initial claims was somewhat larger than expected so analysts are looking for a slight increase in last week's level as the recent volatility continues to settle out.
A little later on Thursday morning, the Conference Board, an independent research firm, will release its Index of Leading Economic Indicators for September. The data series has been mildly bearish throughout the year with five contraction readings in the first eight months. But the last report said that within the previous six months (March to August), the index was up by 0.5%. It fell by 0.6% in August following a 0.7% increase in July. Indicators such as a decline in initial jobless claims and a rise in stocks point to a positive index reading for September. Analysts are predicting an increase of about 0.4%.
The final economic release of the week comes at noon on Thursday when the Philadelphia branch of the Federal Reserve publishes its index data on the region's manufacturing activity for this month. In September's release the index came in at 10.9, up from a flat reading (0.0) in August and the second best reading (after an 18.0 last June) since August of last year. Forecasters had predicted a reading of only about 2.0. As is the case with the New York Fed index, any reading over 0.0 indicates a general expansion of activity relative to the preceding month. A slightly weaker growth reading of about 8.0 is predicted for October.
10:30 AM EDT :
The economic news of the day was mixed but the report on retail sales has been the focus of attention, bearing down on Treasuries and giving stocks a modest boost.
The Commerce Department reported that the seasonally adjusted level of retail sales rose in September by 0.6% after a 0.3% increase in August. The gain was larger than the consensus estimate of 0.2% but some forecasts were calling for an increase of about 0.5%. Auto sales, a volatile category that makes up about a quarter of all sales, were up by 1.2% after a 3.3% increase in August. Excluding the category, sales were up by 0.4% following a 0.4% decline.
For obvious reasons, another volatile category is sales at gasoline stations. Sales there were up by 2.0% in September following a 2.6% decline the month before. Excluding both the auto and gas station categories, sales were up by 0.2% following a 0.1% decline in August.
Other large gaining categories were nonstore retailers (up by 1.1%), health and personal care stores (up by 1.0%), electronics and appliance stores (up by 0.9%), and food and beverage stores (up by 0.8%). Building material and garden supply stores saw a nominal gain of 0.1%. Declines were posted in the categories of miscellaneous store retailers (down by 1.3%); sporting goods, hobby, book, and music stores (down by 0.7%), furniture and home furnishings stores (down by 0.6%); clothing and clothing accessories stores (down by 0.4%). General merchandise stores saw a decline of 0.1%).
The major inflation news of the day was mixed but the headline surprise is weighing against both stocks and bonds. The Labor Department reported that its Producer Price Index, a gauge of inflation at the wholesale level, rose in September by 1.1%, the largest increase since February. Though a bounce was expected after August's 1.4% oil-related plunge (the largest since October of last year), last month's increase was larger than the 0.5% that analysts had predicted. On a year-over-year basis, the index was up by 4.4%, the largest Y/Y margin since June of 2006.
But energy was again a major factor in the overall move. The energy index rose by 4.1% in September, the biggest increase since last November. This followed a 6.6% decline in August, the largest drop since April of 2003. Foods, another volatile category, also jumped more than expected last month. The index for that category, after four months of declines, rose by 1.5%, the largest increase since March.
The inflation news was not all bad. Excluding foods and energy, the so-called core index rose by just 0.1% in September. On a year-over-year basis, the core index was up by 2.0%. This is still somewhat elevated but an improvement from August's Y/Y margin of 2.2% and July's 2.3%. Price pressures further down the production pipeline were also relatively tame. The index for prices at the intermediate stage of production rose by 0.4% last month following a 1.2% decline in August. At the initial, or crude, stage of production, the price index rose by 0.1% following a 3.0% decline.
The report on business inventories was also released this morning and though it was a little softer than anticipated, the news was not all that surprising. The Commerce Department said the seasonally adjusted level of business inventories rose by 0.1% in August, the weakest gain since a flat (0.0%) reading in March. Sales fell by 0.4% due to a 1.6% decline in the manufacturing sector.
This combination raised the inventory-to-sales (I/S) ratio up to 1.27 from July's 1.26. The I/S ratio is the value of inventories divided by the values of sales for the month. The result shows how many months it would take to entirely deplete the stocks on hand at the prevailing sales pace. A low ratio means pressure is high on the production process to replenish supplies. Though August's ratio was up from July's, it was
still not far from the record low of 1.25.
In the final economic release of the week, news sources report that the preliminary index on consumer sentiment for the month from the University of Michigan came in at 82.0, down from September's final reading of 83.4 and the weakest sentiment indicator since August of last year. Forecasters had predicted a more optimistic reading of about 84.0. Some improvement was seen in the index of current conditions. It came in at 98.2 for the early part of October, up from September's final reading of 97.9. But the expectations index slipped to 71.6 from 74.1.
