5:00 PM EDT :
Stocks had a volatile session today but the indices ultimately managed to finish in positive territory. Treasuries maintained a positive bias after early losses but wound up off their best levels of the day. In late trading, the 10-Year Treasury Note was up by 7/32, lowering its yield to 4.32%; the Dow was up by 27.23 points to 13,595.10; and the Nasdaq was up by 15.55 points to 2,810.38.
The economic news released today would normally have given stocks a big lift and weighed heavily against bonds. The increase in nonfarm payrolls last month was much stronger than predicted and factory orders for September actually rose instead of falling as forecast.
The news follows Wednesday's stronger than expected report on gross domestic product for the third quarter (3.9% growth instead of the predicted 3.1%) and a cut to short-term interest rates by the Fed. All of these items are stock-friendly but the market struggled this week as signs of more turmoil in credit flows clouded trader sentiment.
An analyst's warning on Citigroup stirred credit concerns that had already been roused last week by a dismal earnings report from Merrill Lynch. A huge short-term infusion of cash to the banking system yesterday by the Federal Reserve also unnerved traders. And today, a report that Merrill Lynch might be trying to hide additional losses fueled more anxiety.
Another negative for stocks today was a sharp increase in oil futures. The price of a barrel of light, sweet crude oil for next month delivery rose by $2.44 on the New York Mercantile Exchange to close at a new record high of $95.93. Though oil companies are reportedly reducing their margins and OPEC's latest increase in production limits took effect yesterday, the high prices threaten the economy by reducing
the amount of money businesses and consumers have to spend on other things.
But Merrill Lynch today denied allegations it had made deceptive hedge fund deals and news that Citigroup's board of directors was holding an emergency meeting this weekend seemed to bolster some trader confidence.
During today's session the Dow was down by as much as 121.85 points or 0.90% and up by as much as 65.03 points or 0.48%. But by the end of the day, it had gained 0.20%. The S&P 500 had been down by 1.05% and up by 0.31% but finished with a gain of just 0.08%. The Nasdaq was down by 0.75% at its low and up by 0.79% at its high and finished with a gain of 0.56%.
For the week, the Dow lost 211.60 points or 1.53% and the S&P 500 lost 1.67%. But the Nasdaq managed to post a small gain of 0.22% for the week. All three indices posted gains last week of over 2.00%. Treasuries made headway this week with the yield of the benchmark 10-Year Note falling by 8 basis points (yield moves inversely to price. It rose last week by just 1 basis point after plunging by 29 basis points in the week ending October 19.
Next week's events calendar includes the influx of new supply which may pressure the bond market. The slate of economic releases begins with Monday's index data for last month from the Institute for Supply Management (ISM) on the non-manufacturing, or services, sector. In September's release the overall index came in at 54.8, down from August's reading of 55.8. Though the reading was the lowest in six months, it still reflected a general expansion of activity relative to the preceding month (any reading over 50.0) and was the fifty-fourth consecutive growth indicator. Moreover, the reading was in-line with most predictions.
A negative for the markets was a pick-up in the prices index from August's 58.6 to 66.1. Because of the recent Fed rate cuts, traders are particularly sensitive to the threat of inflation.
For October, the services index is expected to have slipped once again to about 54.0. The manufacturing index, released yesterday, showed almost no change in activity last month with an index reading of 50.9, the lowest in seven months. A relatively weak services index would give backing to speculation that overall economic growth is slowing down.
However, though the services sector is much larger than the manufacturing sector, the services data 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 is that the services data series is relatively young (begun in 1997 vs. 1948 for the manufacturing series).
There are no major releases scheduled for Tuesday. On Wednesday, the Labor Department will release its preliminary report on productivity for the third quarter. The final report for the second quarter indicated that the seasonally adjusted, annualized rate of nonfarm business productivity (output per worker per hour) rose by 2.6%. This was up from the preliminary reading of 1.8% and was the strongest gain in seven quarters. Productivity rose by just 0.7% in the first quarter.
The upward revision to productivity in the third quarter final report had the effect of reducing unit labor costs (ULC) from the originally reported gain of 2.1% to a gain of just 1.4%, the smallest in four quarters.
Prior to last Wednesday's release of the initial report on gross domestic product (GDP) for the third quarter, forecasters were predicting a slight reduction in productivity growth to about 2.3%. But this was based on the assumption that GDP declined to about 3.1% from the second quarter's 3.5%. Instead, the report showed GDP up by 3.9%. Consequently, productivity was probably better than the early estimates.
Strong productivity is usually a positive influence on the markets. The increased output per hour is seen by stock traders as a bullish economic development: more efficiency and therefore better corporate earnings. And the efficiency often translates into reduced labor costs per unit of output which has a salutary effect on inflation pressures -- a plus for both stocks and bonds.
Also out on Wednesday is the report on wholesale inventories for September. The release is considered second-tier since the wholesale category is only one part of the inventory picture and the data is somewhat dated. In August's report, the Commerce Department said the seasonally adjusted level of inventories rose by 0.1%, down from a 0.2% increase in July and the weakest reading since a 0.3% decline posted last December. The report said that sales picked up by 0.4% following a 0.2% rise in July.
This combination produced an inventory-to-sales (I/S) ratio of 1.11, tying the previous three month's readings as the lowest on record. The I/S ratio is the value of stocks on hand at the end of a month divided by the value of sales for the month. It indicates how many months it would take to entirely deplete existing inventory at the prevailing sales pace.
While lean inventories maintain pressure to replenish stocks, the inventory increases have been soft in the last three report months (0.3% in June, 0.2% in July, and 0.1% in August). In addition, the wholesale report does not include the inventory from the manufacturing and retail sectors. The business inventories report for September, which includes all three sectors, will be released on the 14th.
Besides the productivity and inventories reports, traders will also have a couple of minor, weekly reports to consider. These are the oil inventory report from the Energy Department and the application index data from the Mortgage Bankers Association.
The first influx of new supply (other than the weekly issuance of Treasury Bills -- securities with a maturity smaller than a year) comes on Wednesday as the Treasury will be auctioning a new issue of 10-Year Notes. On the current issuance schedule, there is an initial issue each quarter that is followed a month later by a sale of an additional amount of the initial issue.
The last initial auction in August had mixed results. Bids exceeded the $13 billion offer amount by 2.30 to 1, the same bid-to-cover ratio as in the last initial offering in May. Non-competitive bids, a gauge of individual investor demand, was strong, totaling $155 million, the highest amount in any 10-year offering (initial or reopening) since May of 2004.
But foreign demand was on the weak side. Indirect competitive bids, which include those from foreign central banks, garnered 31.7% of the issue. This was down from last May's award portion of 44.1% and below the 38.6% average of the twelve initial offerings prior to August's.
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.
On Thursday, the only major release is the jobless claims report. In yesterday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits fell last week by 6,000 to 327,000. The previous week's originally reported level of 331,000 was revised up slightly to 333,000. The level has now fallen by 12,000 in the last two weeks but this follows a 30,000 gain the week before that.
The four-week moving average, which smoothes out some of this week-to-week volatility, edged up by 1,750 to 327,000, the highest reading in six months. The average weekly reading for the year to date is 318,488. For all of 2006 it was 312,962. Despite the general increase this year, any figure below 400,000 is an indication that hiring is outpacing layoffs.
The report said that continuing claims for the week ending October 20 (continuing claims must be at least a week old) rose by 65,000 to 2.588 million, the highest reading in seven weeks. The four-week average rose by 13,000 to 2,537,500, the highest reading in four weeks. For the year to date, the average weekly continuing claims figure has been 2.531 million. For all of 2006 it was 2.459 million.
More supply will be hitting the market on Thursday as the Treasury will be auctioning $5 billion in 30-Year Bonds. The issue is actually a reopening of an initial offering in August but that issue, for some reason, had a maturity of 29-years and 9-months. This means next week's issue will have an actual maturity of 29-years and 6-months. It will have a face value of $5 billion, the same size as the last reopening offering in May, which had a maturity of 29-years and 9-months.
May's offering was poorly received. The bid-to-cover ratio was 1.97 to 1, a slightly higher bid-to-cover ratio than the 1.77 seen in the last reopening in August of 2006 but that offering was twice as large ($10 billion). Non-competitive bids totaled just $2.5 million, down from $19 million in the previous reopening. Even accounting for the difference in issue size, this was a much weaker bid. And foreign demand was feeble. Indirect competitive bids garnered just 10.4% of the issue. In August's reopening, the award percentage was 32.7%.
Two trade-related reports are slated for Friday morning. These are the report on international trade for September and the report on import / export prices for October. In August's trade report, the Commerce Department said the seasonally adjusted value of imports exceeded that of exports by $57.6 billion in August. The deficit was the smallest since last January and was considerably narrower than the $59.0B that analysts had predicted. July's originally reported deficit of $59.2 billion was also revised down slightly to $59.0 billion. The report said that the value of imports fell by 0.4% in August from July's record high while that of exports rose by 0.4% to a new record high.
For September, a slightly wider gap of about $58.0 billion is forecast. Net exports constitute a component of gross domestic product so a deeper deficit would subtract from the calculation and a narrower deficit would add to it.
The report on import and export prices gives some indication of inflation pressures stemming from the trade situation. Most attention is given to the import sector. In the last report, the Labor Department said its index of import prices rose in September by 1.0%.
An increase had been anticipated since oil prices spiked up that month. The report showed a 5.4% jump in the price index for imported petroleum products following a 1.1% decline in July. But excluding that category, ex-oil import prices fell by 0.2% in September, the largest decline in eleven months. This followed a 0.1% decline in July. Since oil prices rose again last month, the overall import index is expected to have risen again by about 0.9%.
The last report said that export prices were up by 0.3% in September, the largest increase since June. But the rise was attributable to a 4.1% jump in agricultural product prices, the largest since last November. Excluding the volatile category, there was no change in export prices (0.0%). This follows a 0.1% ex-agriculture increase in August and a 0.1% decline in July.
And the final release of the week is the preliminary read on consumer sentiment from the twice monthly surveys conducted by the University of Michigan. In the final read for October, the overall sentiment index came in at a seventeen month low of 80.0, down from the preliminary reading of 82.0 and from September's final reading of 83.4.
Pessimism prevailed in the outlook for the future and the assessment of current conditions. The expectations index fell to 70.1 from the preliminary 71.6 and September's 74.1. The index of current conditions fell to 97.6 from the preliminary 98.2 and September's 97.9. The expectations index was the lowest in fourteen months and the current conditions index was the lowest in thirteen. Little change from October's numbers is predicted in the preliminary report for November.
10:30 AM EDT :
Treasuries began the day underwater as the employment report for last month was stronger than expected. Stocks initially rose on the news, but the negative sentiment arising from credit market concerns that weighed against stocks yesterday reemerged and the indices fell into the red. The retreat from risk generated a flow into government securities (Treasuries) and bonds are currently ahead, despite the day's economic data.
In the major release of the day, the Labor Department reported that the seasonally adjusted level of nonfarm payrolls rose in October by 166,000. The gain was much higher than the 90,000 that analysts were predicting and was the biggest jump since last May when payrolls increased by 188,000. The downward revision to September's originally reported gain of 110,000 to 96,000 was not much compensation to those who were looking for a weaker gain in October.
The report showed that last month's gains came in the services sector. The biggest increase came in the category of professional and business services where payrolls were up by 65,000. Leisure and hospitality saw a payroll gain of 56,000, the twenty-fourth consecutive increase. And education and health services payrolls grew for a thirty-seventh consecutive month, adding 43,000 in October. The only services categories that contracted were retail sales (down by 21,500) and information (down by 3,000). Government payrolls rose by 36,000 last month.
The goods producing sector was a different story. While payrolls in natural resources and mining grew by 2,000, manufacturing payrolls shrank by 21,000, a sixteenth consecutive decline. Construction payrolls fell by 5,000.
As expected, the report said that the unemployment rate held at 4.7% for a second month. Though the rate is the highest since August of last year, it is still relatively low. A positive for both markets was an increase in average hourly earnings of just 0.2%, the smallest increase since last April.
The second and final economic release of the day was also more bullish than expected. The Commerce Department reported that the seasonally adjusted level of factory orders rose in September by 0.2%. Many forecasters had predicted a decline of about 0.8% because of last week's durable goods orders report which indicated a decline in that category of 1.7%. What they were not counting on was a 2.1% surge in the nondurable category, the largest increase since last March. Factory orders fell in August by 3.5% (revised from -3.3%).
Excluding the volatile transportation category, orders were up by 1.4% as the order level in transportation fell by 6.2%. Orders in the defense sector are not governed by standard market forces so orders excluding the sector are seen as a better representation of underlying demand on production. Ex-defense orders were up by 1.3% as defense saw a 33.9% decline due primarily to a 37.2% drop in aircraft orders.
In the category of ex-defense capital goods minus aircraft, orders were up by 0.6%, a third consecutive monthly increase. The category is seen as a measure of core business demand.
But traders are currently concentrating on news reported by the Wall Street Journal that Merrill Lynch made deals with hedge funds that might have been intended to temporarily hide losses associated with its mortgage related holdings. The news put shares of Merrill into a dive and kept the credit market situation in the spotlight.
Another negative for stocks is a rise in oil prices. The front month crude oil contract retreated yesterday and in early trading today, but in recent activity, the price had turned higher again and was up by $1.06 per
barrel to $94.55.
