5:00 PM EST :Stocks gyrated through large swings today and Treasuries were thrown around in the wake. In late trading, the 10-Year Treasury Note was down by 7/32, raising its yield to 4.17%; the Dow was up by 66.74 points to 13,176.79; and the Nasdaq was up by 18.73 points to 2,637.24.
Today's major market-related news release favored bonds in its role in supporting further rate cuts to stimulate economic activity. Industrial production unexpectedly fell last month by the largest amount in nine months. A welcome inflation item within the report was a drop in capacity utilization. It was also the biggest drop in nine months and the level was the lowest in five months.
The news was not helpful for stocks nor was a rise in oil prices. The price of a barrel of light, sweet crude oil for next month delivery rose by $1.82 on the New York Mercantile Exchange to settle at $95.25, the highest close since last Friday and was not too far from the record closing high of $96.70 posted on Tuesday of last week.
And sentiment in the stock market continues to suffer from concerns about the credit situation. But following losses in the last two days, traders ultimately leaned toward the buy side by the end of today's session. The Dow, which had been up by about 100 points and down by about 60 points, finished the day with a 0.51% gain. The S&P 500 rose by 0.52% and the Nasdaq, by 0.72%.
Despite sizeable losses on Wednesday and Thursday, all three indices made progress for the week. The Dow gained 1.03% while both the S&P 500 and the Nasdaq rose by 0.35%. The gain this week represents a partial recovery from heavy losses suffered last week and by additional losses for the Dow and S&P 500 the week before.
The bond market also gained this week with the yield of the benchmark 10-Year Note falling by 5 basis points (price moves inversely to yield). This is the third consecutive weekly yield decline for a combined total of 23 basis points. Four weeks ago, the yield only gained 1 basis point. In the week before that (the week ending October 19), the yield fell by 29 basis points. And even though the yield rose today, the close was still the second lowest since September 22, 2005.
Next week has a light economic release schedule. There are no major reports slated for Monday but Tuesday brings the report on housing starts for last month. In the last report, the Commerce Department said that the seasonally adjusted, annualized rate of new housing starts fell in September by 10.2% to 1.191 million. The pace was much lower than analyst predictions of 1.285 million. The decline was the largest in eight months and the start rate was the lowest since March of 1993.
Not only was the starts data weaker than expected, but the outlook for the near-term is also bleaker. The report said that the rate of building permit issuance fell from 1.322 million to 1.226 million. While September's pace has subsequently been revised to 1.261 million, it is still the lowest since March of 1995.
For October, forecasters predict that the rate of starts fell by 1.8% to 1.17 million. A steep decline in the rate of building permit issuance to about 1.190 million is anticipated.
Wednesday will be busy since traders from all markets will be positioning for a long weekend despite the fact that the market will be open on Friday. One strategy for those who will be sidelined is to shift into the relative safety of Treasuries to avoid event risk while they are gone.
But bond trading will quickly thin on Wednesday as the Securities Industry and Financial Markets Association (formerly the Bond Market Association) has recommended an early close (2:00 PM Eastern instead of 3:00). Light trading volumes mean less liquidity and that can lead to erratic price moves.
On Wednesday morning, the Labor Department will release its weekly report on jobless claims. In yesterday's report, observers were surprised by an unexpected, 20,000 drop in the seasonally adjusted level of initial claims for state unemployment benefits. At 339,000, the level tied with the week of October 13 as the highest since mid-April.
However, the four-week moving average, which smoothes out some of the short-term volatility, was unchanged last week at 330,000. For the year to date, the weekly average initial claims level is 319,000.
The report said that continuing claims for the week ending November 3 (continuing claims must be at least a week old) fell by 7,000 to 2.568 million. The four-week average rose by 11,000 to 2,562,250 and the weekly average for the year to date is 2,532,614.
After last week's drop, a moderate rebound in this week's initial claims figure would not be unexpected.
A little later on Wednesday, the Conference Board, an independent research firm, will release its Index of Leading Economic Indicators for last month. The index rose by 0.3% in September, slightly lower than forecasts for a 0.4% increase. Moreover, August's originally reported decline of 0.6% was revised to a drop of 0.8%.
The largest contributors to the rise in September were slower vendor performance (a sign of increased demand), rising stock prices (higher wealth levels), and a projected rise in manufacturers' new orders for nondefense capital goods after a sharp decline in August.
The negative components were the decline in building permit issuance and a drop in the spread between the effective fed funds rate and the yield of the 10-Year Treasury Note. The average monthly interest rate spread has been negative -- a bearish economic indicator -- since July of 2006 and September's was the most negative in four months.
The steep losses in the stock market and a rise in initial jobless claims point to a decline in October's index. Current forecasts call for a decline of 0.4%.
The final read on consumer sentiment for the month from the University of Michigan will also be released on Wednesday morning. In last Friday's preliminary release, the overall sentiment index came in at 75.0, down sharply from October's final reading of 80.9 and the lowest reading in two years. The expectations index fell to 64.7 from 70.1 and the index of current conditions fell to 91.0 from 97.6. The drop in optimism reflected rising energy prices, falling stocks, and declining home values. With little news since then to boost optimism, the final reading is expected to be little changed.
Two minor releases will also get some attention on Wednesday. These are the Mortgage Bankers Association of America's index data on mortgage applications for this week and the weekly report on oil inventories from the Energy Department.
The U.S. markets will be closed on Thursday in observance of Thanksgiving. The markets are open on Friday but the bond market will once again be closing early. There are no major economic releases scheduled. The combination of thin trading volumes and no economic guidance could make for some turbulence; though barring an unforeseen influence, traders will attempt to keep the markets on an even keel.
10:30 AM EST :
The first impulse of bond traders this morning was to cash in on some of yesterday's hefty gains and stock traders were inclined to pick up bargains after market declines in the last two days. But the economic news released this morning was more bearish than expected, pressuring stocks and lending support for bonds.
In recent trading, short-term Treasuries were up and the longer-dated maturities had pared earlier losses and were near unchanged levels. The stock indices, after opening with gains, were all in negative territory with the Nasdaq leading the way.
In today's only major economic release, the Federal Reserve reported that its index of industrial production -- a gauge of output from the nation's factories, mines, and utilities -- fell last month by 0.5%.
Although data revisions revealed slightly more strength in August and September (0.1% and 0.2% respective increases instead of 0.0% and 0.1%); Octobers decline, the largest since last January, was much weaker than analysts' predictions of a 0.1% increase.
And the weakness was broad-based. The utilities category is usually the most volatile due to weather and, as might be expected, it showed the largest change with a decline of 1.6%. But the largest category, manufacturing, saw a 0.4% drop and mining experienced a decline of 0.6%.
The report said that capacity utilization, the ratio of output to potential output, fell to 81.7% from 82.2% (originally reported as 82.1%). This was the lowest reading since last May. The figure indicates that there is more slack in the production process. Significantly, utilization in the manufacturing sector fell from 80.5% to 80.1%, also the lowest reading since May. More slack translates to a more favorable inflation situation since high utilization can lead to bottlenecks that prevent demand from being met and thereby pushing up prices.
Another negative for stock is a rise in oil prices this morning. In recent trading, the price of a barrel of crude oil for next month delivery was up by $1.67 on the New York Mercantile Exchange to $95.10. High energy costs mean businesses and consumers have less to spend in other areas of the economy.
Stock traders were also dismayed by negative earnings guidance issued by FedEx and Starbucks.
Traders in both markets are looking ahead to next week, which is likely to contain volatile action due to a light economic calendar and holiday disruption. The releases are expected to favor bonds, however. Tuesday's report on housing starts is predicted to show continued weakness in the sector. Thursday's release of the Index of Leading Economic Indicators for last month is expected to have contracted. And the final index on consumer sentiment (also a Wednesday release) is not expected to reveal any improvement from the two-year low posted earlier this month.
The markets will be closed next Thursday in observance of Thanksgiving and there are no major economic releases slated for Friday. Trading volumes are expected to be light around the holiday, leaving prices vulnerable to erratic moves because of the reduced liquidity.
