5:00 PM EST :

The inflation news released today was not supportive for either stocks or bonds, though bonds were in a better technical position to absorb the impact. Consequently, Treasuries were moderately lower on the day while the stock indices suffered deeper losses. In late trading, the 10-Year Treasury Note was down by 9/32, raising its yield to 4.24%; the Dow was down by 178.11 points to 13,339.85; and the Nasdaq was down by 32.75 points to 2,635.74.

A key inflation indicator, the Consumer Price Index, rose in November by the largest amount in over two years. Though the increase at the core level (ex-food and energy) was not as extreme, it was larger than predicted. Inflation weakens dollar-denominated investments. It also weakens the case for aggressive rate cutting by the Federal Reserve since economic stimulation also promotes inflation.

In the other major release of the day, industrial production rose a little more than expected last month though the report indicated a larger contraction in October than was originally stated. Capacity utilization rose slightly but from a downwardly revised October reading that made November's actual figure lower than analysts had predicted.

A drop in oil futures today failed to provide support for stocks. A barrel of light, sweet crude for next month delivery fell by $0.98 on the New York Mercantile Exchange to settle at $91.27. This followed a loss yesterday of $2.14, but for the week, the price rose by $2.99.

By the end of stock trading, the Dow had lost 1.32% for the day; the S&P 500, 1.37%; and the Nasdaq, 1.23%. After two week's of strong advances, the indices took sizeable hits this week with the Dow falling by 285.73 points or 2.10%. The S&P 500 lost 2.44% on the week and the Nasdaq lost 2.60%.

The drop in stocks this week did not translate into gains for Treasuries as the yield of the benchmark 10-Year Note gained 13 basis since last Friday's close (yield moves inversely to price). This followed a 17 basis point rise last week and today's closing yield was the highest in a month.

Next week's economic calendar is somewhat lighter than this week's. It kicks off on Monday with the report on the current account balance for the third quarter. The balance is the difference between dollars leaving and entering the country and includes investment income and unilateral transfers (foreign aid and government pensions sent abroad) so the report is broader than the monthly reports on international trade of goods and services.

In the report for the second quarter, the Commerce Department said the balance was a deficit of $190.8 billion. While this was a smaller deficit than the $192.0 billion analysts had predicted, the originally reported first quarter gap of $192.6 billion was revised to a wider deficit of $197.1 billion. For the third quarter, a narrower gap of about $183.0 billion is anticipated. This would be a bullish development and favor stocks, but the positive implications for the value of the dollar would also benefit the bond market.

Also on Monday, the New York branch of the Federal Reserve will publish its index data on the manufacturing sector of the region. Last month, the overall index came in at 27.37, down slightly from October's 28.75. Any reading over 0.0 indicates a general expansion of activity relative to the month before. November's index represented a thirtieth consecutive monthly expansion. Another expansion reading of about 21.0 is anticipated for this month.

But the New York region is comparatively small though the index provides the first look at the manufacturing sector 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.

On Tuesday, the only major release is the report on housing starts for last month. In October's report, the Commerce Department said that the seasonally adjusted, annualized rate of new home construction rose by 3.0% to 1.229 million from September's 1.193 million.

The acceleration surprised forecasters who were looking for a decline to about 1.170 million, but the starts data is notoriously volatile due to such variables as weather and other regionally particular influences. Gains were posted in most areas of the country. The Midwest saw a gain of 21.1%; the Northeast, 8.5%; and the West, 5.8%. The largest regional contributor, the South, stood apart with a decline in its starts pace of 4.6%.

Though the starts rate increased, the pace was still the second lowest since March of 1993. Moreover, the rate of building permit issuance (a gauge of near-term starts) fell by 6.6% to 1.178 million. This was subsequently revised slightly to 1.170 million, a fifth consecutive decline and the lowest reading since June of 1993.

Continued deterioration in the sector is anticipated to be illustrated in November's report. Most predictions call for a 4.0% drop in the rate of starts to 1.180 million. Another decline in the permit issuance rate is also expected.

There are no major releases slated for Wednesday, but a couple of minor ones may have an impact on the markets. The Mortgage Bankers Association of America will release its index data on mortgage applications for this week. Traders are eager to see if the unusually bullish readings of the last couple of weeks were flukes. The index rose moderately last week following a huge upward spike the week before. The latest reading was the highest in two-and-a-half years.

The other minor release on Wednesday is the report on oil inventories for this week. Inventories of crude oil have fallen in eight of the last ten weeks, though gasoline inventories have risen in eight of the last ten. Distillate inventories, which include diesel and heating fuel, have fallen in six of the last ten weeks.

On Thursday, the jobless claims report will highlight 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 7,000 to 333,000 from an upwardly revised 340,000 (originally reported as 338,000) in the previous week. Analysts had been looking for a slight rise since the data series had been swinging back and forth for five weeks and the level in the week ending December 1 had fallen from the preceding week.

But the four-week moving average, which smoothes out some of the short-term volatility, fell by just 2,000 last week to 338,750, the second highest level since October of last year. The average weekly claims reading for the year to date has been 320,653. For all of 2006 it was 312,962.

The report said that continuing claims in the week of December 1 (continuing claims must be at least a week old) rose by 38,000 to 2.639 million. This was the third highest reading since December of last year. The four-week average rose by 18,750 to 2,613,250, the highest reading since last January. The average weekly continuing claims reading for the year to date has been 2,539,250. For all of 2006 it was 2,458,519.

After two week's of declines, a slight increase in the initial claims level is anticipated for this week.

Another early release on Thursday is the final report on gross domestic product (GDP) for the third 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.

In last month's preliminary report, the Commerce Department said that GDP grew by 4.9% in the third quarter, up sharply from the 3.9% reported in October's advance estimate and the 3.8% reading in the second quarter. In fact, it was the highest growth figure since the third quarter of 2003.

The improvement was primarily due to a smaller trade deficit than previously assumed and increased business investment. The strength of the economy is all the more impressive given that the weak residential housing sector subtracted 1.03% from the GDP calculations.

Inflation measures in the report remained soft. The price index rose by 0.9%. While this was up slightly from the advance report of 0.8%, it was still the lowest reading since the second quarter of 1998.

Though the latest report on international trade showed slightly deeper monthly deficits in the July through September period, analysts are predicting that the final GDP figure will not deviate significantly from the preliminary reading.

A little later on Thursday, the Conference Board, an independent research firm, will release its Index of Leading Economic Indicators. In October, the index fell by 0.5%. Adding to the gloomy economic outlook were revisions to past data that changed September's originally reported rise of 0.3% to a gain of just 0.1% and August's previously reported decline of 0.8% to a drop of 0.9%.

Only three of the ten index components saw improvements in October: stock prices, the money supply, and manufacturers' new orders for consumer goods. Of the negative contributors, the three largest were the decline in the rate of building permit issuance, a rise in jobless claims, and a decline in the index of consumer expectations.

Despite a sizeable rebound at the end of the month, stocks were mostly down in November; the consumer confidence data (also from the Conference Board) showed a steep drop in the index of consumer expectations to its lowest level in four years; and the rate of building permit issuance is expected to have fallen again. Consequently, another contraction is anticipated for November's leading indicators index. However, analysts predict a smaller decline of 0.1%.

At noon on Thursday, the Philadelphia branch of the Federal Reserve will release its index on the region's manufacturing sector. Last month, the index came in at 8.2, up slightly from October's 6.8. Like the New York index, any reading above 0.0 indicates growth for the month. Activity stalled in August with a reading of 0.0 but the last contraction reading was in December of last year (-2.3). For this month, a reading of between 7.0 and 8.0 is predicted.

On Friday, the report on personal income and spending will be released. In October's report, the Commerce Department said the seasonally adjusted, annualized level of personal income, the fuel for consumer spending, rose by just 0.2% following a 0.4% rise in September. The increase was half the 0.4% that forecasters had predicted. Personal consumption expenditures (spending) also rose by 0.2%. This followed a 0.3% rise in September and was slightly below the 0.3% analysts were expecting.

Rebounds in both categories are predicted for November's report. Recent projections called for 0.5% increases in both income and spending, but yesterday's stronger than expected retail sales report suggests that the spending prediction may be too low.

The last major economic release of the week is the final read on consumer sentiment for the month from the twice-monthly surveys conducted by the University of Michigan. In the preliminary report, released last Friday, the overall sentiment index came in at 74.5, the lowest reading since October of 2005. The index of current conditions actually rose to 92.1 from November's 91.5, but projections for the future dimmed with the expectations index falling from 66.2 to 63.2 (also the lowest reading since October of 2005). Little change is predicted for December's final index numbers.

10:30 AM EST :

Treasuries are currently hovering around unchanged levels with a negative bias as the losses in the last two days cushioned the market for today's economic data. But inflation fears are weighing heavily on stocks and the major indices are currently in the red.

In today's news, the Labor Department reported that its Consumer Price Index (CPI), a gauge of inflation at the retail level, rose by 0.8% last month. This was the largest jump since September of 2005. While it topped recent predictions of a 0.6% rise, yesterday's stronger than expected rise in the Producer Price Index (a measure of prices at the wholesale level) partially prepared observers for the stronger reading in the CPI.

The rise was primarily due to a 5.7% increase in the energy category, the largest leap since last March. Another large and volatile category is food but its index rose by 0.3%, matching the increase in October. Excluding both food and energy, the so-called core index was up by 0.3% last month, the biggest increase since last January.

Not surprisingly, within the core components the largest gainer was the energy-dependent transportation category. Its index was up by 2.9%, the largest increase since September of 2005. But the index for apparel was up by 0.8%, the biggest rise since April of 1999. And the price index for medical care was up by 0.4%.

On a year-over-year basis, the CPI was up by 4.3%, the biggest increase since June of 2006. The energy index was up by 21.4%, also the biggest increase since June of 2006. And while the month-to-month increase in the price index for food was not too alarming, on a year-over-year basis, it was up by 4.8%, the largest jump since December of 1990. At the core level, the index was up by 2.3% over the previous November, the biggest increase since last April.

The final release of the week contained mixed signals but was generally bullish. The Federal Reserve reported that industrial production -- a gauge of output from the nation's factories, mines, and utilities -- rose in November by 0.3%. The increase was slightly stronger than forecasts of a 0.1% or 0.2% rise, but October's originally reported decline of 0.5% was revised to a contraction of 0.7%. However, production in the large manufacturing sector rose by 0.4%, the biggest increase in four months. Mining output rose by 1.1% while that from utilities declined by 1.3%.

The report said that capacity utilization, the ratio of output to potential output, was 81.5%. While this was slightly higher than October's 81.4%, October's reading was a downward revision from the originally reported 81.7%. November's increase was primarily due to a rise in the mining category from 91.3% to 92.3%. The increase in the manufacturing category was only to 79.9% from 79.7% and utilization in the utilities category fell to 85.2% from 86.4%.

Besides the inflation concerns raised by the CPI numbers, an analyst downgrade of Citigroup has renewed anxiety regarding the financial sector and is weighing on stocks this morning. The downgrade came after yesterday's announcement by Citigroup that it was bailing out seven structured investment vehicles (SIVs) it sponsors. SIVs are investment funds that profit from the yield curve by issuing short-term debt to buy higher-yielding longer-termed investments. SIVs have been troubled lately due to the inclusion of mortgage-related products in the investment mix.