5:00 PM EST :Treasuries fell throughout today's session as stocks rallied on encouraging consumer spending news and more bullish news from the tech sector. An announcement by the Federal Reserve that it would continue to
conduct bi-weekly funding auctions indefinitely in order to fend off a credit crunch also perked up the stock market and drained some safe-haven support from bonds. In any event, light trading volumes may well have magnified today's price moves. In late trading, the 10-Year Treasury Note was down by 31/32, raising its yield to 4.17%; the Dow was up by 205.01 points to 13,450.65; and the Nasdaq was up by 51.13 points to 2,691.99.
The stand out-item in today's economic news was a huge jump in consumer spending last month. Such spending constitutes the bulk of all economic activity and suggests that conditions are not as bleak as recent data has suggested. The other release of the day showed a slight rise in consumer optimism since the beginning of the month, though the mood is still gloomy.
The push higher in stocks overcame several negative influences including a poor earnings report from Circuit City, a large jump in the consumer spending price index, and a spike in oil futures. These factors were trumped by the Fed announcement (coming on the heels of this week's first two such fund auctions for banks), news of a bail out for Merrill Lynch, and recent reports of strong earnings from such tech bellwethers as Oracle and Research in Motion.
The strong spending news raised demand expectations on oil and the price of a barrel of light, sweet crude for February delivery shot up by $2.25 on the New York Mercantile Exchange to settle at $93.31, the highest closing price for a front-month contract in the last seven sessions. Nevertheless, the Dow gained 1.55% on the day; the S&P 500, 1.67%; and the Nasdaq, 1.94%. All three gained for the week with the Dow rising by 0.83%, the S&P 500 by 1.12%, and the Nasdaq by 2.13%.
Despite today's bond market sell-off, Treasuries also made price gains on the week. The yield of the benchmark 10-Year Note fell by 7 basis points after two weeks that saw the yield move up by 30 basis points (yield moves inversely to price).
There are no major economic releases slated for Monday and the Securities Industry and Financial Markets Association (formerly the Bond Market Association) has recommended an early close for bond trading on Monday (2:00 PM Eastern instead of 3:00). Trading is expected to be extremely thin throughout the abbreviated session and it will get progressively thinner as the close approaches. The markets will be closed all day Tuesday.
On Wednesday, there are no major releases but the bond market will get some supply pressure from the monthly 2-Year Treasury Note auction. Some traders liquidate a portion of their old 2-Year Notes to make room for the new and most traders avoid buying the old issue since the new issue will be more liquid. Those who will be bidding for the new supply avoid buying the old in order to keep yields up (bids are for yield and bidders would like to get the highest they can).
Last month's auction was weak. Bids exceeded the offer amount by 2.21 to 1, the lowest bid-to-cover ratio since July of 2006. Noncompetitive bids, a gauge of individual investor demand, totaled $617 million, up slightly from $568 million in October's auction, but well below the average of $788 million for the twelve auctions preceding November's. Foreign demand was soft. Indirect competitive bids, which include those from foreign central banks, garnered just 23.5% of the issue. While this was up from 22.1% in October, it was below the twelve-month average of 32.9%.
Wednesday's deadline for competitive bids is 1:00 PM Eastern Time. The offering is expected to have a face value of $20 billion, matching the size of the last two issues.
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 rose last week by 12,000 to 346,000. The move was anticipated due to the jagged plot of recent data and a decline in claims levels in the preceding two weeks. The four-week moving average, which smoothes out some of the short-term volatility, rose by 4,250 to 343,000. This was the highest four-week average reading since October of 2005. For the year-to-date, the average weekly claims level has been 321,160.
The report said that continuing claims for the week ending December 8 (continuing claims must be at least a week old) also rose by 12,000 to 2.646 million. This was the second highest reading in two years, down by only 13,000 from the highest in that time, posted in the middle of last month. The four-week average rose by 23,000 to 2.633 million and that figure was the highest in two years. The weekly average continuing claims level for the year-to-date has been 2.541 million.
Another early release on Thursday is the report on durable goods orders for last month. Durable goods are defined as items meant to last three years or more. They are usually labor-intensive to produce, expensive, and therefore often financed. Because of this, the trend in orders provides some insight regarding upcoming production activity and the effect interest rates may be having on the process.
In October's report, the Commerce Department said that the seasonally adjusted level of orders fell in October by 0.4%, a weaker performance than consensus predictions of no change (0.0%). Somewhat softening the effect of the news were data revisions that changed September's previously reported decline of 1.7% to a drop of 1.4%. But October's loss represented a third consecutive monthly decline, the first time this has occurred since the period from November of 2003 through January of 2004.
A large but volatile category is transportation and October's report indicated that orders there were up by 0.2%. Excluding transportation, overall orders were down by 0.7% following a 1.1% increase in September.
Another category that is often filtered out of the data is defense since orders there are not governed by standard market forces. Defense orders were up by 8.5% following a sharp, aircraft-related 25.9% drop in September. Excluding defense, overall orders were down by 0.9% in October following a 0.3% increase the month before.
A particularly bearish indicator was the decline in orders in the category of ex-defense capital goods minus aircraft, a category which is seen as a gauge of core business demand. The order level there was down by
2.3% in October, the biggest drop in eight months.
Following three months of declines, a rebound is anticipated for November. Predictions range from an increase of 2.0% to 3.0%.
A little later, the Conference Board, an independent research firm, will release its Consumer Confidence Index for the month. Last month, the index fell to a two-year low of 87.3 from October's 95.2.
The biggest drop in optimism came from consumers' assessment of conditions in the months ahead. The expectations index fell from 80.0 to 68.7, the lowest reading in four years. The index of current conditions slipped from 118.0 to a two-year low of 115.4.
In November's news release, Lynn Franco, Director of the Board's Consumer Research Center, summarizes the situation: "Consumers' apprehension about the short-term outlook is being fueled by volatility in financial markets, rising prices at the pump and the likelihood of larger home heating bills this winter. In fact, consumers' inflation expectations have surpassed the spike experienced this spring and a larger percentage than last month expect stock prices to decline. The Present Situation Index, despite losing ground, still suggests the economy is expanding, albeit slowly. Despite this rather bleak outlook, consumers have not lost their holiday spirit and anticipate spending more on gifts this season than they did last Christmas."
December's overall index is expected to have slipped once again with predictions ranging from 86.5 to 87.0. Even at the higher estimate, this would be the lowest reading since October of 2005.
More supply comes to market on Thursday as the Treasury will be conducting its monthly auction of 5-Year Notes. As was the case with last month's 2-Year offering, November's 5-Year issue met with lackluster demand. The bid-to-cover ratio was 2.26, the lowest for the security since March. Noncompetitive bids totaled $117 million, up from October's $108 million but below the average of $144 million in the twelve auctions preceding November's.
And foreign demand was relatively light. Indirect competitive bids garnered 21.0% of the issue, the smallest award portion in four months and below the twelve-month average of 28.8%.
On Friday, the only major release is the report on new home sales for last month. As everyone knows, the housing sector has been in decline for the last two years but the seasonally adjusted, annualized pace of new home sales rose in October by 1.7% to 728,000. October's increase was deceptive, however, because September's originally reported pace of 770,000 was revised down by 7.0% to 716,000, August's previously reported rate of 735,000 was revised down by 2.6% to 717,000, and July's 798,000 was trimmed by 0.3% to 796,000.
As builders have backed away from new construction, the inventory of homes left on the market has fallen in each of the last seven report months. The seasonally adjusted inventory level in October was 516,000, the lowest since December of 2005. At the prevailing sales pace, this represented 8.5 months of supply. This was down from the 9 month turnover time in September.
The average price of a new home rose by $15,600 in October to $305,800 and this was just 0.3% less than the average a year earlier. But the median home price fell by $20,000 to $217,800, the lowest since September of 2004. This was 13.0% lower than the median price in October of last year.
Another decline in the overall sales pace is predicted for November. The consensus forecast is for a drop of 1.1% to 720,000. Behind August and September's readings, this would be the third lowest since January of 1996.
Thin trading will prevail throughout the week but Friday will again see a quick fade in activity as participants attempt to make the most of the holidays.
10:30 AM EST :
Treasuries opened in the red this morning and have continued to slide as the economic news of the day was stronger than expected. The economic data and a couple of bullish corporate news items have sparked a rally in the stock market, which is also weighing against bonds.
In today's news, the Commerce Department reported that personal income, the fuel for consumer spending, rose by 0.4% last month compared with a 0.2% increase in October. The move was right in line with predictions.
But the report also indicated a 1.1% spike in personal consumption expenditures (PCE or spending). This was the largest monthly increase since July of 2005 and was much stronger than predictions of an 0.8% rise. October's originally reported increase of 0.2% was also revised up to 0.4% and September's 0.3% increase was revised to 0.5%.
Strong economic news hurts rate-sensitive bonds since it reduces prospects of continuing interest rate cuts by the Federal Reserve. Another negative for the market was the headline inflation indicator contained in this morning's income and spending report. The price index for expenditures rose by 0.6% in November, the largest increase since September of 2005. Most of the hike was due to energy prices, however. Excluding food and energy, the so-called core index was up by just 0.2%.
The last economic release of the week was a little stronger than anticipated. The final Consumer Sentiment Index from the University of Michigan's twice-monthly surveys came in at 75.5. This was up from the preliminary reading of 74.5, released earlier this month. Forecasters were expecting little change from the initial reading. But the index was still the lowest in two years. November's reading was 76.1.
The final reading for the expectations index was 65.6, up from the preliminary reading of 63.2 but down from November's 66.2 and the lowest since October of 2005. The index of current conditions fell from the preliminary reading of 92.1 to 91.0, the lowest reading since March of 2003.
Despite the modest increase in the final overall index from the preliminary reading, the data indicate a generally pessimistic consumer mood. However, the spending news belies the inference that expressed attitudes correspond with actual behavior.
A bullish earnings report released by Research in Motion after the bell yesterday has helped the tech sector of the stock market to maintain yesterday's upward momentum this morning. Stocks are also getting a boost on word that Merrill Lynch may get a bail-out from a Singapore investment fund following steep losses due to the company's holdings of subprime mortgage products.
Trade is expected to be thin today as market participants attempt to stretch the holiday. The reduced liquidity may result in erratic price movements.
