5:00 PM EST :
Treasuries rallied for a second day as geopolitical jitters enhanced the allure of the government-backed securities. Startlingly weak home sale news also helped bonds by dimming economic prospects, thereby bolstering the case for more Fed rate cuts.
The plusses for bonds were negatives for stocks, but the indices showed some stamina and finished narrowly mixed. In late trading, the 10-Year Treasury Note was up by one percent (32/32), lowering its yield to 4.07%; the Dow was up by 6.26 points to 13,365.87; and the Nasdaq was down by 2.33 points to 2,674.46.
The pace of new home sales fell sharply last month and the levels of the preceding three months were also revised lower. Though it is well known that the housing sector is in a slump, the weaker than expected sales data rattled stock traders. The effect was offset somewhat, however, by a stronger than expected reading in this month's Chicago Purchasing Managers Index.
Also lending some support to stocks was a modest decline in oil futures today, the first in five sessions. After being up for most of the day, the price of a barrel of light, sweet crude for February delivery turned lower and in late trading was down by $0.56 on the New York Mercantile Exchange at $96.06. In the previous four sessions, the price had risen by $5.56.
By the end of stock trading, the Dow had managed a slight gain of 0.5% and the S&P 500 rose by 0.14%. The Nasdaq took a slight loss of 0.09%. All three declined slightly on the week with the Dow losing 0.63%; the Nasdaq, 0.65%; and the S&P 500, 0.40%.
Treasuries made progress this week. The yield of the benchmark, 10-Year Note fell by 10 basis points (yield moves inversely to price). This follows last week's decline in yield of 7 basis points.
As was the case this week, next week's trading is expected to be light as traders stretch the holidays. But the economic release calendar is heavier than this week's and includes a couple of major market-movers.
On Monday, the housing issue will be addressed once again in the report on existing home sales for last month. In October's report, the National Association of Realtors said that the seasonally adjusted, annualized pace of sales fell by 1.2% to 4.97 million. This was an eighth consecutive deceleration and the rate was the lowest in nine years. No region of the country saw an increase in sales.
The softening market brought home prices down. The average price fell by $1,600 to $255,500 and the median price fell by $2,600 to $207,800. The average price was 3.4% lower than a year earlier and the median price was 5.1% lower.
The level of inventories of existing homes on the market at the end of October (also seasonally adjusted and annualized) was up by 1.9% to 4.453 million. At the prevailing sales pace, this represented 10.8 month's of supply.
Partly because the Index of Pending Home Sales edged up in September and October, forecasters are predicting that November's overall sales pace made a nominal gain of about 0.6% to 5.00 million.
The Securities Industry and Financial Markets Association has recommended an early close for bond trading on Monday (2:00 PM Eastern instead of 3:00). On Tuesday, the markets and government offices will be closed in observance of New Years.
On Wednesday, the national manufacturing index for December from the ISM will be released. In November, the index came in at 50.8, off slightly from October's 50.9. December's index is expected to show another deceleration in growth with a reading of about 50.5.
Between June of 2003 and October of last year, the overall index posted forty-one straight expansion readings. But the extent of growth declined throughout 2006 until the index indicated slight contractions in November and then last January. The index strengthened after that, hitting a fourteen month high of 56.0 in June. Yet, November's near-neutral reading was the fifth-consecutive fall in the index and the lowest since last January's slight contraction reading of 49.3.
Another housing-related release is slated for Wednesday. This is the report on construction spending for November. In October's report, the Commerce Department said that the seasonally adjusted, annualized pace of spending fell by 0.8%, the largest contraction since September of last year. Of particular interest was a 1.96% decline in the rate of residential construction spending. This was a twentieth consecutive monthly contraction and October's pace was the lowest in four years.
There is no reason to assume the residential sector made any headway in November and analysts predict that the overall construction spending rate fell by 0.4%.
On Wednesday afternoon, the Federal Reserve will release the minutes of its December 11 monetary policy meeting. Though the minutes might contain a surprise, Fed watchers are not expecting any. The meeting resulted in a well anticipated 0.25% cut to the Fed's target for the overnight borrowing rate between banks (federal funds rate) and a 0.25% cut to the rate for loans by the Fed to banks (discount rate). This left the fed funds rate at 4.25% and the discount rate at 4.75%.
The policy statement, released after the meeting explained the action: "Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time."
There were no indications in the statement that the Fed would not cut rates again at the next policy meeting scheduled for the 29th and 30th of January. In fact, the only dissenting vote against December's decision came from Boston Fed President Eric Rosengren who wanted a deeper cut to the fed funds rate of 0.50%.
But there has been a major development since the last meeting. Because borrowing directly from the Fed is traditionally perceived as a sign that a bank is in trouble, this source of funds has been avoided even though the repayment period was extended in August and the Fed has urged banks to use the service.
In order to keep monetary flows from bogging down, the Fed instituted what it calls a Term Auction Facility (TAF), a temporary program whereby short-term funds can be obtained on an auction basis using a broad range of collateral. The first auction was held on December 17 and bids totaled $61.6 billion for the $20 billion being offered. Just last Friday, the Fed announced that it would continue holding bi-weekly auctions for as long as necessary to address elevated pressures in short-term funding markets.
So while the meeting minutes may suggest additional forthcoming rate cuts (and most observers are expecting further monetary easing at the end of January), the TAF program offsets some of this bias.
On Thursday, the jobless claims report will spotlight the labor situation; thus heralding the approach of the heavyweight, monthly employment report. Though the data collection periods for the two reports do not coincide, the claims data, if nothing else, will act as a reminder of Friday's release.
In yesterday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits rose last week by 1,000 to a 349,000. The previous week's level was revised up from 346,000 to 348,000. Although the level was slightly higher four weeks before, last week's reading was the second highest since last February. The four-week moving average, which smoothes out some short-term volatility, slipped by 1,000 to 342,500 from the previous week's two-year high. The average level of initial claims for the year-to-date is 321,745.
The report said that continuing claims for the week ending December 15 (continuing claims must be at least a week old) rose by 75,000 to a two-year high of 2.713 million. The four-week average rose by 13,500 to 2,655,500 -- also a two-year high. The weekly average of continuing claims for the year-to-date is 2,544,440.
Though initial claims readings below 400,000 generally indicate more hiring than layoffs, the rising levels suggest a falling demand for labor and therefore fewer payroll gains.
The other major release on Thursday is the report on factory orders for November. In the last report, the Commerce Department said that the seasonally adjusted level of rose by 0.5% in October. This was slightly higher than the 0.4% that had been forecast and September's originally reported increase of 0.2% was revised up to 0.3%.
Yesterday's durable goods orders report for last month showed a smaller than expected increase of 0.1% following a 0.4% decline in October and a 1.8% decline in September. Nondurable goods orders have averaged a gain of 0.5% so far this year but they grew by 2.1% in September and 1.3% in October, suggesting that they may have fallen back in November. Recent forecasts called for an overall rise in factory orders of about 1.0% but the predictions will probably be trimmed considerably.
On Friday, the main event of the day will be the release of the employment report for December. In November's report, the Labor Department said the seasonally adjusted level of nonfarm payrolls rose by 94,000. This was down sharply from October's gain of 170,000 and below the average of about 140,000 in the twelve months prior to November. The unemployment rate, the portion of the active workforce without jobs, remained at 4.7% for a third consecutive month.
Partly because of the rise in jobless claims, analysts are looking for a smaller rise in December's payrolls. The current prediction is for a gain of 70,000. Forecasters are also looking at a rise in the unemployment rate to 4.8%. This would be the highest rate since June of last year.
The last release of the week will probably be eclipsed by the employment news. This is the ISM index on the non-manufacturing, or services, sector of the economy. It came in at 54.1 in November, down from October's 55.8 and the lowest reading since last May. As is the case with the manufacturing index, any reading over 50.0 indicates an expansion of activity and November's index represented a fifty-sixth consecutive expansion.
But though the services sector is much larger than the manufacturing sector, the services index 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 relativelyyoung (begun in 1997 vs. 1948 for the manufacturing series).
For December, the index is expected to be about 53.5. Though another growth reading, it would be the weakest in nine months.
10:30 AM EST :
Treasuries are up again this morning as flight-to-safety flows continue to provide support. The economic releases of the day were mixed but the weaker report is getting the greatest attention. The stock indices began their session with sizeable advances but much of the gains have been pared in choppy action.
In economic news, the Commerce Department reported that the seasonally adjusted, annualized pace of new home sales fell in November by 9.0% to 647,000. In addition, October's previously reported rate of 728,000 was revised down to 711,000, September's 716,000 was revised to 699,000, and August's 717,000 was revised to 701,000.
Last month's pace was the lowest since April of 1995 and much lower than forecasters' predictions of 720,000. The rate fell in November by 27.6% in the Midwest, by 19.3% in the Northeast, and by 6.4% in the South. The West saw a pickup of 4.0%.
Inventories of homes on the market fell for an eighth month to 505,000, the lowest level (seasonally adjusted) in two years. But given the declining sales rate, the inventory represented 9.3 months of sales. Though last August's 9.4 month supply was slightly higher, November's was the second highest since October of 1981.
The average new home price fell in November by $14,600 to $293,300 from October's average but the price was 0.5% higher than the previous November. The median price rose by $9,600 to $239,100 but was 0.4% lower than a year earlier.
The other release of the day was more bullish than expected. The Chicago Purchasing Managers Index, usually released on the last business day of the month, came out today due to the holiday disruptions. The index, a gauge of manufacturing activity in the highly-industrialized region, came in at 56.6, up from last month's 52.9 and higher than analyst predictions of 52.0. Any reading over 50.0 reflects a general increase in activity relative to the preceding month. December's reading was the strongest in six months.
While the Chicago PMI is often viewed as an indicator of how the national index will move, the correlation between the indices has not been strong lately. In the last twelve months, they have moved in the same direction only six times. The national index from the Institute for Supply Management will be released next Wednesday.
The home sales data is weighing against stocks this morning. Another negative factor is the ongoing rise in oil prices. Because of declining domestic inventories of crude oil and uncertainties stemming from political instability in Pakistan following yesterday's assassination of opposition leader Benazir Bhutto, oil futures are up again this morning.
In recent trading, the price of a barrel of crude for February delivery was up by $0.89 to $97.51. High energy prices divert business and consumer spending from other areas of the economy.
Once again, holiday fever is likely to result in rapidly thinning trading volumes today and this could exaggerate price moves.
