Market Overview: September 28, 2007

5:00 PM EDT :

Month and quarter close-out activity in the bond market faded during the day and Treasuries finished in the red. Stocks also took modest losses. In late trading, the 10-Year Treasury Note was down by 5/32, raising its yield to 4.59%; the Dow was down by 17.31 points to 13,895.63; and the Nasdaq was down by 8.09 points to 2,701.50.

The economic news of the day was mixed. Personal income rose less than expected last month but personal spending rose by more than expected. The price indices for spending were tame, however. The rate of construction spending rose slightly last month though forecasts had called for a slight decline. Yet, residential construction spending continued its decline. The Chicago PMI was a little stronger than anticipated, reflecting better manufacturing growth in the region than last month. But an inflation measure in the Chicago report was encouraging. And lastly, the final Consumer Sentiment Index for September was a bit weaker than the preliminary reading and matched August's as the lowest since August of 2006.

Apart from the economic data, both markets were unnerved by comments from St. Louis Fed President William Poole. Answering a question following a speech in New York, he said that the markets should not assume that the Fed is going to continue to make rate cuts.

Another negative influence on the markets was the continuing decline of the dollar, which obviously dilutes the value of dollar-denominated investments. But the fall in the dollar also bore on oil prices, which made a U-turn today. After crude oil for November delivery rose as high as $83.76 per barrel, profit-takers moved in and the price eventually closed at $81.66, down by $1.22 from yesterday's close.

By the end of stock trading, the Dow had slipped by 0.12% on the day while both the S&P 500 and Nasdaq lost 0.30%. All three made gains on the week with the Dow up by 0.55%; the S&P 500, 0.07% and the Nasdaq, 1.13%. They all made large gains for the month. The Dow finished September with a gain of 1.03%; the S&P 500, 3.58%; and the Nasdaq, 4.05%. For the quarter the Dow gained 3.63%; the S&P 500, 1.56%; and the Nasdaq, 3.77%.

The benchmark, 10-Year Treasury Note fell by 3 basis points this week but was up by 6 basis points on the month (yield moves inversely to price). But for the quarter, the yield was down by 44 basis points.

Next week, the economic calendar is relatively light but there are a couple of heavyweight releases that have market-moving potential. The first of these is the only major release slated for Monday. This is the index figures on the nation's manufacturing sector for September from the Institute for Supply Management (ISM). In the release for August, the overall index came in at 52.9 following a 53.8 reading in July. Any reading over 50.0 indicates a general expansion of activity relative to the preceding month and August's marked a seventh consecutive expansion.

The data series had lost altitude from late October of 2005 to the beginning of this year, posting slight contraction readings last November and then again in January -- the first since May of 2003. Since February,
activity has been expanding and June's index reading of 56.0 was the strongest in fourteen months. But the last two readings have been less forceful and August's was the weakest in five months. Little change is anticipated in September's reading with most predictions ranging from 52.5 to 53.0.

Aside from the softer than expected headline figure, August's release revealed another bond-friendly detail. The prices index, an inflation gauge, came in at 63.0. While still showing price growth, the reading was the lowest in six months. Traders are hoping that today's pull-back in the Chicago PMI prices paid index will be mirrored in another decline in the national release.

On Tuesday, the National Association of Realtors will release its latest Pending Home Sales Index data. July's index fell by 12.2%, the biggest plunge in the history of the data series (2001) and the index was the second lowest in the series (the lowest was in September 2001). In the first seven months of the year, the index has fallen five times. July's especially large decline suggested a significant decline in the actual sales pace in subsequent months. The index is a measure of contract activity and the NAR asserts that 80% of contracts become sales within two months and a large portion of the rest, two months thereafter.

The only major release on Wednesday is the ISM index on the non-manufacturing or services sector. Though the services sector is much larger than the manufacturing sector, the data series 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 the services data is less market moving than the manufacturing information is that the services data series is relatively young (begun in 1997 vs. 1948 for the manufacturing series).

In August's release, the index came in at 55.8, matching July's reading. Like the manufacturing index, any reading over 50.0 indicates growth and August's marked a fifty-third consecutive expansion of activity. The inflation data in the release was tame. The prices index came in at a six-month low of 58.6, down from July's 61.3. For September, the overall index is expected to come in at around 55.0 but some analysts are looking for a stronger reading of up to 57.0.

Traders will also be attending to the minor releases of the day, the Energy Department's weekly oil inventory report and the application index data from Mortgage Bankers Association.

On Thursday, the jobless claims report may get added attention since it heralds the approach of the other heavyweight release of the week, Friday's employment report. The data collection periods for the two reports do not coincide so the claims numbers will have no direct bearing on the employment numbers but the trend in claims is seen as an indicator of what is happening in the labor market. Yesterday's report said that the seasonally adjusted level of initial claims for state unemployment benefits fell by 15,000 last week to 298,000, the lowest reading in nineteen weeks. The four-week moving average, which smoothes out some of the short-term volatility, fell by 9,750 to 311,500. Both readings are down from the average weekly level for the year to date of 317,500.

But continuing claims remained elevated. Yesterday's report said that the level for the week ending September 15 (continuing claims must be at least a week old) rose by 11,000 to 2.551 million. The four-week average slipped by 5,500 to 2.570 million but this was still up from the average weekly level for the year to date of 2.530 million. It is also up from the average reading in 2006 of 2.459 million.

Because initial claims have suffered a net loss of 39,000 in the last four reports, analysts are looking for an upward correction of about 10,000 in this week's figure.

Also out on Thursday is the report on factory orders for August. In the report for July, the Commerce Department said that the seasonally adjusted level of orders rose by 3.7%. The rise was the largest in four months and June's originally reported increase of 0.6% was revised up to 1.0%. A hefty gain had been expected because of the previously released, strong report on durable goods orders.

The volatile category of transportation saw a gain of 11.0% in July, but even excluding them, orders were up by 2.4% following a 0.4% decline in ex-transportation orders in June. Another significant category is orders excluding those in the defense sector because defense needs are not governed by standard market forces. While defense orders soared by 31.5% in July, the biggest jump since last November, orders outside the category still increased by 3.2%. And even if commercial aircraft orders were further excluded from the ex-defense category, orders were still up by 2.7%.

Interested observers also look at the category of ex-defense capital goods minus aircraft since it provides a gauge of core business demand on the manufacturing process. Orders there rose by 1.7% in July following a 0.2% decline in June and a 1.5% decline in May.

The month-to-month readings on orders are notoriously volatile and a weak report is almost a certainty for August. Wednesday's durable goods orders report (durable goods are items meant to last three years or more and represent more than half of all factory orders) showed a 4.9% decline last month, the weakest reading since a 6.1% decline in January. The average monthly change in non-durable goods orders this year has been a gain of 0.6% and if this is plugged into the calculation, then total factory orders will have declined by 2.4% last month. This would be the weakest reading since a 4.2% decline in January.

The most influential release of the week is Friday's employment report for September. August's report was much weaker than analysts had predicted. The Labor Department said the seasonally adjusted level of nonfarm payrolls fell by 4,000, the first decline since August of 2003. Moreover, July's originally reported gain of 92,000 was revised down by 24,000 to 68,000 and June's previously reported gain of 126,000 was revised down by 57,000 to 69,000.

Not all of the news was bearish in August. Despite the dramatic fall off in payrolls, the unemployment rate -- the portion of the active workforce without jobs -- held steady at 4.6%. Though the rate was lower in the months from February through June, August's reading was still low by historical standards. The payroll data is derived from a survey of businesses while the unemployment rate is calculated from information obtained from a household survey.

The decline in initial jobless claims is one of the reasons analysts are looking for a stronger reading for September. Current estimates are for an expansion in payrolls of about 110,000 and August's decline could be revised to a modest increase. But the unemployment rate is expected to have risen to 4.7%, putting it at its highest level since August of last year.

10:30 AM EDT :

Treasuries are currently up this morning despite economic data that on the whole was somewhat stronger than expected. End of period (month / quarter) portfolio adjusting may be lending support. In the stock market, the indices have fallen into negative territory.

Today's news was not strong enough to sink bonds or lift stocks. In the first release of the day, the Commerce Department reported that the seasonally adjusted, annualized rate of personal income, the fuel for spending, rose in August by 0.3%, the smallest increase since a flat reading (0.0%) in April. Growth in each of the three months prior to last month was 0.5%.

While August's increase was slightly less than the 0.4% that analysts had predicted, today's report said that personal consumption expenditures (PCE or consumer spending) rose by 0.6%, up from July's 0.4% and higher than the 0.4% that had been forecast.

A plus for both markets were tame inflation measures in the report. The PCE price index fell by 0.1%, the first decline since last October, and the price index minus the volatile categories of food and energy rose by just 0.1%.

In a separate report, the Commerce Department said that the seasonally adjusted, annualized pace of construction spending rose last month by 0.2%. Although this was stronger than the decline of 0.1% that had been predicted, revisions pushed July's originally reported decline of 0.4% down to 0.5% and June's previously reported gain of 0.1% was revised to a decline of 0.1%.

As expected, the residential category continued to deteriorate. The spending rate there was down by 1.4% in August following a 1.7% decline in July (originally reported as -1.4%) and a 1.0% decline in June (last reported as -0.4%). August's decline was an eighteenth consecutive monthly contraction and the spending rate was the lowest since December of 2003.

The Chicago branch of the National Association of Purchasing Management (now known nationally as the Institute for Supply Management or ISM) said today that its purchasing managers index came in at 54.2 this month, up from 53.8 in August. Any reading indicates a general expansion in manufacturing activity in the highly-industrialized region relative to the preceding month. September's index was slightly stronger than had been predicted and marks a seventh consecutive growth reading following modest contractions in January and February. The national index from the ISM comes out on Monday.

A detail in the news release that mitigates the negative (for bonds) aspect of the headline number was a sharp deceleration in the growth of prices paid by manufacturers. The prices index fell to 59.0 this month from August's 71.8. The combination of the tame PCE price indices and the Chicago prices paid index helps to ease inflation concerns that were intensified by the Fed rate cut last week.

The last major economic release for this week was the final read on consumer sentiment from the twice-monthly surveys conducted by the University of Michigan. According to news sources, the overall index came in at 83.4, down from the preliminary reading of 83.8 and matching August's final figure as the lowest since August of last year.

The expectations index slipped to 74.1 from the preliminary reading of 74.4 but this was still better than August's final read of 73.7. But the index of current conditions fell to 97.9 from the preliminary 98.3 and August's 98.4. The latest current conditions index is the lowest since September of last year.

Today is the last trading day of the month and quarter and affords portfolio managers with their last opportunity to make adjustments for the periods. Much of this activity may already have been performed but certain index-related funds are rebalanced at this time. Since Treasuries have a fixed lifespan and carry no credit risk, they are used as adjustment instruments for regulating such portfolio characteristics as yield, risk, and return horizon. The process, therefore, usually entails the purchase of Treasuries.

In the stock market, the close out activity may be including some profit-taking since the market has rallied this month. As of yesterday's close, the Dow was up on the month by 4.2%, the Nasdaq by 4.4%, and the S&P 500 by 3.9%.

Another negative for stocks is rising oil prices. With Hurricane Lorenzo currently in the Gulf of Mexico region with its oil production and refining facilities, supply worries are pushing oil futures up. In recent commodities trading, the price of a barrel of light, sweet crude oil for November delivery was up by $0.30 to $83.18.

Market Overview September 21, 2007

5:00 PM EDT :

In today's bond trading activity, Treasuries managed to recoup some of the losses they suffered in the last few days. Stocks, after taking minor losses yesterday, resumed their climb of the previous two days. In late trading, the 10-Year Treasury Note was up by 19/32, lowering its yield to 4.62%; the Dow was up by 53.49 points to 13,820.19; and the Nasdaq was up by 16.93 points to 2,671.22.

Heavy losses in the bond market since Tuesday's rate cut by the Fed at last reached a level where Treasuries looked attractive once again. Today's gains were not propelled by data as there were no major economic releases.

Bullish earnings reports from Oracle and Nike helped lift stocks. A decline in oil prices also lent support. A barrel of light, sweet crude oil for November delivery fell by $0.16 on the New York Mercantile Exchange to settle at $81.62. This was the first decline in a front-month contract closing price in five sessions. The price was down by $1.70 from yesterday's record $83.32 close of the now-expired October contract.

By the end of stock trading, the Dow had gained 0.39%; the S&P 500, 0.46%; and the Nasdaq, 0.64%. The Dow and Nasdaq closed at their highest levels since July 23 and the S&P 500 closed at its second highest level since that date. All three made solid gains for a second week with the Dow up by 2.81%, the S&P 500 by 2.80%, and the Nasdaq by 2.66%. Over the last two-week period, the Dow has gained over 700 points or 5.39%; the S&P 500, 4.97%; and the Nasdaq, 4.11%.

In contrast, the yield of the benchmark, 10-Year Treasury Note gained 16 basis points this week following a gain of 8 basis points last week (yield moves inversely to price).

Next week is the last trading week of the month and quarter and period close-out activity may benefit Treasuries. Since the securities have no credit risk and a fixed maturity, they serve as good adjustment mechanisms in portfolio rebalancing -- the process of resetting holdings according to such parameters as risk, yield, and return horizon. The process usually entails the purchase of Treasuries.

On Monday, the markets will continue to be driven by technicals as there are no economic releases scheduled. On Tuesday, the release calendar kicks off with the Consumer Confidence Index and the report on existing home sales.

The Conference Board, an independent research firm, puts out its index results from consumer surveys. In the release for August, the overall Consumer Confidence Index came in at 105.0. Although this was higher than forecasts of 104.0, July's originally reported reading of 112.6 was revised down to 111.9. July's was still a six-year high but August's was the lowest in a year.

Lynn Franco, Director of the Board's Consumer Research Center, assessed the results this way, "A softening in business conditions and labor market conditions has curbed consumers' confidence this month [August]. In addition, the volatility in financial markets and continued sub-prime housing woes may have played a role in dampening consumers' spirits. But, despite less favorable conditions and in spite of all the recent turmoil, consumers still remain confident. And, current Index levels suggest further economic growth in the months ahead."

For September, the index is expected to have dipped to about 104.5, but if the Fed rate cut and the rally in stocks are captured in the survey, the confidence reading could be higher than last month's.

The last report on existing home sales showed continued weakening but there were a couple of mildly bullish details. The National Association of Realtors said that the seasonally adjusted, annualized rate of sales edged down in July by 0.2% to 5.75 million. Despite the fact that July's decline marked a fifth consecutive monthly fall and the pace was the lowest since March of 2003, analysts were predicting a lower rate of 5.70 million. Moreover, the only region that declined was the Midwest, where the pace fell by 2.2%. The largest regional component, the South, saw no change in its sales rate. The Northeast saw a 1.0% increase and the West (the second largest regional contributor to overall sales) saw a gain of 1.8%.

The report said that inventories of homes on the market rose by 5.1% and June's originally reported decline of 4.2% was revised to a decrease of just 0.2%. The heavy inventory and slow sales pace translated into a 9.6 month turnover rate, up from 9.1 months in June.

Home prices were virtually unchanged with the average home price declining by $500 and the median price rising by $300. On a year-over-year basis, the average price was up by 0.2% and the median price was down by 0.6%.

Forecasters are looking for a deeper drop of about 4.3% in August's sales pace to 5.50 million. This would be a five-year low.

On Wednesday, the major release 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 July's report, the Commerce Department said that the seasonally adjusted level of orders rose by 5.9% and this was subsequently revised to 6.0% in the factory orders report (all following data is derived from the revisions released after the last durable orders report). June's previously reported increase of 1.3% was also ultimately revised up to 1.8%. A large portion of July's gain came from an 11.0% rise in the volatile transportation category, but even excluding that sector, orders were up by 3.8%, the biggest ex-transportation increase since August of 2005.

Another category that can skew the overall picture is defense since orders there are not governed by standard market forces. Defense orders were up by 31.2% but excluding the category, orders were still up by 5.0%. Further excluding commercial aircraft from the ex-defense figures showed a gain in orders of 4.2% in July, the biggest jump since March of 2004.

And another closely watched category is ex-defense capital goods minus commercial aircraft. This category is seen as a proxy for core business demand on the production process. It saw an increase of 1.7%, the first increase in three months.

Estimates of August's new orders for durable goods items cover a wide range: from a decline of 3.0% to an increase of 4.5%.

A couple of minor releases on Wednesday may get some attention. These are the Energy Department's weekly oil inventory report and the Mortgage Bankers Association report on application activity.

New supply hits on Wednesday with the Treasury's auction of 2-Year Notes. 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.

Last month's 2-Year Note auction was well-received. Bids exceeded the $18 billion offer amount by an exceptionally high 3.97 to 1. The average ratio for the last twelve, 2-year auctions before August's was 2.77. Noncompetitive bids, a gauge of individual investor demand, totaled $856 million, up from $698 million in July and higher than the twelve-month average of $839 million. And foreign demand was decent, if not overwhelming. Indirect competitive bids, which include those from foreign central banks, garnered 31.0% of the issue, the biggest award portion in the last four issues but below the twelve-month average of 32.8%.

Tuesday's issue is also expected to have a face value of $18 billion, the same as in the last seven, 2-year issues. The deadline for competitive bids is 1:00 PM Eastern Time.

On Thursday, the jobless claims report highlights 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 9,000 to 311,000, the lowest reading in seven weeks. The four-week moving average, which smoothes out some of the short-term volatility, declined by 3,500 to 320,750. For the year to date, the average weekly level has been 317,973.

The report said that continuing claims in the week ending September 8 (continuing claims must be at least a week old) fell by 53,000 to 2.544 million -- also the lowest reading in seven weeks. But the previous week's originally reported level of 2.585 million was revised up by 12,000 to 2.597 million, the highest reading in twenty-nine weeks. The four-week average fell by 5,500 to 2,576,500. The average weekly reading for the year to date is 2,592,722.

The net decline of 26,000 in initial claims over the past three weeks suggests that the employment situation is not as worrisome as the last monthly jobs report indicated. The employment data for August jolted observers with a 4,000 drop in nonfarm payrolls, the first decline in four years.

Thursday also brings the final report on gross domestic product for the second 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.

The initial or "advance" report came out in July and indicated a 3.4% increase in GDP versus the first quarter. This was revised up in last month's preliminary report to 4.0%. The gain was the largest since the first quarter of 2006. In contrast, the first quarter gain of 0.6% was the weakest increase since the fourth quarter of 2002.

The inflation measures in the preliminary report were also little changed from the advance report, though what changes there were were for the better. The overall GDP price index was up by 2.7%, the same as in the advance report. But the price index for personal consumption expenditures (PCE; consumer spending) was trimmed to an increase of 4.2% from the originally reported 4.3% and the core PCE index, which excludes the volatile categories of food and energy, was trimmed to a 1.3% gain from 1.4%.

Since the preliminary report captured most of the economic data for the period, little change to the last figures are expected in the final report. The release also loses clout by its age. With the third quarter coming to a close, traders are more concerned with its GDP figures and those of the upcoming quarter. Estimates for the current quarter range from gains between 2.0% and 2.5%.

The report on new home sales also comes out on Thursday. July's report surprised observers who were expecting a decline. Instead, the Commerce Department said that the seasonally adjusted, annualized pace of sales rose by 2.8% to 870,000. In addition, June's originally reported pace of 834,000 was revised up to 846,000 pace.

The report said that the inventory of homes on the market fell by 0.9% to 533,000. This was the fourth consecutive monthly decrease and the lowest level since January of last year. Combined with the increased sales pace, this inventory represented 7.5 months worth of sales, down from 7.7 months worth of inventory at the end of June.

The average new home price fell to $300,800 from June's $304,900 but the median price rose to $239,500 from $230,600. The average price was down by 3.4% on a year-over-year basis and the median price was up by 0.6%.

For August, analysts predict that the rate of sales fell by 4.6% to 830,000. This would be the largest percentage decline since February and tying March for the lowest pace since June of 2000.

More supply comes to market on Thursday as the Treasury conducts its monthly auction of 5-Year Notes. Last month's issue had a mixed reception. Overall demand was high. The bid-to-cover ratio was 2.74, the highest since last September. Non-competitive bids totaled $198 million. This represented 1.5% of the issue, the highest percentage since August of last year. But foreign demand was relatively weak. Indirect competitive bids garnered 22.5% of the issue. While this was up from July's award portion of 19.7%, it was well below the 30.2% average for the twelve auctions prior to last month's.

Thursday's offer size is expected to be $13 billion, the same as the last nine.

On Friday, the report on personal income and spending will be released. According to the Commerce Department personal income, the fuel for consumer spending, rose in July by 0.5%, the largest increase since March. Personal consumption expenditures (PCE or consumer spending) rose by 0.4%, up from a 0.2% increase in June. Both readings were right in line with the monthly averages of the previous twelve months. For August, both income and spending are expected to have increased by 0.4%.

An important manufacturing indicator is slated to be released on Friday. This is the Chicago Purchasing Managers Index, a gauge of manufacturing activity in the highly-industrialized region. August's index came in at 53.8, up from July's reading of 53.4. Any reading over 50.0 reflects a general increase of activity relative to the preceding month. Analysts predict that September's index will come in somewhere between 54.0 and 55.0. The national index for September will be released on the following Monday.

The last release of the week is the final read on consumer sentiment from the University of Michigan's twice monthly surveys. The preliminary index for the month, released last Friday, came in at 83.8, up slightly from August's final reading of 83.4 but still below the average reading of 89.5 for the last twelve months. Little change is expected in September's final reading; however, as with the Consumer Confidence Index, if the survey includes responses following the Fed rate cuts, the sentiment index may be higher.

10:30 AM EDT :

Treasuries have finally bounced following three losing sessions that pushed the yield of the benchmark 10-Year Note up by 24 basis points (yield moves inversely to price). In recent trading this morning, the yield had shed about 5 basis points. This morning's move is largely technical in nature -- bargain hunting by those who feel the sell-off was overdone. In the stock market, the indices are currently up once again following a breather yesterday after two days of strong gains.

There are no economic releases slated for today so technical factors will continue to dominate trade. The expiration of options and futures may add to volatility to price moves in the stock market.

Oil prices continue to climb but the October contract for crude oil expired yesterday at $83.32 per barrel. The November contract closed yesterday at $81.78 and was up to $82.03 in recent trading.

Of course, the markets are still reacting to Tuesday's Fed rate cuts. Atypically, Treasuries plunged following the cuts on heightened inflation concerns and the unwinding of previously acquired safe-haven positions. Stocks rallied on the lowered rates since they will stimulate economic activity as consumers and businesses can obtain cheaper loans.

Looking ahead to next week, position squaring as the month and quarter come to a close may bolster Treasuries, especially since prices have fallen so sharply this week. But supply may present some downward pressure as the Treasury will be conducting its monthly auctions of 2- and 5-Year Notes.

The home sales reports come out next week (both for existing and new homes) as does the final report on gross domestic product for the second quarter. Other economic releases include the Consumer Confidence Index, the Consumer Sentiment Index (final), the report on durable goods orders, the report on personal income and spending, and the Chicago Purchasing Managers Index.

Market Overview 09/07/07

5:00 PM EDT :

Prices of Treasuries maintained altitude and stocks took steep losses on today's weak employment news. In late trading, the 10-Year Treasury Note was up by 32/32, lowering its yield to 4.38%; the Dow was down by 249.97 points to 13,113.38; and the Nasdaq was down by 48.62 points to 5,565.70.

Nonfarm payrolls fell in August for the first time in four years and the news was seen as helping pave the way for a Fed rate cut. While a rate cut would also lower corporate borrowing costs, the negative economic consequences of the payroll number weighed on stocks. Adding to the bleak economic outlook was a weaker than expected report on wholesale inventories for July.

Another negative for stocks was today's fifth straight move higher in oil futures. A barrel of light, sweet crude for next month delivery rose by $0.40 on the New York Mercantile Exchange to settle at $76.70, the highest close for a front-month contract since August 2.

By the end of stock trading, the Dow had lost 1.87%; the S&P 500, 1.69%; and the Nasdaq, 1.86%. All three fell on the week with the Dow losing 1.83%; the S&P 500, 1.39%; and the Nasdaq, 1.18%. In contrast, the yield of the benchmark 10-Year Treasury Note fell for a fourth straight week and has fallen in eight of the last nine weeks (yield moves inversely to price). The yield fell by 15 basis points in the last week and closed today at its lowest level since January 23, 2006.

Next week, the economic calendar is back weighted. It kicks off on Tuesday with the report on international trade for July. In June's report, the Commerce Department said the seasonally adjusted value of imports exceeded that of exports by $58.1 billion. This was well short of the $61.0 billion deficit figure that analysts were predicting. Moreover, May's originally reported trade gap of $60.0 billion was revised down to $59.2 billion. The lower gap numbers help explain the upward revision to second quarter gross domestic product from initial estimates of a 3.4% gain to a preliminary reading of 4.0%.

For the first month of the third quarter, the trade report is expected to show a wider gap of between $59.0 billion and $59.4 billion.

There are no major releases on Wednesday but the weekly oil inventories report and the Mortgage Bankers Association application index data will get close attention. Oil inventory levels affect prices and high energy prices act as a brake on the economy. The state of mortgage applications will throw additional light on the mortgage and housing situations.

On Thursday, the jobless claims report will once again address the state of the labor market. Yesterday's report said that the seasonally adjusted level of initial claims for state unemployment benefits fell last week by 19,000 to 318,000 from 337,000 the week before (originally reported as 334,000). A decline had been expected following five weeks of increases and a week of no change. The reading is in line with the underlying trend for the year to date. The average weekly reading in that time has been 318,200.

But the actual decline was stronger than anticipated and seemed to contradict other signs of faltering job growth. Yet, not all of the claims data was bullish. The four-week moving average of initial claims, which smoothes out some of the short-term volatility, rose by 500 to 325,750, the highest level in four months.

The report also showed that the level of continuing claims for the week of August 25 (continuing claims must be at least a week old) rose by 25,000 to 2.598 million, the highest reading since the week ending February 17. The four-week average rose by 12,000 to 2,571,500, the highest reading in over a year-and-a-half. The average weekly reading of continuing claims for the year to date is 2,527,500.

With today's employment report indicating a much gloomier jobs picture, a significant increase in this week's initial claims level would not be unexpected. But this week's data may have been distorted by the closure of state labor offices on Monday. An adjustment factor, derived from past data, will have to be applied to the claims numbers to make up for the missing day. A faulty adjustment factor could skew the claims figure.

Supply will bear on the bond market on Thursday as the Treasury will be auctioning an additional amount of last month's 10-Year Note issue (making the actual maturity 9-years and 11-months). The offer size is expected to be $8 billion, the same as in the last nine such reopening auctions. The last reopening in June drew mixed demand. Bids exceeded the offer amount by 2.55 to 1, down from the 2.64 bid-to-cover ratio in the previous reopening sale in March.

Noncompetitive bids, a measure of individual investor demand, totaled $32 million, up from $12 million in March and the largest amount in a 10-year reopening since June of 2006. But foreign demand was weak. Indirect competitive bids, which include those from foreign central banks, garnered just 10.9% of the issue, down from 15.1% in March and the smallest award portion since March of last year.

The bidding deadline for competitive bids is 1:00 PM Eastern Time. An hour later, the Treasury will release its budget figures for August. In August of last year, the value of government outlays exceeded that of receipts by $64.7 billion. Forecasters predict that last month's deficit will be a larger $85.0 billion or more. An $85.0 billion figure would make the running total for the fiscal year to date (begun last October) to a deficit of $242.3 billion. This would still be an improvement over the $304.4 billion deficit total for the same period in the 2006 fiscal year.

Friday is the busiest news day. Of the three earliest releases, the most influential will be the report on retail sales for last month. In July's report, the Commerce Department said the seasonally adjusted value of sales rose by 0.3%. While this was slightly lower than the 0.4% that forecasters had predicted, June's originally reported decline of 0.9% was trimmed to a decline of 0.7% and May's previously reported increase of 1.5% was revised up to 1.6%. Excluding the large but volatile category of motor vehicles and parts, sales rose by 0.4% in July after a 0.2% decline in June.

Another volatile category is sales at gasoline stations. Because of declining gasoline prices, sales there were down by 0.8% following a 1.3% decline in June. Excluding both the categories of auto and gasoline stations, sales were up by 0.6% in July following no change (0.0%) in June.

Auto sales rebounded in August but gasoline prices declined. Current estimates call for a 0.5% rise in overall retail sales but excluding autos, sales are expected to have risen by 0.2% or 0.3%.

The report on import / export prices may shed some light on the inflation picture stemming from international trade. In July's report, the Labor Department said its import price index rose by 1.5%. The report indicated that imported petroleum prices rose by 7.0% in July following a 4.4% increase in June. Excluding this volatile category, prices were up by just 0.2%. Average spot oil prices declined in August and the import price index is expected to have risen by 0.5%. If this is the case, it will be the smallest increase since February.

The current account balance for the second quarter also comes out on Friday. The figure 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 last report, the Commerce Department said today that the current account balance for the first quarter showed a deficit of $192.6 billion. This was a wider gap than the fourth quarter's $187.9 billion but that figure was a downward revision from the originally reported deficit of $195.8 billion. In fact, revisions for the eight quarters of 2005 and 2006 trimmed a total of $82.0 billion from the previously reported gap figures. The deficit in the first quarter was better than the $202.5 billion that analysts had predicted. A slightly narrower gap of $192.0 billion is predicted for the second quarter.

Later on Friday morning, the Federal Reserve will release its report on industrial production; a gauge of output from the nation's factories, mines, and utilities. According to the last report, industrial production rose in July by 0.3%. Revisions moved June's originally reported gain of 0.5% to 0.6% but May's previously reported decline of 0.1% became a decline of 0.2%. Manufacturing output rose by 0.6% for a second consecutive month and mining output rose by 0.7%, its largest increase of the year so far. The volatile category of utilities saw a 2.1% decline in output

Some inflation concerns were roused by the capacity utilization statistic. This is the ratio of output to potential output. It rose from 81.8% in June to 81.9% in July. Cap utilization in the manufacturing sector was 80.7%, its highest reading since June 2000, and mining's utilization was 91.0% in July, its highest of the year so far. Utilities saw a drop in its utilization figure to 83.6% from 85.5%. High utilization numbers mean there is less slack in the production process, which could lead to bottlenecks that drive up prices.

For August, another 0.3% increase is expected in industrial production but capacity utilization is expected to have edged up to a ten-month high of 82.0%

Also out on Friday is the report on business inventories for July. June's report indicated a 0.4% rise. Sales fell by 0.3%, the first decline since January. The rise in inventory and decline in sales pushed the inventory-to-sales (I/S) ratio up slightly to 1.27 from May's 1.26. The I/S ratio is the value of remaining inventory divided by the value of sales for the month. The result indicates how many months it would take to entirely deplete the stocks on hand at the prevailing sales pace. Despite June's increase, the level was still not far from the record low of 1.25 and it still indicated high pressure on the production process to replenish supplies.

Recent predictions have called for a 0.3% rise in inventories but today's report on wholesale inventories was weaker than predicted. With increases of 0.2% in the manufacturing sector (according to the last factory orders report) and the wholesale sector, the only unknown is the retail sector.

The last economic release of the week is the initial read on consumer sentiment for the month from the twice-monthly surveys conducted by the University of Michigan. August's final sentiment index was 83.4, up slightly from the preliminary reading of 83.3. Despite the nominal increase, the index was still down sharply from July's final reading of 90.4. In fact, it was the lowest reading since the final reading in August of 2006. Though little change is expected in the preliminary index for August, recent indicators have clouded the economic picture and a further decline in optimism could show up in Friday's index.

10:30 AM EDT :

Treasuries are sharply higher as the employment report for August turned out to be much weaker than anticipated. The stock indices are currently deep in the red.

The Labor Department said the seasonally adjusted level of nonfarm payrolls fell last month by 4,000, the first decline since August of 2003. Not only was this much weaker than the 120,000 increase that analysts had predicted.

Many observers were expecting a weaker than predicted report based on several, recently released minor reports. But the extent of payroll weakness was greater than even these lowered expectations. Moreover, July's originally reported gain of 92,000 was revised down in today's report by 24,000 to 68,000 and June's previously reported gain of 126,000 was revised down by 57,000 to 69,000.

The goods producing sector saw the biggest gains with construction payrolls falling by 22,000 and manufacturing by 46,000. The decline in manufacturing payrolls was the largest in four years and it marked a fourteenth consecutive month of contractions.

On the services side, the biggest gainer was education and health. Payrolls there grew by 63,000. But the next largest gainer was retail trade with only a 12,500 increase. The category of leisure and hospitality saw a gain of 12,000. The large category of professional and business services saw a gain of only 6,000 and financial services saw no change. Payrolls in the information category declined by 7,000 and in transportation by 4,200. Government payrolls fell by 28,000 following a 52,000 drop in July.

The news is a plus for the bond market because it provides strong evidence that the economy is faltering and gives the Fed more of a reason to cut interest rates. Many Fed watchers are already convinced that the monetary policy committee will cut its target for the fed funds rate at the September 18 meeting. And a growing number of observers are speculating that the cut will be 0.50% rather than 0.25%. This would push the rate down from its current 5.25% to 4.75%.

The fed funds rate is the rate banks charge one another for short-term loans necessitated by daily reserve requirements. The banks actually set the rate but the Fed can make adjusts to the amount of reserves in the banking system, thereby maneuvering the rate to conform to the central bank's policy goals.

Not all of the news was bearish. Despite the dramatic fall off in payrolls, the unemployment rate -- the portion of the active workforce without jobs -- held steady at 4.6%. Though the rate was lower from February through June, the latest level is still considered low by historical standards. The payroll data is derived from a survey of businesses while the unemployment rate is calculated from information obtained from a household survey.

The inflation data in the report was relatively mild. Average hourly earnings rose by 0.3% in August, matching July's gain. On a year-over-year basis, earnings were up by 3.9% following a 4.1% Y/Y increase in July.

The second economic release of the day was also bond-friendly; that is, more bearish than expected. The Commerce Department said that the seasonally adjusted level of wholesale inventories rose by 0.2% in July. This was lower than the 0.4% or 0.5% increase that forecasters were calling for. Moreover, June's previously reported gain of 0.5% was revised down to 0.3%.

Sales also slowed in July, growing by just 0.1% after a 0.4% increase in June. Yet, inventories remained lean. The inventory-to-sales (I/S) ratio came in at a record low 1.11 for a third consecutive month. The I/S ratio is the value of remaining inventory divided by the value of sales for the month. The result indicates how many months it would take to entirely deplete stocks on hand. A low ratio indicates strong pressure to replenish supplies.

But the report does not give a complete picture of the inventory situation since it does not include the manufacturing and retail sectors. A report on business inventories, which covers all of these components, will be released next Friday.