Mortgage 101 Network

2007-12-28T14:27:00.000-08:00

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.

2007-12-21T15:06:00.000-08:00

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.

2007-12-14T14:13:00.000-08:00

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.

2007-12-07T14:46:00.000-08:00

5:00 PM EST :

Treasuries tanked today but the catalyst was not the stock market since the indices barely moved. A number of market commentators blame today's solid employment report for dimmed any expectations of a half-point rate cut by the Fed next week. In late trading, the 10-Year Treasury Note was down by 26/32, raising its yield to 4.11%; the Dow was up by 5.69 points to 13,625.58; and the Nasdaq was down by 2.87 points to 2,706.16.

Nonfarm payrolls rose more than the forecasts of a couple days ago. But recent speculation had observers looking for a strong report and bonds lost considerable ground on Wednesday and Thursday because of those concerns. Apparently, the preparation was inadequate and Treasuries took an even larger plunge today.

The other economic news of the day was bond-friendly but failed to make an impression on the market. The preliminary read on consumer sentiment for the month reflected the lowest level of optimism in two years.

The jobs news did not spark a rally in stocks. Nor did a retreat in oil futures today. The price of a barrel of light, sweet crude oil for next month delivery falling by $1.95 on the New York Mercantile Exchange to settle at $88.28. After Wednesday's close of $87.49, this was the second lowest for a front-month contract since October 24.

By the end of stock trading, the Dow posted a nominal gain on the day of 0.04%, the S&P 500 slipped by 0.18%, and the Nasdaq lost 0.11%. Despite today's performance, all three indices made good gains for the week. The Dow rose by 1.90%, the S&P 500 by 1.59%, and the Nasdaq by 1.70%. In contrast, the yield of the benchmark 10-Year Treasury Note rose by 17 basis points following five consecutive weeks of declines. Yields rise when the price falls. Today's closing yield was the highest since November 16.

Next week has a heavy slate of market influences but it starts off on Monday with only one major economic release. This is the report on pending home sales from the National Association of Realtors and the report is of secondary importance since its value is as an indication of subsequent, actual home sales that will be reported later this month.

The report for September said that the NAR's seasonally adjusted index of pending home sales rose by 0.2% that month, although forecasters were looking for a decline of 1.0% or 2.0%. Yet, the improvement is only modestly bullish as it comes off a record low in August.

The data series was first published in 2005 with data going back to 2001. 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.

On Tuesday morning, trade is apt to be subdued as participants await the results of the day's meeting of the Federal Open Market Committee (FOMC), the central bank's monetary policy arm. There is only one major economic release in the morning and it will probably get scant attention. This is the report on wholesale inventories for October.

Even without the FOMC meeting, the release is not usually a market-mover since the data is somewhat dated and it does not give a complete overview of the inventory situation (last Wednesday's factory orders report revealed levels of manufacturer inventories, but the situation in the retail sector is still missing).

The report for September was more bullish than expected. The Commerce Department reported that the seasonally adjusted level of wholesale inventories rose by 0.8%. Not only was this much higher than the 0.1% that forecasters had predicted, but August's originally reported gain of 0.1% was revised up to an increase of 0.7%.

Rising inventories are often a bullish indicator since they may represent efforts to stock up for rising demand. And September's report showed that demand was strong then with sales rising by 1.3%. August's originally reported increase of 0.4% was revised to 0.8%.

The combination of inventory levels and sales produced a record low inventory-to-sales (I/S) ratio of 1.10. The I/S ratio is the value of stocks on hand at the end of a month divided by the value of sales for the month. It indicates how many months it would take to entirely deplete existing inventory at the prevailing sales pace. A low figure indicates high turnover and high pressure to replenish supplies.

For October, wholesale inventory levels are expected to have risen by about 0.5%.

The FOMC policy statement will be released at about 2:15 PM Eastern Time. Most observers are expecting the committee to cut its target for the overnight borrowing rate between banks (federal funds rate) and the rate banks must pay for loans directly from the Fed (discount rate).

Between June of last year through early August of this year, the Fed took no rate action but maintained a slightly hawkish (that is, tightening) bias, citing elevated core inflation and concerns that it might not abate as expected. But the troubled housing and mortgage industries began to obstruct credit flows since investors backed away from risky mortgage debt, thereby eroding its value. Consequently, lenders in general tightened loan standards, making it harder to borrow money. In the meantime, holders of mortgage loan products have suffered losses since buyers are scarce. This bottleneck reduces the amount of money flowing through the monetary system and drives up the cost of borrowing.

With the complex network of risk-sharing in the world markets, the credit troubles spread and the Fed finally stepped in and made an emergency 0.50% cut to the discount rate in August. This brought the rate down from 6.25% to 5.75%. In addition, the committee extended the length of time reserves could be borrowed and it made a public relations push to diminish the negative connotations attached to such borrowing (loans from the Fed were typically considered last resort measures).

Nevertheless, short-term commercial debt offerings dried up and investors flocked to the safety of government backed securities. In order to ease the credit situation, the Fed decided in its September meeting to cut the fed funds rate by 0.50%, from 5.25% to 4.75%. This was the first rate cut since June of 2003 and the largest since November of 2002. The policy committee also cut the discount rate again by 0.50% from 5.75% to 5.25%.

Then, in October's meeting, the committee cut both rates once more but by 0.25%, bringing the fed funds rate down to 4.50% and the discount rate to 5.00%. But October's policy statement seemed to indicate that the actions taken since August should be enough to offset the flagging economy. "The Committee judges that, after [the latest] action, the upside risks to inflation roughly balance the downside risks to growth."

Another aspect of the meeting that unnerved some bond traders was the fact that the rate cut decision was not unanimous. Kansas City Fed President, Thomas Hoenig, voted against it.

But the Chairman of the Federal Reserve, Ben Bernanke, raised expectations for another cut last month. In congressional testimony, he laid out the Fed's economic projections. He said, "Growth was seen [by the monetary policy committee at the last meeting] as remaining sluggish during the first part of next year, then strengthening as the effects of tighter credit and the housing correction began to wane."

However, he noted the possibility that the economy might not recover as expected. "Should the rate of foreclosure rise proportionately, communities as well as individual borrowers would be hurt because concentrations of foreclosures tend to reduce property values in surrounding areas. A sharp increase in foreclosed properties for sale could also weaken the already struggling housing market and thus, potentially, the broader economy."

While this seemed to hint that more monetary accommodation was in the works, the thrust of the argument was blunted somewhat by the threat of inflation. Mr. Bernanke said that though price stability is expected to remain within acceptable limits, high price of oil and other commodities, along with the weak dollar, could boost overall inflation.

A stronger than expected revision to third quarter gross domestic product and today's relatively strong employment report have also weakened the rate cut argument. Furthermore, yesterday's official unveiling of a plan to cushion the fallout rate of subprime mortgage loans has reduced the expected impact on the economy and credit market from the housing situation.

Currently, though, Fed watchers still believe that the policy committee will cut the fed funds and discount rates again by 0.25% when it meets next Tuesday.

Wednesday brings a couple of trade-related reports. The main one is the report on international trade for October, the first month of the fourth-quarter. In the last report, the Commerce Department said that the seasonally adjusted value of imports exceeded that of exports by $56.5 billion in September. The deficit figure was much lower than the $58.0 billion that analysts had predicted. Moreover, August's originally reported trade gap of $57.6 billion was revised to a deficit of $56.8 billion.

The deficit figures have narrowed in each of the last four report months and in five of the last six. The latest was the lowest since May of 2005. The declining value of the dollar is the primary reason. The weaker dollar makes U.S. goods cheaper to foreign buyers, thereby boosting sales.

The trade report said the value of imports rose in September by 0.6% but this followed a 0.7% decline in August. Exports rose by 1.1%, the seventh consecutive increase. The value of exports was a record high and the value of imports was at its second highest monthly level.

For October, analysts foresee only a slightly wider monthly gap of about $57.0 billion.

The other release on Wednesday morning is the report on import and export prices for November. In the last report, the Labor Department said its seasonally adjusted index of import prices rose by 1.8% in October, the largest jump since May of 2006. Forecasters had been expecting a rise of about 0.8%. The fact that September's originally reported increase of 1.0% was trimmed to 0.8% did not cushion their surprise.

As expected, the largest contributor to the increases has been from petroleum products. The index for that sector rose by 6.9% in September, the largest since last March. Yet, even excluding petroleum, prices were up by 0.5%, the biggest increase since last May. Ex-petroleum prices were down by 0.2% in September and were unchanged (0.0%) in August.

The report said that export prices were up by 0.9% last month, the largest increase since April of 1995. A large but volatile export category is agricultural products and its price index was up by 3.9% following a 4.1% increase in September. Excluding the category, prices were up by 0.5%, the largest increase in six months.

Oil prices surged last month so forecasters are looking for another jump in the overall import price index of 2.0%. This would be the largest increase since April of 2006.

On Wednesday afternoon, the Treasury will release its budget figures for last month. In November of 2006, outlays exceeded receipts by $75.6 billion. Forecasts for last month call for a slightly smaller deficit of $75.0 billion. This would bring the total for the first two months of the 2008 fiscal year to a deficit of $130.6 billion, a deeper shortfall than the $122.4 billion of the first two months of the 2007 fiscal year. Higher deficit figures are a negative for bonds since they mean the Treasury will not have to issue more debt securities (Treasuries) in the future.

On Thursday, the jobless claims report will once again address the employment situation. In yesterday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits fell last week by 15,000 to 338,000. The decline was not unexpected as the data series has been swinging back and forth lately with a rise of 24,000 in the week of November 24, a decline of 12,000 in the week of November 17, and a rise of 22,000 in the week of November 10.

Despite the latest move, the recent underlying trend has been up. The four-week moving average, which smoothes out some of the short-term volatility, rose last week by 4,750 to 340,250, the highest reading in over a year. The average weekly claims figure for the year to date is 320,354. For 2006, the average was 312,962. The rising claims levels suggest a slack labor market, but any reading below 400,000 is generally considered a sign that hiring is outpacing layoffs.

Yesterday's report said that the level of continuing claims for the week ending November 24 (continuing claims must be at least a week old) fell by 59,000 to 2.599 million. Again, however, the underlying trend has been up. The four-week average rose by just 6,000 to 2,593,750 but this was the highest reading since last January. The average weekly continuing claims level for the year to date is 2,537,064. For 2006, the
average was 2,458,519.

A key inflation indicator comes out on Thursday. This is the Producer Price Index (PPI), a gauge of price changes at the wholesale level. October's report said the index rose by just 0.1% following a 1.1% energy-related spike in September. The index of energy prices fell by 0.8% in October following a 4.1% rise. The headline increase was largely attributable to a 1.0% increase in the index for another volatile
category: foods. Excluding energy and foods, the so-called core index showed virtually no change at all (0.0%). This followed a core increase in September of only 0.1%. Forecasters had predicted an overall PPI increase of 0.2% in October and a same-sized move at the core level.

Another energy-related surge is expected for November with predictions that the overall index rose by 1.5%. But at the core, the index is expected to have risen by just 0.2%.

Another major release on Thursday besides the PPI is the report on retail sales for last month. In October's report, the Commerce Department said the seasonally adjusted level of sales rose by 0.2%. This was in line with forecasts though September's originally reported increase of 0.6% was revised up slightly to 0.7%. Excluding the large but volatile auto category, sales were also up by 0.2%, a slightly weaker gain than analysts had predicted. Furthermore, September's originally reported ex-auto increase of 0.4% was revised down to 0.3%.

For November, forecasters are predicting an overall increase of 0.2% and a 0.5% rise excluding autos.

A little later, the Commerce Department will release its report on business inventories for October. The seasonally adjusted level rose by 0.4% in September. By the time October's report is released, observers will already have a fairly broad view of the inventory situation since the last factory orders report indicated that manufacturers' inventories rose by 0.1% that month and the wholesale inventories report will have been released, which is predicted to show a 0.5% increase.

The only unknown is the retail category. The average monthly change in this category has been an increase of 0.3%. If these values are plugged into the category weightings for the overall business figure, it produces an unremarkable rise of 0.3%.

Another item in the report that will be watched is the inventory-to-sales (I/S) ratio. This is the value of inventories divided by the values of sales for the month. The result shows how many months it would take to entirely deplete the stocks on hand at the prevailing sales pace. A low reading means that pressure is high on the production process to replenish supplies.

Sales increased by 0.6% in September and the combination of factors left the inventory-to-sales (I/S) ratio at 1.27. This was not far from the record low of 1.25. October's ratio is also expected to have remained relatively low.

New supply will be weighing on the bond market on Thursday morning as the Treasury will be auctioning an additional amount of last month's 10-Year Note issue. 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.

In the last such 10-Year Note reopening in September, demand was fairly strong. Bids exceeded the $8 billion offer amount by 2.95 to 1, the highest bid-to-cover ration since the current issue cycle (an initial and reopening auction each quarter) began in 2003. Noncompetitive bids -- a gauge of individual investor demand -- totaled $18 million, which was below the average of $21 million for the twelve reopenings prior to September's.

Foreign demand was strong for a reopening with indirect competitive bids, which include those from foreign central banks, receiving 22.4% of the issue. This was about twice the twelve-reopening average of 11.7%.

Last month's initial issue for the quarter was mixed with a decent bid-to-cover ratio of 2.34 on the $13 billion offering versus the twelve (initial) auction average of 2.30. Noncompetitive bids totaled $137 million versus the twelve auction average of $86 million. However, foreign demand was weak. Indirect competitive bids garnered just 28.2% of the issue, the weakest award for a new 10-Year issue since February of 2005.

Thursday's offering is expected to have a face amount of $8 billion, the same as in the last ten such reopenings. The deadline for competitive bids is 1:00 PM Eastern Time.

On Friday, an even more influential inflation indicator will be released. This is the Consumer Price Index (CPI), a gauge of inflation at the retail level. It rose by 0.3% in October, matching the increase in September. While the monthly release is often a market-mover, October's number was right in line with forecasts.

The largest contributor to the overall advance was a 1.4% rise in the energy category following a 0.3% rise in September. The index in the other volatile category, food, rose by 0.3% following a 0.5% rise in September. Excluding these two categories, the core index was up by 0.2% -- also as expected and also matching September's increase.

Energy is expected to have pushed the overall index up by about 0.6% last month, which if accurate would be the largest jump in six months. But the core index is expected to have risen by 0.2%, making it the sixth consecutive same-sized increase.

The final major economic release of the week is the report on industrial production from the Federal Reserve. Industrial production -- a gauge of output from the nation's factories, mines, and utilities -- fell in October by 0.5%, the largest decline since last January. This followed weak increases in August and September of 0.1% and 0.2%, respectively. And October's 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, thereby pushing up prices.

Not much progress is predicted for November with predictions of a 0.1% increase in industrial production. Capacity utilization is expected to have remained at 81.7%.

10:30 AM EST :

Was the employment report too strong or too weak? The stock indices are bobbing around unchanged levels as traders there have yet to make up their minds on the jobs numbers. In contrast, bond traders are looking at the report as a positive assessment of the economy, which reduces the argument for aggressive interest rate cuts by the Federal Reserve. Treasuries began the day underwater and they have fallen further since the release of the employment report.

The Labor Department reported this morning that the seasonally adjusted level of nonfarm payrolls rose in November by 94,000. While this was above last week's predictions of 75,000, it was at the low end of recent predictions of between 90,000 and 150,000.

October's gain was revised up slightly from 166,000 to 170,000 but August's previously reported rise of 93,000 was trimmed to 44,000.

The goods producing sector continued to slide with construction payrolls losing 24,000 last month and manufacturing payrolls, 11,000. In the services sector financial services payrolls fell by 20,000, information services lost 6,000, and utilities lost about 200. The big gainers were professional and business services (+30,000), education and health services (+28,000), and leisure and hospitality services (+26,000). Government payrolls grew by 30,000.

The report said that the unemployment rate, the portion of the active workforce without jobs, remained at 4.7% for a third consecutive month. Forecasters had predicted a slight increase to 4.8%.

One item in the report that provides no support for either stocks or bonds is a jump in average hourly earnings of 0.46%, the highest increase since June. But it follows an exceptionally mild increase in October of 0.06%.

A second-tier economic release was bearish -- normally a plus for bonds, but the news had no impact on the market. According to news sources, the preliminary read on consumer sentiment for the month from the twice-monthly University of Michigan surveys produced an overall index reading of 74.5, its lowest level 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).

Although the bond market's reaction to today's data seems puzzling, traders are also looking ahead to a heavy slate of events next week that includes a Fed policy meeting and a 10-Year Treasury Note auction. The economic release calendar includes the key inflation indicators: the Producer Price Index and the Consumer Price Index. It also includes the monthly retail sales report and the report on industrial production.

Market Overview: Friday, November 30, 2007

2007-11-30T14:33:00.000-08:00

5:00 PM EST :

Treasuries pared earlier losses as the stock indices fell from their morning highs and both markets finished narrowly mixed. In late trading, the 10-Year Treasury Note was down by 2/32, leaving its yield at 3.94%; the Dow was up by 59.99 points to 13,371.72; and the Nasdaq was down by 7.17 points to 2,660.96.

Once again, the news of the day was not the principal driver behind the moves in the bond market. Though the Chicago PMI was somewhat stronger than anticipated this month, personal income and spending rose less than expected last month, and the rate of construction spending fell more sharply than predicted with the aid of a still stronger deceleration in the residential sector.

Treasuries swung wildly this week with a huge rally on Monday, followed by two day's of deep losses, and then a rebound yesterday. Some end-of-month positioning helped offset profit-taking pressure on Treasuries today. The benchmark 10-Year Treasury Note had been down by as much as 25/32 in morning trading action.

For the week, the yield of the 10-year fell by 6 basis points (yield falls when the price rises). This was the fifth consecutive week in which the yield has fallen and the sixth in the last seven weeks. Over that time, the net loss to the yield has been 74 basis points or 2-10/32.

Profit-taking was also a problem for stocks today, but suggestions this week by Fed Vice Chair Donald Kohn on Monday and Fed chief Ben Bernanke yesterday that the Fed is poised to make more interest rate cuts have eased worries concerning the credit market. Talk of a plan between the Treasury and mortgage lenders to temporarily freeze interest rates on some existing subprime mortgage loans also encouraged traders.

And another solid retreat in oil futures also benefited stocks. The price of a barrel of light, sweet crude oil for January delivery fell by $2.30 on the New York Mercantile Exchange to settle at $88.71. This was the fourth decline this week for a net decline of $9.47 since last Friday. Today's close was the lowest for a front-month contract since October 24th. Lower energy prices help the economy because they leave businesses and consumers with more money to spend on other things.

By the end of stock trading, the Dow was up by 0.45% and the S&P 500 by 0.78%. The Nasdaq fell by 0.27%. But all three indices made strong gains for the week. The Dow gained 390.84 points or 3.1%, the S&P 500 rose by 2.81%, and the Nasdaq closed today 2.48% higher than last Friday's close.

Next week, the economic calendar is relatively light but it includes a couple of potential market-movers. The first is the national gauge of manufacturing activity, the purchasing managers' index from the Institute for Supply Management (ISM). In October, the index came in at 50.9. Any reading above 50.0 reflects a general increase in activity relative to the preceding month but October's index showed the least amount of growth in seven months.

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 last year 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. But each of the four reading since then has been weaker than the one before.

Although October's weak growth indicator was a plus for bonds the inflation measure in the data was not as bond-friendly. The prices index rose to 63.0 from September's 59.0. September's index, however, was the lowest in seven months.

For November, the ISM index is expected to come in near October's level. Current forecasts call for a reading of about 50.5.

On Wednesday, the Labor Department will release its revised report on productivity for the third quarter. According to the preliminary report, released on the 7th of this month, the seasonally adjusted level of nonfarm business productivity (output per worker per hour) rose by 4.9% in the third quarter following a 2.2% rise in the second quarter (revised down from 2.6%). The jump was much larger than the 3.0% that analysts had predicted.

The report said that output rose by 4.3% while hours worked shrank by 0.5%. Hourly compensation rose by 2.7%, but unit labor costs (ULC; cost per unit of output) fell by 0.2%. The decline in ULC was the first in five quarters.

Strong productivity is usually a positive influence on the markets. The increased output per hour is seen by stock traders as a bullish economic development: more efficiency and therefore better corporate earnings. And the efficiency often translates into reduced unit labor costs which have a salutary effect on inflation pressures -- a plus for both stocks and bonds.

Recent forecasts of the final read on productivity have called for an improved gain of about 5.5%. But yesterday's strong revision to third quarter gross domestic product (4.9% from the advance estimate of 3.9%) suggests even stronger productivity growth.

Later on Wednesday, the report on factory orders for October will be released. In September's report, the Commerce Department said the seasonally adjusted level of orders rose by 0.2%. Many forecasters had predicted a decline of about 0.8% because of a soft durable goods orders report for the month. What they were not counting on was a 2.1% surge in the nondurable category, the largest increase since last March. Factory orders fell in August by 3.5%.

Excluding the volatile transportation category, orders were up by 1.4% in September as the order level in transportation fell by 6.2%. Orders in the defense sector are not governed by standard market forces so orders excluding the sector are seen as a better representation of underlying demand on production. Ex-defense orders were up by 1.3% in September as defense saw a 33.9% decline due primarily to a 37.2% drop in aircraft orders.

In the category of ex-defense capital goods minus aircraft, orders were up by 0.6%, a third consecutive monthly increase. The category is seen as a measure of core business demand.

Last Wednesday's report on durable goods orders for October showed a weaker than expected 0.4% decline. But analysts feel that orders for nondurables will again buoy the headline number. However, they see only a slight overall gain of about 0.1% or 0.2%.

Also out on Wednesday morning is the ISM Index on the non-manufacturing, or services, sector of the economy. In October, the index came in at 55.8. This was up from September's reading of 54.8 and was higher than the 54.0 that analysts were expecting. Like the manufacturing index, any reading over 50.0 indicates growth and October's was a fifty-fifth consecutive expansion indicator. Another, but slightly less forceful growth reading of about 55.0 is anticipated for November.

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 relatively young (begun in 1997 vs. 1948 for the manufacturing series).

The only major release on Thursday is the jobless claims report. In yesterday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits rose last week by 23,000 to 352,000. The jump was the largest in six weeks and the level was the highest since early last February.

While the jump suggests a slackening labor market, market veterans are withholding judgment until a trend can be confirmed. An additional adjustment had to be made to last week's raw data to account for the Thanksgiving closure of labor offices. A faulty adjustment factor would have skewed the results. The report said that the four-week moving average, which smoothes out some of the short-term volatility, rose by 5,750 to 335,250. The weekly average claims figure for the year to date is about 320,000.

Continuing claims for the week ending November 17 (continuing claims must be at least a week old) rose by 112,000 to 2.665 million. The increase was the largest since February and the claims level was the highest since last December. The four-week average rose by 20,500 to 2,589,250. The average weekly continuing claims reading for the year to date is 2,535,848.

Following such a large move last week, a partially compensating decline is expected in this week's initial claims figure.

Though the holiday-related swings may cause observers to view the claims data with suspicion, the report will be significant as a reminder that the monthly employment report is looming. This is often a market mover and it comes out on Friday. In the last report, the Labor Department said that the seasonally adjusted level of nonfarm payrolls rose in October by 166,000. The gain was much higher than the 90,000 that analysts were predicting and was the biggest jump since last May when payrolls increased by 188,000. The downward revision to September's originally reported gain of 110,000 to 96,000 was not much compensation to those who were looking for a weaker gain in October.

As expected, the report said that the unemployment rate, the portion of the active workforce without jobs, held at 4.7% for a second month. Though this level was the highest since August of last year, it was still relatively low. A positive in the report for both markets was news that average hourly earnings rose in October by just 0.2%, the smallest increase since last April.

Forecasts for November call for a smaller increase in nonfarm payrolls of between 70,000 and 80,000. The unemployment rate is expected to have edged up to 4.8%, the highest since July of last year.

The final release of the week is the preliminary read on consumer sentiment for December from the University of Michigan. November's final sentiment index was 76.1, up from the preliminary read of 75.0 but down from October's final reading of 80.9. In fact, November's final reading was the lowest in two years. High energy prices, stock and home price losses, and soft economic data suggest that sentiment is continuing to decline. Estimates for December run from 75.0 to 76.0.

10:30 AM EST :

Volatility continues to be the hallmark of this week's market activity as Treasuries have retreated this morning following yesterday's rally while stocks have continued the strong surge seen on Tuesday and Wednesday after a breather yesterday that produced only modest gains.

The economic data released today was largely bond-friendly; that is, bearish. The Commerce Department reported that the seasonally adjusted, annualized level of personal income, the fuel for consumer spending, rose by just 0.2% in October 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 for last month as well.

Later, in a separate report, the Commerce Department said that the seasonally adjusted, annualized pace of construction spending fell in October by 0.84%, the largest contraction since September of last year. A decline of about 0.2% had been forecast for last month. The rate rose by 0.2% in September (revised from a 0.3% increase).

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.

The final release of the day was somewhat more bullish than expected. 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 (PMI) came in at 52.9 this month. This was up from October's 49.7 and was stronger than the 50.5 that analysts had predicted. Any reading over 50.0 indicates a general expansion of activity in the region relative to the preceding month.

The Chicago index is considered an important gauge of manufacturing since the region is highly-industrialized. But although the Chicago PMI is perceived as a predictor of how the national index may have moved, in the last twelve months the indices have moved in the same direction six times. The ISM's national index for November will be released on Monday. It came in at 50.9 in October and little change is anticipated in this month's index reading.

Helping to generate renewed enthusiasm for stocks were comments by Federal Reserve Board Chairman Ben Bernanke yesterday evening. Speaking before the Charlotte, North Carolina Chamber of Commerce, he outlined the Fed's recent rate easing and the reasons for it. He then noted that since the last monetary policy meeting the outlook for the economy has been impacted by the turbulence in the financial markets.

"Investors have focused on continued credit losses and write-downs across a number of financial institutions, prompted in many cases by credit-rating agencies’ downgrades of securities backed by residential mortgages. The fresh wave of investor concern has contributed in recent weeks to a decline in equity values, a widening of risk spreads for many credit products (not only those related to housing), and increased short-term funding pressures. These developments have resulted in a further tightening in financial conditions, which has the potential to impose additional restraint on activity in housing markets and in other credit-sensitive sectors. Needless to say, the Federal Reserve is following the evolution of financial conditions carefully, with particular attention to the question of how strains in financial markets might affect the broader economy."
(BERNANKE SPEECH)

These comments have bolstered speculation that the Fed will cut rates (the short-term borrowing rate between banks and the rate charged to banks for loans directly from the Fed) when the policy committee meets on December 11. Lower rates are a plus for bonds but they also stimulate the economy and this is the current focus for stock traders. At present, the inter-market dynamics and other technical factors are guiding Treasuries.

Market Overview

2007-11-16T15:15:00.000-08:00

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.

Market Overvies November 9, 2007

2007-11-09T15:22:00.000-08:00

5:00 EST :

Stocks fell sharply again today and Treasuries looked more attractive by comparison. In late trading, the 10-Year Treasury Note was up by 16/32, lowering its yield to 4.22%; the Dow was down by 223.55 points to 13,042.74; and the Nasdaq was down by 68.06 points to 2,627.94.

The economic news of the day was not the guiding factor for the markets. The trade gap in September was the smallest in over two years and revisions narrowed August's originally reported deficit. The trade report is good economic news but it argues against more rate cuts by the Federal Reserve.

Another obstacle to further rate cuts is inflation pressure and today's report on import / export prices indicated an increased threat coming from international trade.

The last release of the day favored cutting rates but it is considered a second-tier indicator. The Reuters / University of Michigan initial read on consumer sentiment for the month showed a big decline in optimism, though sentiment does not always correlate with spending behavior.

Stock traders overlooked the bullish trade gap news and focused instead on the ongoing deterioration of the financial sector. Following a string of earnings misses and negative guidance from major companies in the sector, Wachovia warned today of massive write-downs stemming from mortgage-related problems. Apart from the financial sector, the tech sector also saw large losses. Negative guidance from Qualcomm was a major contributing factor.

Of course, high oil prices continue to weigh against stocks. A barrel of light, sweet crude oil for next month delivery rose by $0.86 on the New York Mercantile Exchange to settle at $96.32, not far from Tuesday's record high close of $96.70.

By the end of stock trading, the Dow had lost 1.69%; the S&P 500, 1.43%; and the tech-heavy Nasdaq, 2.52%. All three took huge hits for the week. The Dow fell by 4.06% and the Nasdaq by 3.71%. The Nasdaq was the worst performer with a loss of 6.49%.

In contrast, Treasuries rose. The yield of the benchmark 10-Year Note fell by 10 basis points this week after falling by 8 basis points last week (yield moves inversely to price). And though the yield gained 1 basis point in the week ending October 26, it fell the week before that by 29 basis points. Today's closing yield was the lowest in over two years.

Next week, the bond market will be closed on Monday in observance of Veterans Day though the stock market will be open. The economic calendar kicks off on Tuesday with the report on pending home sales for September. In August's report, the National Association of Realtors said that its index of pending home sales fell by 6.5% from the previous month to a record low. This followed a 10.7% drop in July. On a year-over-year unseasoned basis, pending sales were down by 21.3%.

The data series was first published in 2005 with data going back to 2001. 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. Confirming this thesis is the report (also by the National Association of Realtors) that the seasonally adjusted, annualized pace of existing home sales fell in September to its lowest level since September of 2001.

September's pending sales report is expected to show further weakness with a monthly decline of 1.0% to 2.0%.

On Tuesday afternoon, the Treasury will release its budget figures for October, the first month of the 2008 fiscal year. September was a heavy tax receipt month so a surplus (more receipts than outlays) was anticipated, but the actual surplus figure of $111.6 billion was much higher than the $100 billion that analysts had predicted. The variance may have been due to calendar issues so the deficit in October is expected to be higher than the $49.3 billion posted in October of last year. Recent estimates range from a shortfall of $55.0 billion to $60.0 billion.

The higher the deficit figure, the worse it is for Treasuries since it translates into a greater need for the issuance of more government securities to cover Federal debts and operation expenses.

Wednesday brings a couple of heavyweight releases. The Producer Price Index has clout because it is a gauge of inflation at the wholesale level. In September's report, the Labor Department said the PPI rose 1.1%, the largest increase since February.

Though a bounce was expected after August's 1.4% oil-related plunge (the largest since October of last year), September's increase was larger than the 0.5% that analysts had predicted. On a year-over-year basis, the index was up by 4.4%, the largest Y/Y margin since June of 2006.

But energy was a major factor in the overall move. The energy index rose by 4.1% in September, the biggest increase since last November. This followed a 6.6% decline in August, the largest drop since April of 2003. Foods, another volatile category, also jumped more than expected last month. The index for that category, after four months of declines, rose by 1.5%, the largest increase since March.

Excluding foods and energy, the so-called core index rose by just 0.1%. On a year-over-year basis, the core index was up by 2.0%. This is still somewhat elevated but an improvement from August's Y/Y margin of 2.2% and July's 2.3%. Price pressures further down the production pipeline were also relatively tame. The index for prices at the intermediate stage of production rose by 0.4% following a 1.2% decline in August. At the initial, or crude, stage of production, the price index rose by 0.1% following a 3.0% decline.

Consensus forecasts call for increases of about 0.2% for both the overall and core PPI. But this morning's report in import/export prices indicated a larger than expected increase in imported oil prices last month so the headline PPI number could be higher.

The other heavyweight release on Wednesday is the report on retail sales. The report for September was stronger than expected. In it, the Commerce Department said the seasonally adjusted level of sales were up by 0.6% after a 0.3% increase in August. Auto sales, a volatile category that makes up about a quarter of all sales, were up by 1.2% after a 3.3% increase in August. Excluding the category, sales rose by 0.4% following a 0.4% decline.

For obvious reasons, another volatile category is sales at gasoline stations. Sales there were up by 2.0% in September following a 2.6% decline the month before. Excluding both the auto and gas station categories, sales were up by 0.2% following a 0.1% decline in August.

A weaker report is predicted for October. Overall sales are expected to have risen by 0.2% and ex-auto sales by about 0.3%.

Later on Wednesday morning, the report on business inventories for September will be released. The report is not likely to get as much attention as the PPI and retail sales report since previous releases have already disclosed the inventory change in the manufacturing and wholesale categories. The only unknown is the retail sector.

The last factory orders report said that manufacturers' inventories rose by 0.6% in September and the report on wholesale inventories showed a 0.8% increase there. The average monthly change in retail inventories for the year through August has been an increase of 0.4%. If this is plugged into the estimate equation, then overall business inventories rose in September by 0.6%. A weaker retail gain of as little as 0.1% would produce an overall increase of 0.5%.

In August, business inventories reportedly rose by 0.1% but this is likely to be revised slightly higher in Wednesday's release. The last report also said that sales fell by 0.4%, pushing the inventory to sales (I/S) ratio up to 1.27 from July's 1.26.

The I/S ratio is the value of inventories divided by the values of sales for the month. The result shows how many months it would take to entirely deplete the stocks on hand at the prevailing sales pace. A low ratio means pressure is high on the production process to replenish supplies. Despite the increase in August, the ratio is still considered low by historical standards (the record low is 1.25). September's is expected to also come in at 1.27.

On Thursday, the jobless claims report spotlights the employment situation once again. In yesterday's report, the Labor Department said that the seasonally adjusted level of initial claims for state unemployment benefits fell by 13,000 last week to 317,000. This was a third consecutive week of declines totaling 22,000 but it followed a spike of 30,000 in the week ending October 13. The four-week moving average, which smoothes out some of the week-to-week volatility, was little changed, rising by 2,000 to 329,750. The weekly average claims level for the year to date is 318,523.

The report said that the level of continuing claims for the week ending October 27 (continuing claims must be at least a week old) declined by just 4,000 to 2.579 million. But this followed a 60,000 increase the week before. The four-week average rose by 16,000 to 2,552,250. The average weekly continuing claims level for the year to date is 2.532 million.

Following last week's decline in the initial claims level, a slight increase would not be too surprising in this week's figure.

An even more influential inflation indicator than the PPI comes out on Thursday morning. This is the Consumer Price Index, a gauge of price changes at the retail level. In September, it rose by 0.3%, the biggest increase since last May. The energy index rose by 0.3% and the index of food prices rose by 0.5%. Excluding these categories, the core index rose by an in-trend 0.2%. But, despite the tame core reading, the broad-base of the increase could be seen in the fact that there were no declines in any major category.

For October, forecasters are looking for a repeat of September's headline figures with a 0.3% overall increase and a 0.2% rise at the core level.

Also out on Thursday morning is the index data from the New York branch of the Federal Reserve on manufacturing activity in the region for the month. October's index came in at a remarkably strong 28.8, up from 14.7 in September. Any reading over 0.0 indicates a general expansion of activity relative to the preceding month and October's index represented a twenty-ninth consecutive monthly expansion.

But the attention-grabber was the strength of October's expansion. The index was the highest since July of 2004 and surprised forecasters who were looking for a weaker reading than September's. A modestly weaker growth reading of about 20.0 is predicted for November.

The New York region is comparatively small but the index provides the first glimpse of manufacturing activity 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.

The predictive aspect of the New York index will be short-lived this month as the Philadelphia index is scheduled to be released at noon on Thursday. It came in at 6.8 in October, down from September's reading of 10.9. As is the case with the New York index, any reading of the Philadelphia index over 0.0 indicates growth. Activity stalled in August with a reading of 0.0 but the last contraction reading was in December (-2.3). Analysts predict that the index will come in at about 6.0 this month.

On Friday, the only major release is the report on industrial production for last month from the Federal Reserve. September's report said that industrial production -- a gauge of output from the nation's factories, mines, and utilities -- rose by 0.1%.

The increase was right in line with predictions but the report revised August's originally reported gain of 0.2% to a flat reading (0.0%). Revisions also increased July's previously reported gain of 0.5% to 0.6% but this was offset by a downward revision of June's 0.6% gain to 0.5%.

The static level of industrial activity in August and September translated into a slight slackening in the ratio of output to potential output. The name of this ratio is capacity utilization and August's originally reported 82.2% was trimmed to 82.1% and September's ratio held at that level. Despite the slight decline, the level in August and September was the second highest after July's 82.2% since August of last year. High utilization raises inflation concerns. It means less slack in the production process which can lead to bottlenecks; and when demand cannot be met, prices rise.

But October's report is expected to once again show little advancement. Production is expected to have increased by another 0.1% and the utilization statistic is expected to be unchanged at 82.1%.

10:30 AM EST :

The economic data released this morning was largely unfavorable for bonds but Treasuries are finding support from further shifts out of the stock market. Huge losses projected by Wachovia have stirred credit concerns once again, thus keeping stock traders in a bearish mood.

The Commerce Department said this morning that the seasonally adjusted value of imports exceeded that of exports by $56.5 billion in September. The deficit figure was much lower than the $58.0 billion that analysts had predicted. Moreover, August's originally reported trade gap of $57.6 billion was revised to a deficit of $56.8 billion.

The deficit figures have narrowed in each of the last four report months and in five of the last six. The latest was the lowest since May of 2005. The declining value of the dollar is the primary reason. The weaker dollar makes U.S. goods cheaper to foreign buyers, thereby boosting sales.

The trade report said the value of imports rose in September by 0.6% but this followed a 0.7% decline in August. Exports rose by 1.1%, the seventh consecutive increase. The value of exports was a record high and the value of imports was at its second highest monthly level.

The news is bullish and therefore unfavorable to bonds since it weakens the case for more Fed rate cuts. Net exports are calculated into gross domestic product (GDP) and the smaller trade deficit in September is a positive contributor. The advance report of third quarter GDP, released last week, said the annualized rate of economic growth increased by 3.9% in the July through September period.

The other early release of the day sounded an inflation alarm which is not good for stocks or bonds. The Labor Department reported that its seasonally adjusted index of import prices rose by 1.8% in October, the largest jump since May of 2006. Forecasters had been expecting a rise of about 0.8%. The fact that September's originally reported increase of 1.0% was trimmed to 0.8% did not cushion their surprise.

But, as expected, the largest contributor to the increases has been from petroleum products. The index for that sector rose by 6.9% last month, the largest since last March. Yet, even excluding petroleum, prices were up by 0.5%, the biggest increase since last May. Ex-petroleum prices were down by 0.2% in September and were unchanged (0.0%) in August.

The report said that export prices were up by 0.9% last month, the largest increase since April of 1995. A large but volatile export category is agricultural products and its price index was up by 3.9% following a 4.1% increase in September. Excluding the category, prices were up by 0.5%, the largest increase in six months.

The final release of the day was the most bond-friendly; that is, bearish. According to news sources, the preliminary index on consumer sentiment for the month from the University of Michigan 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 reflects rising energy prices, falling stocks, and declining home values.

The bond market will be closing early today (2:00 PM Eastern Time) and will be closed all day Monday in observance of Veterans Day. With the long weekend ahead for the bond market, some traders may be inclined to cash in on some recent gains but so far the performance of the stock market is dominating the trading action in
bonds.

Market Overview: November 2, 2007

2007-11-02T14:58:00.000-07:00

5:00 PM EDT :

Stocks had a volatile session today but the indices ultimately managed to finish in positive territory. Treasuries maintained a positive bias after early losses but wound up off their best levels of the day. In late trading, the 10-Year Treasury Note was up by 7/32, lowering its yield to 4.32%; the Dow was up by 27.23 points to 13,595.10; and the Nasdaq was up by 15.55 points to 2,810.38.

The economic news released today would normally have given stocks a big lift and weighed heavily against bonds. The increase in nonfarm payrolls last month was much stronger than predicted and factory orders for September actually rose instead of falling as forecast.

The news follows Wednesday's stronger than expected report on gross domestic product for the third quarter (3.9% growth instead of the predicted 3.1%) and a cut to short-term interest rates by the Fed. All of these items are stock-friendly but the market struggled this week as signs of more turmoil in credit flows clouded trader sentiment.

An analyst's warning on Citigroup stirred credit concerns that had already been roused last week by a dismal earnings report from Merrill Lynch. A huge short-term infusion of cash to the banking system yesterday by the Federal Reserve also unnerved traders. And today, a report that Merrill Lynch might be trying to hide additional losses fueled more anxiety.

Another negative for stocks today was a sharp increase in oil futures. The price of a barrel of light, sweet crude oil for next month delivery rose by $2.44 on the New York Mercantile Exchange to close at a new record high of $95.93. Though oil companies are reportedly reducing their margins and OPEC's latest increase in production limits took effect yesterday, the high prices threaten the economy by reducing
the amount of money businesses and consumers have to spend on other things.

But Merrill Lynch today denied allegations it had made deceptive hedge fund deals and news that Citigroup's board of directors was holding an emergency meeting this weekend seemed to bolster some trader confidence.

During today's session the Dow was down by as much as 121.85 points or 0.90% and up by as much as 65.03 points or 0.48%. But by the end of the day, it had gained 0.20%. The S&P 500 had been down by 1.05% and up by 0.31% but finished with a gain of just 0.08%. The Nasdaq was down by 0.75% at its low and up by 0.79% at its high and finished with a gain of 0.56%.

For the week, the Dow lost 211.60 points or 1.53% and the S&P 500 lost 1.67%. But the Nasdaq managed to post a small gain of 0.22% for the week. All three indices posted gains last week of over 2.00%. Treasuries made headway this week with the yield of the benchmark 10-Year Note falling by 8 basis points (yield moves inversely to price. It rose last week by just 1 basis point after plunging by 29 basis points in the week ending October 19.

Next week's events calendar includes the influx of new supply which may pressure the bond market. The slate of economic releases begins with Monday's index data for last month from the Institute for Supply Management (ISM) on the non-manufacturing, or services, sector. In September's release the overall index came in at 54.8, down from August's reading of 55.8. Though the reading was the lowest in six months, it still reflected a general expansion of activity relative to the preceding month (any reading over 50.0) and was the fifty-fourth consecutive growth indicator. Moreover, the reading was in-line with most predictions.

A negative for the markets was a pick-up in the prices index from August's 58.6 to 66.1. Because of the recent Fed rate cuts, traders are particularly sensitive to the threat of inflation.

For October, the services index is expected to have slipped once again to about 54.0. The manufacturing index, released yesterday, showed almost no change in activity last month with an index reading of 50.9, the lowest in seven months. A relatively weak services index would give backing to speculation that overall economic growth is slowing down.

However, though the services sector is much larger than the manufacturing sector, the services 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 relatively young (begun in 1997 vs. 1948 for the manufacturing series).

There are no major releases scheduled for Tuesday. On Wednesday, the Labor Department will release its preliminary report on productivity for the third quarter. The final report for the second quarter indicated that the seasonally adjusted, annualized rate of nonfarm business productivity (output per worker per hour) rose by 2.6%. This was up from the preliminary reading of 1.8% and was the strongest gain in seven quarters. Productivity rose by just 0.7% in the first quarter.

The upward revision to productivity in the third quarter final report had the effect of reducing unit labor costs (ULC) from the originally reported gain of 2.1% to a gain of just 1.4%, the smallest in four quarters.

Prior to last Wednesday's release of the initial report on gross domestic product (GDP) for the third quarter, forecasters were predicting a slight reduction in productivity growth to about 2.3%. But this was based on the assumption that GDP declined to about 3.1% from the second quarter's 3.5%. Instead, the report showed GDP up by 3.9%. Consequently, productivity was probably better than the early estimates.

Strong productivity is usually a positive influence on the markets. The increased output per hour is seen by stock traders as a bullish economic development: more efficiency and therefore better corporate earnings. And the efficiency often translates into reduced labor costs per unit of output which has a salutary effect on inflation pressures -- a plus for both stocks and bonds.

Also out on Wednesday is the report on wholesale inventories for September. The release is considered second-tier since the wholesale category is only one part of the inventory picture and the data is somewhat dated. In August's report, the Commerce Department said the seasonally adjusted level of inventories rose by 0.1%, down from a 0.2% increase in July and the weakest reading since a 0.3% decline posted last December. The report said that sales picked up by 0.4% following a 0.2% rise in July.

This combination produced an inventory-to-sales (I/S) ratio of 1.11, tying the previous three month's readings as the lowest on record. The I/S ratio is the value of stocks on hand at the end of a month divided by the value of sales for the month. It indicates how many months it would take to entirely deplete existing inventory at the prevailing sales pace.

While lean inventories maintain pressure to replenish stocks, the inventory increases have been soft in the last three report months (0.3% in June, 0.2% in July, and 0.1% in August). In addition, the wholesale report does not include the inventory from the manufacturing and retail sectors. The business inventories report for September, which includes all three sectors, will be released on the 14th.

Besides the productivity and inventories reports, traders will also have a couple of minor, weekly reports to consider. These are the oil inventory report from the Energy Department and the application index data from the Mortgage Bankers Association.

The first influx of new supply (other than the weekly issuance of Treasury Bills -- securities with a maturity smaller than a year) comes on Wednesday as the Treasury will be auctioning a new issue of 10-Year Notes. On the current issuance schedule, there is an initial issue each quarter that is followed a month later by a sale of an additional amount of the initial issue.

The last initial auction in August had mixed results. Bids exceeded the $13 billion offer amount by 2.30 to 1, the same bid-to-cover ratio as in the last initial offering in May. Non-competitive bids, a gauge of individual investor demand, was strong, totaling $155 million, the highest amount in any 10-year offering (initial or reopening) since May of 2004.

But foreign demand was on the weak side. Indirect competitive bids, which include those from foreign central banks, garnered 31.7% of the issue. This was down from last May's award portion of 44.1% and below the 38.6% average of the twelve initial offerings prior to August's.

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.

On Thursday, the only major release is the jobless claims report. In yesterday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits fell last week by 6,000 to 327,000. The previous week's originally reported level of 331,000 was revised up slightly to 333,000. The level has now fallen by 12,000 in the last two weeks but this follows a 30,000 gain the week before that.

The four-week moving average, which smoothes out some of this week-to-week volatility, edged up by 1,750 to 327,000, the highest reading in six months. The average weekly reading for the year to date is 318,488. For all of 2006 it was 312,962. Despite the general increase this year, any figure below 400,000 is an indication that hiring is outpacing layoffs.

The report said that continuing claims for the week ending October 20 (continuing claims must be at least a week old) rose by 65,000 to 2.588 million, the highest reading in seven weeks. The four-week average rose by 13,000 to 2,537,500, the highest reading in four weeks. For the year to date, the average weekly continuing claims figure has been 2.531 million. For all of 2006 it was 2.459 million.

More supply will be hitting the market on Thursday as the Treasury will be auctioning $5 billion in 30-Year Bonds. The issue is actually a reopening of an initial offering in August but that issue, for some reason, had a maturity of 29-years and 9-months. This means next week's issue will have an actual maturity of 29-years and 6-months. It will have a face value of $5 billion, the same size as the last reopening offering in May, which had a maturity of 29-years and 9-months.

May's offering was poorly received. The bid-to-cover ratio was 1.97 to 1, a slightly higher bid-to-cover ratio than the 1.77 seen in the last reopening in August of 2006 but that offering was twice as large ($10 billion). Non-competitive bids totaled just $2.5 million, down from $19 million in the previous reopening. Even accounting for the difference in issue size, this was a much weaker bid. And foreign demand was feeble. Indirect competitive bids garnered just 10.4% of the issue. In August's reopening, the award percentage was 32.7%.

Two trade-related reports are slated for Friday morning. These are the report on international trade for September and the report on import / export prices for October. In August's trade report, the Commerce Department said the seasonally adjusted value of imports exceeded that of exports by $57.6 billion in August. The deficit was the smallest since last January and was considerably narrower than the $59.0B that analysts had predicted. July's originally reported deficit of $59.2 billion was also revised down slightly to $59.0 billion. The report said that the value of imports fell by 0.4% in August from July's record high while that of exports rose by 0.4% to a new record high.

For September, a slightly wider gap of about $58.0 billion is forecast. Net exports constitute a component of gross domestic product so a deeper deficit would subtract from the calculation and a narrower deficit would add to it.

The report on import and export prices gives some indication of inflation pressures stemming from the trade situation. Most attention is given to the import sector. In the last report, the Labor Department said its index of import prices rose in September by 1.0%.

An increase had been anticipated since oil prices spiked up that month. The report showed a 5.4% jump in the price index for imported petroleum products following a 1.1% decline in July. But excluding that category, ex-oil import prices fell by 0.2% in September, the largest decline in eleven months. This followed a 0.1% decline in July. Since oil prices rose again last month, the overall import index is expected to have risen again by about 0.9%.

The last report said that export prices were up by 0.3% in September, the largest increase since June. But the rise was attributable to a 4.1% jump in agricultural product prices, the largest since last November. Excluding the volatile category, there was no change in export prices (0.0%). This follows a 0.1% ex-agriculture increase in August and a 0.1% decline in July.

And the final release of the week is the preliminary read on consumer sentiment from the twice monthly surveys conducted by the University of Michigan. In the final read for October, the overall sentiment index came in at a seventeen month low of 80.0, down from the preliminary reading of 82.0 and from September's final reading of 83.4.

Pessimism prevailed in the outlook for the future and the assessment of current conditions. The expectations index fell to 70.1 from the preliminary 71.6 and September's 74.1. The index of current conditions fell to 97.6 from the preliminary 98.2 and September's 97.9. The expectations index was the lowest in fourteen months and the current conditions index was the lowest in thirteen. Little change from October's numbers is predicted in the preliminary report for November.

10:30 AM EDT :

Treasuries began the day underwater as the employment report for last month was stronger than expected. Stocks initially rose on the news, but the negative sentiment arising from credit market concerns that weighed against stocks yesterday reemerged and the indices fell into the red. The retreat from risk generated a flow into government securities (Treasuries) and bonds are currently ahead, despite the day's economic data.

In the major release of the day, the Labor Department reported that the seasonally adjusted level of nonfarm payrolls rose in October by 166,000. The gain was much higher than the 90,000 that analysts were predicting and was the biggest jump since last May when payrolls increased by 188,000. The downward revision to September's originally reported gain of 110,000 to 96,000 was not much compensation to those who were looking for a weaker gain in October.

The report showed that last month's gains came in the services sector. The biggest increase came in the category of professional and business services where payrolls were up by 65,000. Leisure and hospitality saw a payroll gain of 56,000, the twenty-fourth consecutive increase. And education and health services payrolls grew for a thirty-seventh consecutive month, adding 43,000 in October. The only services categories that contracted were retail sales (down by 21,500) and information (down by 3,000). Government payrolls rose by 36,000 last month.

The goods producing sector was a different story. While payrolls in natural resources and mining grew by 2,000, manufacturing payrolls shrank by 21,000, a sixteenth consecutive decline. Construction payrolls fell by 5,000.

As expected, the report said that the unemployment rate held at 4.7% for a second month. Though the rate is the highest since August of last year, it is still relatively low. A positive for both markets was an increase in average hourly earnings of just 0.2%, the smallest increase since last April.

The second and final economic release of the day was also more bullish than expected. The Commerce Department reported that the seasonally adjusted level of factory orders rose in September by 0.2%. Many forecasters had predicted a decline of about 0.8% because of last week's durable goods orders report which indicated a decline in that category of 1.7%. What they were not counting on was a 2.1% surge in the nondurable category, the largest increase since last March. Factory orders fell in August by 3.5% (revised from -3.3%).

Excluding the volatile transportation category, orders were up by 1.4% as the order level in transportation fell by 6.2%. Orders in the defense sector are not governed by standard market forces so orders excluding the sector are seen as a better representation of underlying demand on production. Ex-defense orders were up by 1.3% as defense saw a 33.9% decline due primarily to a 37.2% drop in aircraft orders.

In the category of ex-defense capital goods minus aircraft, orders were up by 0.6%, a third consecutive monthly increase. The category is seen as a measure of core business demand.

But traders are currently concentrating on news reported by the Wall Street Journal that Merrill Lynch made deals with hedge funds that might have been intended to temporarily hide losses associated with its mortgage related holdings. The news put shares of Merrill into a dive and kept the credit market situation in the spotlight.

Another negative for stocks is a rise in oil prices. The front month crude oil contract retreated yesterday and in early trading today, but in recent activity, the price had turned higher again and was up by $1.06 per
barrel to $94.55.

Market Overview 10/26/07

2007-10-26T14:54:00.000-07:00

5:00 PM EDT :

Treasuries took losses today but they were relatively mild considering the extent of gains made by the stock indices. In late trading, the 10-Year Treasury Note was down by 5/32, raising its yield to 4.40%; the Dow was up by 134.78 points to 13,806.70; and the Nasdaq was up by 53.33 points to 2,804.19.

The catalysts for today's stock rally were a strong earnings report from Microsoft and positive guidance from Countrywide (despite a miserable third quarter). These were enough to eclipse the negatives facing the market. The economic release of the day was not stock-friendly. The final Consumer Sentiment Index for the month indicated that consumers were generally more pessimistic than they have been in almost a year-and-a-half.

And oil prices continue to climb. The price of a barrel of light, sweet crude oil for December delivery rose by $1.40 on the New York Mercantile Exchange to settle at a new record high of $91.86. Yet, the Dow rose by 0.99% on the day; the S&P 500, 1.38%; and the Nasdaq, 1.94%. All three indices made solid progress for the week as well. The Dow gained 2.11%; the S&P 500, 2.31%; and the Nasdaq, 2.90.

Despite the gains in stocks this week, Treasuries held their ground. For the week, the yield of the benchmark, 10-Year Note was up by only 1 basis point after falling last week by 29 basis points (yield moves inversely to price).

Next week's events calendar is brimming with potential market-movers but starts out slowly. There are no major economic releases slated for Monday and the only one on Tuesday is the Consumer Confidence Index for the month from the Conference Board, an independent research firm. September's index came in at 99.8, a sharp drop from August's 105.6, which in turn was a sharp drop from July's 111.9.

The situation was summarized in the news release by Lynn Franco, Director of the Board's Research Center: "The Consumer Confidence Index is now at its lowest level in nearly two years (Nov. 2005, 98.3). Weaker business conditions combined with a less favorable job market continue to cast a cloud over consumers and heighten their sense of uncertainty and concern. Looking ahead, little economic improvement is expected and with the holiday season around the corner this is not welcome news."

Little change is expected in October's reading with the consensus forecast being 100.0. Yet recent economic data has generally been bearish and another drop in the confidence indicator would not be too surprising.

The Federal Reserves monetary policy committee, the Federal Open Market Committee (FOMC), will begin a two-day meeting on Tuesday. Since the results of the meeting will undoubtedly catch some market participants in the wrong position, many traders take defensive actions prior to the publication of the meeting statement. This includes reeling in long positions and covering shorts. Some traders take to the sidelines. But others will attempt to get ahead of the market by taking positions based on their opinion of what the Fed will do.

On Wednesday morning, key economic data will be released which might affect expectations for the outcome of the Fed meeting. The Commerce Department will be releasing its first estimate of 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. The first, or advance, report for last quarter will be followed next month by a preliminary report, and a final report will be issued in December.

The final report on the second quarter showed that the economy grew in the April through June period by 3.8%. This was an improvement from the first quarter increase of 0.6%. In fact, it was the strongest reading in five quarters.

For the third quarter (July through September), analysts predict that GDP rose by about 3.1%. If the reading is notably weaker, many observers will assume that another Fed rate cut is assured.

Also out on Wednesday morning is the Employment Cost Index (ECI) for the third quarter. The ECI, a measure of the seasonally adjusted level of compensation costs for all civilian workers, rose in the second quarter by 0.9% following a 0.8% increase in the first quarter. The index is a more comprehensive gauge of labor costs than the wage data contained in the monthly employment reports because it also incorporates salaries and employer costs for non-cash employee benefits. For the third quarter, another 0.9% increase is anticipated.

The report on construction spending for September will be released a little later on Wednesday morning. In the last report, the Commerce Department said that the seasonally adjusted, annualized pace of spending rose in August 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 and a 1.0% decline in June. August's decline was an eighteenth consecutive monthly contraction and the spending rate was the lowest since December of 2003. Another decline is expected for September, pulling the overall spending level down by a predicted 0.1%.

And the Chicago Purchasing Managers Index, a gauge of manufacturing activity for the heavily-industrialized region, will be released Wednesday morning. Last month, the index came in at 54.2, up from 53.8 in August. Any reading over 50.0 indicates a general expansion of activity relative to the preceding month and September's represented a seventh consecutive month of growth following modest contractions in January and February.

But, of course, the main event of the day will be the conclusion of the Fed's policy meeting. Between January of 2001 and June of 2003, the Fed reduced the short-term lending rate between banks (fed funds rate) from 6.50% to a decades-low 1.00% in order to reduce general borrowing costs and stimulate the economy. Then, between June of 2004 and June of last year, the FOMC raised rates fourteen times to 5.25% in order to prevent the economy from overheating and thereby fueling inflation.

Between June of last year through early August of this year, the Fed took no rate action but maintained a slightly hawkish (that is, tightening) bias, citing elevated core inflation and concerns that it might not abate as expected. But the troubled housing and mortgage industries began to obstruct credit flows since investors backed away from risky mortgage debt, thereby eroding its value. Consequently, lenders in general tightened loan standards, making it harder to borrow money. In the meantime, holders of mortgage loan products have suffered losses since buyers are scarce. This bottleneck reduces the amount of money flowing through the monetary system and drives up the cost of borrowing.

With the complex network of risk-sharing in the world markets, the credit troubles spread. In August, France's largest bank froze three of its hedge funds because of mortgage-related losses. The incident prompted central banks in numerous countries to make short-term loans to banks in order to keep money flowing and ease investor anxiety.

The Federal Reserve was one of the central banks pumping additional reserves into the monetary system. It even made a temporary 0.50% cut to the discount rate, the rate banks must pay for loans directly from the Fed. This brought the rate down from 6.25% to 5.75%. In addition, the committee extended the length of time reserves could be borrowed and it made a public relations push to diminish the negative connotations attached to such borrowing (loans from the Fed were typically considered last resort measures).

Nevertheless, short-term commercial debt offerings dried up and investors flocked to the safety of government backed securities. In order to ease the credit situation, the Fed decided in its September meeting to cut the fed funds rate by 0.50%, from 5.25% to 4.75%. This was the first rate cut since June of 2003 and the largest since November of 2002. The policy committee also cut the discount rate again by 0.50% from 5.75% to 5.25%.

Late last month, many Fed watchers felt that another cut would be made this month, but doubts were raised when the employment report for September revealed revisions to past data that indicated a respectable gain in nonfarm payrolls in August instead of the first decline in four years as had originally been reported. Moreover, comments by Fed officials earlier this month did not seem to signal that another cut in rates was imminently forthcoming.

Since then, however, prospects for a rate cut have picked up again. On Monday evening, October 15, Fed Chairman Ben Bernanke delivered a speech before the Economic Club of New York. In it, he gave an overview of the interrelated mortgage and credit market problems and summarized the central bank's responses to the recent market turmoil.

Of particular interest to market participants were his warnings that the economy might experience more challenges ahead. He noted that, "Since the September meeting, the incoming data have borne out the Committee's expectations of further weakening in the housing market, as sales have fallen further and new residential construction has continued to decline rapidly. The further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year."

He also said, "Conditions in financial markets have shown some improvement since the worst of the storm in mid-August, but a full recovery of market functioning is likely to take time, and we may well see some setbacks."

Moreover, economic data released in the last couple of weeks has been bearish. The report on housing starts said the pace in September was the lowest in over fourteen years. The report on existing home sales for last month revealed the lowest rate in at least eight years. The rate of new home sales rose in September but the latest data showed that this was from a revised level on August that was sharply lower than previously reported.

And concerns about the mortgage / credit situation have recently been revived by a huge earnings miss reported earlier this week by Merrill Lynch. The earnings news principally reflected deep losses associated with mortgage-backed investments.

For these reasons, many traders feel that next week's FOMC meeting will end with further rate cuts. Most predict that the committee will cut the fed funds and discount rates by 0.25%. A few are looking for another aggressive cut to the rates of 0.50%. Others think the committee will decide to make no rate changes. The policy statement will be released at about 2:15 PM Eastern Time.

Compounding the problems facing bond traders is that Wednesday is the last trading day of the month and affords portfolio managers with their last opportunity to make adjustments for the period. This is the process whereby holdings are rebalanced on the basis of such characteristics as yield, risk, and return horizon. This usually entails the purchase of Treasuries even in mixed portfolios since the securities have a fixed lifespan and carry no credit risk.

On Thursday, the markets are likely to be still reacting to the results of the Fed meeting. But they will also have to contend with more economic data. As usual, the jobless claims report will address the employment situation and it may get more attention than usual since it heralds the approach of the Friday's employment report. The data collection periods for the two reports do not coincide so the claims numbers will not have a direct relationship with the employment figures, but traders will be closely scrutinizing the claims report, nonetheless.

In yesterday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits fell by 8,000 last week to 331,000. The previous week's originally reported 337,000 figure was revised up to 339,000, which was a 30,000 increase from the week before.

The reports over the past month have generally exhibited larger than expected swings in the initial claims number and following the big increase in the week of October 13, a decline in last week's number had been anticipated. The four-week moving average, which smoothes out some of this week-to-week volatility, rose by 7,750 to 324,750. This is up slightly from the year-to-date weekly average of 318,238.

Yesterday's report indicated that the level of continuing claims for the week ending October 13 (continuing claims must be at least a week old) rose by 7,000 to 2.530 million but the previous week week's originally reported 2.534 million was revised down by 11,000 to 2.523 million. The four-week moving average slipped by 3,750 to 2.526 million. The weekly average for the year-to-date is about 2.530 million.

Because of the recent pattern of moves in the data, the initial claims level for this week is expected to have increased slightly.

The other early release on Thursday is the report on personal income and spending for last month. In August, the seasonally adjusted, annualized level of personal income, the fuel for spending, rose by 0.3%, the smallest increase since a flat reading (0.0%) in April. August's rise followed three consecutive months month's of 0.5% increases. Although income growth had decelerated, the report said personal consumption expenditures (PCE or consumer spending) rose by 0.6%, up from July's 0.4% and the biggest increase in four months.

The inflation measures in the report were tame. 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%.

For September, both income and spending is expected to show increases of 0.4%. Over the last twelve report months, the average change in income has been 0.5% and the average in spending has been 0.4%.

At 10:00 AM Eastern Time Thursday, the Institute for Supply Management (ISM) will release its index figures on the nation's manufacturing sector for October. In September's release, the overall index came in at 52.0, the lowest reading since March's 50.9. The index was 52.9 in August. Like the Chicago index, any reading over 50.0 reflects growth for the month.

Between June of 2003 and October of last year, the index posted forty-one straight expansion readings. But the extent of growth declined throughout last year 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. But each three reading since then was weaker than the one before. For October's index, little change from
September's reading is anticipated.

Traders will also be watching the prices index since it measures inflation pressures associated with the sector. September's index came in at 59.0, down from August's 63.0. Though it still indicated an increase in prices manufacturers were paying, the index was the lowest since February.

Another economic release on Thursday is the report on pending home sales for September from the National Association of Realtors. The last report said that the seasonally adjusted index of pending sales fell by 6.5% in August to a record low following a 10.7% drop the month before. The first report was published in 2005 and the NAR has data going back to 2001.

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 weakness in July and August's reports was reflected in September's existing home sale report.

On Friday, the employment report for October will take center stage. September's report said that the seasonally adjusted level of nonfarm payrolls rose by 110,000. The increase had been predicted but, as noted above, the report was much stronger than expected since August's originally reported decline of 4,000 was revised to a gain of 89,000 and July's previously reported gain of 68,000 was revised to 93,000.

A key category behind the revisions to July and August was government employment. July's previously reported decline of 52,000 was trimmed to 28,000 and August's originally reported decline of 28,000 was revised to an increase of 57,000. In September, government payrolls grew by 37,000.

Despite the increases in payrolls, they were not enough to prevent the unemployment rate from edging up to 4.7% from August's 4.6%. Though still considered low, the rate was the highest since August of last year. The unemployment rate is the portion of the workforce (over 16 years old and actively seeking employment) without jobs. While the number of jobs can increase, so can the workforce. September's report said that it rose by 573,000 individuals after falling by 340,000 in August.

Current predictions for October call for another gain in payrolls of about 90,000. The unemployment rate is expected to have remained at 4.7%. But traders have learned that the reports frequently fail to meet forecasters' estimates. Therefore, because of the uncertainty, the markets are usually subdued the afternoon before the report comes out.

The final release of the week is the report on factory orders for September. In August, the seasonally adjusted level of new orders reportedly fell by 3.3% after an increase in July of 3.4%.

Since September's report for durable goods items (which make up slightly more than half of factory orders) has already been released and indicated a surprising 1.7% decline in that category, recent predictions of a rise in factory orders of about 1.0% have been revised sharply lower. Nondurable goods have averaged a modest 0.2% increase so far this year and if that figure is plugged into prediction calculations, this would result in an overall decline in the orders level of 0.8%. This would be the first back-to-back decline since July and August of last year.

But the durable goods report showed that the decline was due primarily to a sharp drop in defense aircraft orders. Excluding the transportation category, orders were up slightly and they were also up if the defense sector was factored out. Moreover, the category of ex-defense capital goods minus aircraft -- seen as a proxy for core business demand -- also saw an increase in orders (0.4%). These categories will also be closely watched in the factory orders report. In any case, however, the employment news is likely to overshadow the orders data.

10:30 AM EDT :

As feared, mortgage lending giant Countrywide reported an even larger loss last quarter than analysts had predicted due to falling loan volumes, poorly performing loans, and set-asides the company made for future
loan losses.

But stock traders were encouraged by the company's estimation that it would post a profit in the current quarter. In addition, the tech sector is being buoyed by strong earnings reported by Microsoft after the bell yesterday.

In the only major economic news of the day, news sources report that the final Consumer Sentiment Index for the month from the University of Michigan came in at a seventeen month low of 80.0, down from the preliminary reading of 82.0 and from September's final reading of 83.4.

The expectations index fell to 70.1 from the preliminary 71.6 and September's 74.1. The index of current conditions fell to 97.6 from the preliminary 98.2 and September's 97.9. The expectations index was the lowest in fourteen months and the current conditions index was the lowest in thirteen.

Though the sentiment data was weaker than analysts had predicted, the erosion of optimism is not too surprising in light of generally bearish economic reports released recently (housing starts, existing home sales, industrial production, durable goods orders).

Rising oil prices are also a growing concern for consumers and oil futures continue to break new ground. In overnight trading, the price of a barrel of crude oil for December delivery topped $92.00. The price has since backed down but in recent trading it was still higher than the record close of yesterday's regular NYMEX session.

In the bond market this morning, traders are still in the process of absorbing this week's new supply ($6 billion 5-Year TIPS, $20 billion 2-Year Notes, and $13 billion 5-Year Notes). And with the major events of the week over, traders in both markets are now looking ahead to next week's heavy set of influences.

These include the first official look at gross domestic product for the third quarter, the Federal Reserve's latest meeting on monetary policy, the release of a key manufacturing indicator, and the employment report for October. In addition to positioning for these market-movers, traders are also considering how best to close out their books for the month.

Given the nature of these variables, stock and bond price movements may be erratic for a while.

Market Overview 10/19/07

2007-10-19T14:57:00.000-07:00

5:00 PM EDT :

Stocks took a beating today as credit concerns intensified. Treasuries were the beneficiary of the retreat from risk and prices were up sharply across the maturity spectrum. In late trading, the 10-Year Treasury Note was up by 26/32, lowering its yield to 4.39%; the Dow was down by 366.94 points to 13,522.02; and the Nasdaq was down by 74.15 points to 2,725.16.

Though stocks had taken losses earlier in the week, they seemed to be holding up relatively well against technical pressures from recent gains (the Dow posted its record closing high of 14,164.53 on October 9), against soft economic data (bearish reports on industrial production, housing starts, initial jobless claims), and against signs that the housing / subprime mortgage / credit market problems were still threatening the economy.

On Monday night, Fed Chairman Ben Bernanke addressed the situation, saying, "Since the September meeting, the incoming data have borne out the Committee's expectations of further weakening in the housing market, as sales have fallen further and new residential construction has continued to decline rapidly. The further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year." With regard to the markets he said, "Conditions in financial markets have shown some improvement since the worst of the storm in mid-August, but a full recovery of market functioning is likely to take time, and we may well see some setbacks."

On Wednesday, the Fed's Beige Book also noted that many of the central bank's industry contacts were uncertain about the outlook for the economy and that the housing sector is likely to remain weak. On top of these negative signals, several large banking companies' earnings numbers for last quarter were lower than analyst projections. More bad news today concerning the credit situation was a downgrade by Standard and Poors on a broad array of mortgage-backed securities.

And though oil futures ultimately fell today, yesterday's close was a record high and a break above the $90 per barrel level in overnight trading has some market watchers pondering the possibility of a $100 per barrel price before too long. But today, profit-taking finally pulled futures lower. The price of a barrel of light, sweet crude oil for November delivery fell by $0.87 on the New York Mercantile Exchange, settling at $88.60. The November contract expires on Monday.

The accumulated pressure was finally too much for stocks and all three major indices nosedived today. By the end of stock trading, the Dow had fallen by 2.64%, the S&P 500 by 2.56%, and the Nasdaq by 2.65%. The declines were the steepest for the Dow and S&P 500 since August 9 and the steepest for the Nasdaq since February 27. For the week, the Dow was the biggest loser with a decline of 4.05%. The S&P 500 lost 3.92% on the week and the Nasdaq lost 2.87%.

In contrast, the yield of the benchmark 10-Year Treasury Note fell by an incredible 29 basis points this week (yield moves inversely to price).

Next week, the economic release calendar is light but it includes the reports on home sales (existing and new) for last month. Bonds will also be pressured by a heavy influx of new supply to compete for investor
dollars.

There are no major economic releases slated for Monday or Tuesday. But the first of three Treasury note offerings will be conducted on Tuesday. The Treasury will be auctioning an additional portion of last April's issue of 5-Year Treasury Inflation Protected Securities (TIPS) so the maturity will actually be 4-1/2 years. TIPS have a fixed coupon (interest) rate, but their face value is regularly adjusted according to the Consumer Price Index, so the interest payout amounts fluctuate according to the changes in inflation. At maturity, the greater of the inflation-adjusted or original redemption value is paid out.

The face value of the offering in April's auction was $8 billion, the lowest for an initial issue in the current issue schedule begun in 2004. Consequently, the face value of next week's offering is expected to be $6 billion, down from the $7 billion in each of the last two reopening sales.

In the last reopening in October of last year, the offering met with strong demand. Bids exceeded the offer amount by 2.89 to 1, the highest bid-to-cover ratio in all of the auctions (initial or reopening) in the current issue cycle including last April's. Individual investor demand was a little disappointing, however. Noncompetitive bids totaled just $67 million, down slightly from $68 million in the previous October's auction and well below the $111 million in the initial offering.

But foreign demand for was strong. Indirect competitive bids, which include those from foreign central banks, received 51.4% of all accepted competitive bids and 50.9% of the entire issue. The total award portion in the previous reopening (October 2005) was 23.2% and it was 26.1% in the initial sale of the issue (April 2006).

On Wednesday, the only major economic release is the report on existing home sales for September. In August's report, the National Association of Realtors said that the seasonally adjusted, annualized pace of sales fell by 4.3% to 5.50 million from July's 5.57 million. Though the decline was in line with predictions, it was the sixth in as many months and the pace was the lowest in five years. The report said that inventories of homes on the market rose to 4.581 million, a ten-month's supply at August's sales pace. Average prices fell by $6,700 and median prices by $4,200.

Current projections for September call for another decline in the sales rate of about 3.6% to 5.30 million. If the prediction is accurate, it would be the lowest sales pace since December of 2001.

More supply hits the market on Wednesday as the Treasury conducts its monthly 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 auction was generally successful. The bid-to-cover ratio was 3.29, down slightly from August's 3.97 but well above the 2.91 average for the twelve, 2-year offerings prior to September's. Noncompetitive bids were soft, however. They totaled $663 million, down from $856 million in August and down from the twelve-month average of $821 million. In fact, noncompetitive bids represented 3.7% of the issue amount, the lowest portion of a 2-year offering since April of 2005. But foreign demand was solid. Indirect competitive bids garnered 34.2% of the entire issue, the highest award portion since last April and slightly higher than the twelve-month average of 33.6%.

The last eight, 2-Year issues had a face value of $18 billion and that is the projected size of next week's. The deadline for competitive bids is 1:00 PM Eastern Time.

On Thursday, the jobless claims report once again highlights the employment situation. Yesterday's report said that the seasonally adjusted level of initial claims for state unemployment benefits jumped last week by 28,000 to 337,000 from the previous week's 309,000 (originally 308,000). The spike was the largest in eight months and the level was the highest in seven weeks.

The data series has been more volatile than expected in the last few weeks, moving back and forth in larger than expected swings. Analysts note that the latest spike could have been exaggerated by an additional adjustment made to offset the closure of labor offices on Columbus Day. The four-week moving average, which smoothes out some of this short-term volatility rose by 6,000 to 316,500. The average weekly initial claims level for the year-to-date is 317,878. For this week's claims figure, a decline of between 10,000 and 15,000 is anticipated.

The other early release on Thursday is the report on durable goods orders for September. 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 August's report, the Commerce Department said the seasonally adjusted level of durable goods orders fell by 4.9% and this was later confirmed in the factory orders report for the month. The information to follow uses whatever revisions the factory report may have made to August's report on orders for durables.

The decline was the largest in seven months but it followed a 5.9% jump the month before which was the largest increase in ten months. A large contributor to August's decline was the transportation category, which saw a contraction of 11.1%, and within the category, commercial aircraft orders were down by 39.9%. But even excluding transportation, orders were down by 1.8% -- also the biggest drop in seven months.

Orders outside the defense sector are often isolated by analysts since defense orders are not governed by standard market forces. The level of ex-defense orders declined by 5.9% in August following a 4.6% rise the month before. If commercial aircraft orders are further excluded from the ex-defense figures, orders were down by 2.0% in August following a 3.7% increase in July.

And ex-defense orders for capital goods minus aircraft -- seen as a proxy for core business demand on the production process -- fell by 0.5% in August and July's originally reported increase of 1.7% was revised down to a gain of just 0.9%.

For September, forecasters are looking for a bounce in durable goods orders of about 1.5%. The final economic release on Thursday is the report on new home sales. In August's report, the Commerce Department said that the seasonally adjusted, annualized sales pace fell by 8.3% month from 867,000 to 795,000. The decline was the largest since January and the sales rate was the lowest since June of 2000. Another decline in the sales pace of about 1.9% is predicted for September, bringing it down to 780,000. This would be the lowest pace since May of 1997.

Observers will also be watching for inventory levels and price changes. August's report said the number of homes on the market declined for a fifth straight month, falling by 1.5% to 529,000. The drop was the largest since last November and the inventory level was the lowest since January of last year. Yet, given the weak sales pace, the inventory represented 8.2 months worth of sales, up from July's turnover pace of 7.5 months.

The average new home price fell in August by $14,200 to $292,000 and the median price fell by $20,500 to $225,700. The average price was the lowest since last November and the median price was the lowest since November of 2004. On a year-over-year basis, the average price was down by 8.0% and the median price by 7.5%.

The last Treasury auction of the week comes on Thursday with the monthly issuance of 5-Year Notes. September's offering was met with strong demand. The bid-to-cover ratio was 2.86, the highest since August of 2006. But individual investor demand was soft. Noncompetitive bids totaled $119 million, the lowest amount for a 5-year offering since last April. But foreign demand was strong. Indirect competitive bids received 44.8% of the issue, the highest award portion since last December. The last ten issues of the 5-Year Note had a face value of $13 billion and that is the anticipated size of next week's.

On Friday, the only economic news is the final read on consumer sentiment from the twice monthly surveys conducted by the University of Michigan. The preliminary index, released last Friday, came in at 82.0, down from September's final reading of 83.4 and the weakest sentiment indicator since August of last year. Forecasters had predicted a more optimistic reading of about 84.0. Some improvement was seen in the index of current conditions. It came in at 98.2 for the early part of October, up from September's final reading of 97.9. But the expectations index slipped to 71.6 from 74.1.

Recent projections for October's final index number were for little change or a slight rise to 82.5. But recent economic data has been bearish and the sentiment indicator could be lower than expected. If the index has held steady or increased slightly, the news is likely to be discounted unless there are some bullish surprises in upcoming economic data.

10:30 AM EDT :

After solid gains this week, Treasuries are up once again this morning despite a lack of any new economic data. The stock indices are down sharply, spooked in part by further increases in oil futures in overnight and early U.S. trading. But, after the front-month contract price broke through the $90.00 per barrel level last night, it has retreated on a round of profit-taking and in recent trading was at $88.76, $0.71 below yesterday's NYMEX closing level of $89.47.

The fear that tight credit conditions still pose a threat to the economy were stoked by additional poor earnings news in the financial sector. Today's report came from Wachovia and it indicated earnings well below street projections. It joins other misses in the sector reported this week including those from SunTrust, First Horizon, Bank of America, and Wells Fargo.

With attention refocused on the situation, even the better than expected earnings report from Google, released after the bell yesterday, has failed to give the stock market any footing.

The drop in stocks is providing a flow into Treasuries but technical pressure may cap gains today. Although there are no major economic reports today and next week's calendar is light, a heavy load of new supply is heading to market next week as the Treasury will be auctioning a 5-Year Treasury Inflation Protected Securities issue (actually a reopening of last April's TIPS issue), a new 2-Year Note, and a new 5-Year Note. This competition for investor dollars will keep a lid on the bond market until the results of the auctions are known.

The existing and new home sales reports for last month will be released next week. Though they are expected to show further declines -- a plus for bonds in that this would further bolster the case for a Fed rate cut -- they could surprise on the high side so this gives traders another reason to be defensive. And, of course, traders may be inclined to cash in on some of their recent gains.

But for now, the bond market is being driven by the losses in stocks. Recent economic data has been bearish and the indices have been at historically high levels despite the swelling parade of quarterly earnings report releases. Yesterday's flat finish for the market may have been a last stand against the combination of negative influences as all three indices have given up a lot of ground in early trading today.

Market Overview October 12, 2007

2007-10-12T15:00:00.000-07:00

5:00 PM EDT :

Treasuries began the day in negative territory, and though they pared most of the losses by midday, they fell back again this afternoon and finished deep in the red. The stock indices had a choppy session but the action was all in positive territory and they finished with gains for the day. In late trading, the 10-Year Treasury Note was down by 12/32, raising its yield to 4.68%; the Dow was up by 77.96 points to 14,093.08; and the Nasdaq was up by 33.48 points to 2,805.68.

The centerpiece of today's news was a larger than predicted increase in retail sales last month. The other releases had less of an impact on the markets. The PPI was up sharply last month but this followed a sharp plunge the month before. Moreover, the core index, which excludes the volatile food and energy components, was only up slightly in September.

Business inventories were only slightly higher in August but they remained at historically lean levels. Lastly, the first of two Consumer Sentiment Index readings for the month was weaker than anticipated, though survey results are not always reliable indicators of forthcoming consumer behavior.

The retail sales news, last week's sharp upward revision to August's payroll number, and yesterday's report of a smaller than expected trade deficit in August all point to a firmer economic picture than previously thought and reduces the chances of a rate cut by the Federal Reserve at the next monetary policy meeting. The shifting perspective undercut the bond market and although further rate cuts would be good for stocks as well, the economic implications of the recent data have been good enough so far to sustain progress in the stock market.

Besides the retail sales news, stocks got a boost from better than expected earnings reported by McDonalds and positive analyst guidance on Eastman Kodak and Safeway. Mergers and acquisitions activity also brightened trader sentiment. Software maker, Oracle, has made a bid for BEA Systems and video game maker, Electronic Arts, announced that it was buying BioWare and Pandemic Studios. Such aggressive actions are considered bullish since they seem to reflect confidence in the economy on the part of corporate decision makers.

A negative influence on stocks was another rise in oil prices. The price of a barrel of light, sweet crude for next month delivery rose by $0.61 on the New York Mercantile Exchange to settle at $83.69, a new record high for a front-month contract. High energy prices support the energy sector of the stock market but they are generally bearish since they divert business and consumer spending from other areas of the economy.

Nevertheless, by the end of stock trading, the Dow had gained 0.56% on the day; the S&P 500, 0.48%; and the Nasdaq, 1.21%. The Dow's close was the second highest on record and the S&P's was the third. The Nasdaq's close was the second highest in six-and-a-half years. The price of the 10-Year Treasury Note lost ground on the week, pushing its yield up by 5 basis points. Yield moves inversely to price.

Next week's economic calendar is relatively light but it contains a key inflation indicator, an important report on industrial production, a couple of regional manufacturing indices, a look at housing construction, and the
Federal Reserve's latest summary of the economy.

On Monday, the only major release is the New York Fed's report on the region's manufacturing activity for the month. Last month, the index of general business conditions came in at a four-month low of 14.7. This was down from August's reading of 25.1 and was slightly below the lower end of forecasts between 15.0 and 20.0. Any reading over 0.0 indicates a general increase in activity relative to the preceding month and September's was a twenty-eighth consecutive growth indicator. For October, the index is expected to have edged down to about 14.0.

The New York region is comparatively small. The importance of the NY Fed Index comes from the fact that it provides the first glimpse of manufacturing activity 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. The Philadelphia index will be released on Thursday.

On Tuesday, 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 August by 0.2%, a little less than the 0.3% that analysts had predicted but July's originally reported gain of 0.3% was revised up to 0.5%. However, two of the components saw contractions in output in August. Manufacturing output fell by 0.3%, the first decline in six months and the largest decline in seven months. Mining output declined by 0.6%, also the largest drop since January. It was only in the volatile category of utilities that output increased. It rose by 5.3%, the biggest jump since last February.

There was a somewhat worrisome inflation indicator in the report. Capacity utilization, the ratio of output to potential output, was 82.2% in August. Not only was this higher than the 82.0% that analysts expected, but July's originally reported 81.9% was also revised up to 82.2%. The last two readings were the highest since August of last year. High utilization means less slack in the production process which can lead to bottlenecks. When demand cannot be met, prices rise.

But a closer look at the utilization data revealed a less dire picture. Once again, the utilities category was the central reason for the high reading. Utilization there rose from 83.6% to 87.9% while the largest category, manufacturing, saw a decline to 80.7% from 81.0% and mining saw a decline to 90.2% from 90.8%.

For September, overall industrial output is expected to have risen by about 0.1%. Capacity utilization is expected to have remained at 82.2%.

Wednesday brings the Consumer Price Index, a gauge of inflation at the retail level. It fell in August by 0.1%, the first contraction since last October. Energy prices constituted the largest component contributing to August's decline with its index falling by 3.2%. Excluding the volatile categories of food and energy, the so-called core index was up by an in-trend and anticipated 0.2%. Food was an upward pressure on the headline number with an index increase of 0.4%.

For September, following two months of virtually no change (01% and -0.1%) a rebound of about 0.2% is anticipated for the overall index. The core index is expected to have risen by 0.2% for a fourth consecutive month.

The report on housing starts is also slated for Wednesday. In August's release, the Commerce Department said that the seasonally adjusted, annualized pace of starts fell by 2.6% to 1.331 million, the lowest rate since June of 1995. Furthermore, July's originally reported rate of 1.381 million was trimmed by 1.0% to 1.367%. The report also said that the rate of building permit issuance, a gauge of near-term starts, also declined, losing 5.9% to 1.307 million. Though this has subsequently been revised to a 4.8% decline to 1.322 million, the pace was still the lowest since June of 1995.

For September, the starts pace is predicted to have fallen another 3.5% to 1.285 million and the rate of permit issuance is expected to have declined once again.

On Wednesday afternoon, the Federal Reserve will release its latest edition of its Beige Book. The Beige Book, so named for the color of the hard copy cover, is an anecdotal summary of economic conditions in the twelve Fed regions and the monetary policy committee uses it as one of its background resources during policy deliberations. The next committee meeting is slated for the 30th and 31st of the month.

The summary is often overlooked because other reports have already revealed the economic situation, but observers will be closely scrutinizing Wednesday's release for any specific emphasis it might place on economic, inflation, and financial market issues. In August, the Fed cut the interest rate it charges to banks for loans (the discount rate). Then, in September it cut the rate again and also the Fed's target rate for short-term loans between banks (the fed funds rate).

These actions were made in an effort to prevent tightening credit conditions from choking off the economy. But they have raised some inflation concerns since prior to the cuts, the Fed had maintained a slightly hawkish stance on rates because of concerns that inflation might not subside in coming quarters as anticipated. Fed watchers are currently not sure if the policy committee will ease rates again at the end of the month.

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 fell by 12,000 last week to 308,000. A decline of some magnitude had been anticipated due to a larger than expected increase the week before (originally reported as a gain of 16,000 but revised to an increase of 20,000 in yesterday's report). The four-week moving average, which smoothes out some of the week-to-week volatility, declined by just 3,000 to 310,250. The average weekly claims level for the year to date is 317,375. As a rule of thumb, any reading below 400,000 is considered an indication that hiring is outpacing layoffs.

The report said that the level of continuing claims for the week ending September 29 (continuing claims must be at least a week old) fell by 15,000 to 2.521 million, the lowest reading in fifteen weeks. The four-week average fell by 19,000 to 2,535,500. The average weekly level of continuing claims for the year-to-date is 2,529,949.

The latest decline in initial claims was somewhat larger than expected so analysts are looking for a slight increase in last week's level as the recent volatility continues to settle out.

A little later on Thursday morning, the Conference Board, an independent research firm, will release its Index of Leading Economic Indicators for September. The data series has been mildly bearish throughout the year with five contraction readings in the first eight months. But the last report said that within the previous six months (March to August), the index was up by 0.5%. It fell by 0.6% in August following a 0.7% increase in July. Indicators such as a decline in initial jobless claims and a rise in stocks point to a positive index reading for September. Analysts are predicting an increase of about 0.4%.

The final economic release of the week comes at noon on Thursday when the Philadelphia branch of the Federal Reserve publishes its index data on the region's manufacturing activity for this month. In September's release the index came in at 10.9, up from a flat reading (0.0) in August and the second best reading (after an 18.0 last June) since August of last year. Forecasters had predicted a reading of only about 2.0. As is the case with the New York Fed index, any reading over 0.0 indicates a general expansion of activity relative to the preceding month. A slightly weaker growth reading of about 8.0 is predicted for October.

10:30 AM EDT :

The economic news of the day was mixed but the report on retail sales has been the focus of attention, bearing down on Treasuries and giving stocks a modest boost.

The Commerce Department reported that the seasonally adjusted level of retail sales rose in September by 0.6% after a 0.3% increase in August. The gain was larger than the consensus estimate of 0.2% but some forecasts were calling for an increase of about 0.5%. Auto sales, a volatile category that makes up about a quarter of all sales, were up by 1.2% after a 3.3% increase in August. Excluding the category, sales were up by 0.4% following a 0.4% decline.

For obvious reasons, another volatile category is sales at gasoline stations. Sales there were up by 2.0% in September following a 2.6% decline the month before. Excluding both the auto and gas station categories, sales were up by 0.2% following a 0.1% decline in August.

Other large gaining categories were nonstore retailers (up by 1.1%), health and personal care stores (up by 1.0%), electronics and appliance stores (up by 0.9%), and food and beverage stores (up by 0.8%). Building material and garden supply stores saw a nominal gain of 0.1%. Declines were posted in the categories of miscellaneous store retailers (down by 1.3%); sporting goods, hobby, book, and music stores (down by 0.7%), furniture and home furnishings stores (down by 0.6%); clothing and clothing accessories stores (down by 0.4%). General merchandise stores saw a decline of 0.1%).

The major inflation news of the day was mixed but the headline surprise is weighing against both stocks and bonds. The Labor Department reported that its Producer Price Index, a gauge of inflation at the wholesale level, rose in September by 1.1%, the largest increase since February. Though a bounce was expected after August's 1.4% oil-related plunge (the largest since October of last year), last month's increase was larger than the 0.5% that analysts had predicted. On a year-over-year basis, the index was up by 4.4%, the largest Y/Y margin since June of 2006.

But energy was again a major factor in the overall move. The energy index rose by 4.1% in September, the biggest increase since last November. This followed a 6.6% decline in August, the largest drop since April of 2003. Foods, another volatile category, also jumped more than expected last month. The index for that category, after four months of declines, rose by 1.5%, the largest increase since March.

The inflation news was not all bad. Excluding foods and energy, the so-called core index rose by just 0.1% in September. On a year-over-year basis, the core index was up by 2.0%. This is still somewhat elevated but an improvement from August's Y/Y margin of 2.2% and July's 2.3%. Price pressures further down the production pipeline were also relatively tame. The index for prices at the intermediate stage of production rose by 0.4% last month following a 1.2% decline in August. At the initial, or crude, stage of production, the price index rose by 0.1% following a 3.0% decline.

The report on business inventories was also released this morning and though it was a little softer than anticipated, the news was not all that surprising. The Commerce Department said the seasonally adjusted level of business inventories rose by 0.1% in August, the weakest gain since a flat (0.0%) reading in March. Sales fell by 0.4% due to a 1.6% decline in the manufacturing sector.

This combination raised the inventory-to-sales (I/S) ratio up to 1.27 from July's 1.26. The I/S ratio is the value of inventories divided by the values of sales for the month. The result shows how many months it would take to entirely deplete the stocks on hand at the prevailing sales pace. A low ratio means pressure is high on the production process to replenish supplies. Though August's ratio was up from July's, it was
still not far from the record low of 1.25.

In the final economic release of the week, news sources report that the preliminary index on consumer sentiment for the month from the University of Michigan came in at 82.0, down from September's final reading of 83.4 and the weakest sentiment indicator since August of last year. Forecasters had predicted a more optimistic reading of about 84.0. Some improvement was seen in the index of current conditions. It came in at 98.2 for the early part of October, up from September's final reading of 97.9. But the expectations index slipped to 71.6 from 74.1.

2007-10-05T14:43:00.000-07:00

5:00 PM EDT :

Treasuries got slammed today by the employment report for last month while stocks made respectable gains. In late trading, the 10-Year Treasury Note was down by 31/32, lowering its yield to 4.4.63%; the Dow was up by 91.70 points to 14,066.01; and the Nasdaq was up by 46.75 points to 2,780.32.

Last month's employment figures were within predicted levels but upward revisions to the nonfarm payroll numbers in the preceding two months dimmed prospects of another Fed rate cut at the end of the month. Though lower borrowing rates would also benefit stocks, the stronger than expected labor situation means businesses are still expanding and more wage earners mean more consumer spending.

The employment report trumped all other influences and by the end of stock trading, the Dow had gained 0.66% on the day; the S&P 500, 0.96%; and the Nasdaq, 1.71%. All three made solid gains for the week, a fourth consecutive advance. The Dow rose by 1.23%, the S&P 500 by 2.02%, and the Nasdaq by 2.92%. The S&P 500's close today was a record high and the Dow's was its second highest on record. The Nasdaq's close was the highest since February 1, 2001. In the bond market, the yield of the benchmark 10-Year Note, despite rising by 12 basis points today, was up by only 4 basis points for the week. This follows a decline of 3 basis points last week. Yields move inversely to price.

Next week, the economic calendar is back-weighted. There are no economic releases slated for Monday and the bond market will be closed in observance of Columbus Day. There are no economic reports on Tuesday either but in the afternoon, the Federal Reserve will release the minutes of its last monetary policy meeting, held on September 18.

Between January of 2001 and June of 2003, the Federal Open Market Committee (FOMC, the monetary policy arm of the Fed) reduced the short-term lending rate between banks (fed funds rate) from 6.50% to a decades-low 1.00% in order to reduce general borrowing costs and stimulate the economy. But between June of 2004 and June of 2006, the FOMC raised rates fourteen times to 5.25%. The rate remained there until last month when the committee cut the rate by 0.50% to 4.75%.

In the meetings between the last rate increase and September's rate cut, the FOMC had said that its primary concern was with the threat of inflation. In the meetings just prior to last month's, the committee said that though it expected elevated inflation levels to abate over time, the possibility that they might not abate as expected was keeping the Fed in a wait-and-see stance regarding rates.

But the troubled housing and mortgage industries jolted the credit market since it caused investors to back away from risky mortgage debt. Consequently, lenders in general have tightened loan standards, making it
harder to borrow money. In the meantime, holders of mortgage loan products are in a bind since buyers are scarce. This bottleneck reduces the amount of money flowing through the monetary system and drives up the cost of borrowing.

With the complex network of risk-sharing in the world markets, the situation has become wide-spread. In August, France's largest bank froze three of its hedge funds, not allowing investors to add to or liquidate their holdings. The incident prompted central banks in numerous countries to make short-term loans to banks in order to keep money flowing and ease investor anxiety.

The Federal Reserve was one of the banks pumping additional reserves into the monetary system. It even made a 0.50% cut to the discount rate in August. The discount rate is the rate banks must pay for loans directly from the Fed. In addition, the committee extended the length of time reserves could be borrowed and it made a public relations push to diminish the negative connotations attached to such borrowing (loans from the Fed were typically considered last resort measures).

Nevertheless, short-term commercial debt offerings dried up and investors flocked to the safety of government backed securities (Treasuries). In order to ease the credit situation, the Fed made another 0.50% cut to the discount rate and cut the fed funds rate last month.

The bond market, which normally benefits from rate cuts, took a hit after the Fed action. For one thing, it eased the flight-to-safety flow that had been generated by the credit situation. For another thing, the aggressive actions were seen as potentially inflationary. But, after the initial reaction played itself out, prices of Treasuries trended higher once again -- until today's meltdown.

Fed watchers will be very eager to see if the minutes of the September meeting shed any light on the committee's assessment of the inflation threat and the effect on it that the cuts might make. They will also be interested to see if August's employment report was mentioned as a contributing factor in the committee's decision to cut rates.

The only major economic release on Wednesday is the report on wholesale inventories for August. The release is considered second-tier since the wholesale category is only one part of the inventory picture and the data is somewhat dated. In July's report the Commerce Department said that the seasonally adjusted level of wholesale inventories rose by 0.2%. This was lower than forecasters were calling for and June's previously reported gain of 0.5% was revised down to 0.3%. Moreover, July's gain was the weakest inventory reading since a 0.3% decline was posted last December.

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.

Inventory gains are expected to have been sluggish again in August with a projected increase of 0.2% or 0.3%. The I/S ratio is still expected to indicate lean supply levels, however.

Besides the inventories report, traders will also have a couple of minor, weekly reports to consider. These are the oil inventory report from the Energy Department and the application index data from the Mortgage
Bankers Association.

The release schedule heats up 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 rose by 16,000 last week to 317,000. The increase was a little stronger than analysts had anticipated but they were looking for a move higher after a net decline of 36,000 over the previous four weeks. The four-week moving average, which smoothes out some of the short-term volatility, was up by just 500 to 312,750. For the year to date, the average weekly level has been 317,564.

The report said that continuing claims for the week ending September 22 (continuing claims must be at least a week old) declined by 10,000 to 2.541 million. The four-week moving average fell by 12,750 to 2,557,250. This was still up from the weekly average for the year to date of 2,530,474.

Little change is expected in this week's claims level but given the larger than expected rise in the last report, a slight pull-back would not be too surprising.

Two trade-related reports are also slated to be released on Thursday morning. These are the report on international trade for August and the report on import / export prices for September. In the last report on the balance of trade, the Commerce Department said that the seasonally adjusted value of imports exceeded that of exports in by $59.2 billion in July. This was a slightly narrower monthly deficit than June's $59.4 billion gap but June's figure was sharply revised from its originally reported $58.1 billion. In fact, data revisions going back to the beginning of the year resulted in larger deficit readings in every month except April.

The report indicated that the value of exports surged by 2.7% in July to a record high $137.9 billion. This was the largest jump since March. But the larger category of imports rose by 1.8% to a record high $196.9
billion.

August's trade gap is expected to be slightly narrower than July's. The consensus prediction is for a deficit of $59.0 billion but some analysts have predicted a gap as small as $58.5 billion. Since net exports constitute a component of gross domestic product, a larger gap figure would translate into a larger deduction from GDP and a smaller deficit would translate into a smaller deduction from GDP.

The report on import and export prices gives some indication of inflation pressures stemming from the trade situation so observers usually focus on the import sector. In the last report the Labor Department said its index of import prices fell in August by 0.3%, the first decline since January. While oil played a part (the price index for petroleum products fell by 1.3%), the decline was broad-based. Even excluding oil, import prices were down by 0.1%. Moreover, July's originally reported overall gain of 1.5% was revised down to 1.3% and the originally reported ex-oil increase of 0.2% was revised to a rise of just 0.1%.

On the export side, prices were up by a 0.2%. The large but volatile category of agricultural products rose by 1.0% but excluding the category, export prices were up by 0.1%. July's originally reported overall gain of 0.2% was revised to a decline of 0.1% and a flat reading (0.0%) excluding agriculture was revised to a decline of 0.2%.

According to the Energy Department, average spot oil prices moved sharply higher last month. Consequently, a rise in the import price index is anticipated. Forecasts are between 0.5% and 1.0%.

Supply may generate some resistance for the bond market on Thursday morning as traders position for the Treasury's auction of 10-Year Treasury Inflation Protected Securities (TIPS). TIPS have a fixed coupon (interest) rate, but their face value is regularly adjusted according to the Consumer Price Index, so the interest payout amounts fluctuate according to the changes in inflation. At maturity, the greater of the inflation-adjusted or original redemption value is paid out.

In the current auction schedule (begun in July of 2003) a new 10-Year TIPS issue is offered twice a year but three months after each initial offering, an additional amount of the issue is sold so there are two initial and two reopening auctions each year. Next week's offering is a reopened of July's issue and the last such auction had a face value of just $6 billion, the lowest offer size for a 10-Year TIPS reopening in the current issue schedule.

The last reopening auction in April was weak. Bids exceeded the $6 billion offer amount by 1.88 to 1, the lowest bid-to-cover ratio for a reopening of the security in three years. Noncompetitive bids, a gauge of individual investor demand, totaled $27 million, the lowest amount for any 10-Year TIPS offering since October of 1998. Foreign demand was extremely light. Indirect competitive bids, which include those from foreign central banks, received just 18.6% of the issue. The average award in this bid category in the previous six reopenings was 47.1%.

But July's initial offering was well-received. The bid-to-cover ratio was 1.97, the highest for an initial offering of the security since January of 2004. Noncompetitive bids totaled $71 million, the largest amount in an initial offering since last July. And indirect competitive bids garnered 43.4% of the issue, the largest portion of an initial sale since January of 2006.

Later Thursday afternoon, the Treasury is scheduled to release its budget figures for September. But, since September marks the end of the 2007 fiscal year, the report may be delayed due to auditing activity. In September of 2006, receipts exceeded government outlays by $56.3 billion. Forecasters predict that last month's bottom line will be a larger surplus of around $100 billion. One of the reasons for the projection is that August's reported deficit of $117.0 billion was much larger than estimates at the time of an $85 billion deficit. Some of the variance may have been due to calendar issues which are expected be compensated for in September's numbers.

If the current prediction is accurate, this would result in a total deficit for the 2007 fiscal year of $174.3 billion. This compares favorably to the $248.1 billion deficit in fiscal year 2006. In fact, it would be the smallest yearly deficit in five years. Lower deficit figures are a plus for bonds since they mean the Treasury will not have to issue as many debt securities (Treasuries) in the future.

Friday's slate of economic releases contains a couple of heavyweights. The report on retail sales will indicate the strength of consumer buying last month. In August's report, the Commerce Department said that the seasonally adjusted level of sales rose by 0.3%. Though this fell short of predictions of a 0.5% gain, July's originally reported increase of 0.3% was revised to a gain of 0.5%.

Auto sales showed strength in August, rising by 2.8%, the largest increase since September of last year. But excluding this sector, sales were down by 0.4%, the largest ex-auto drop since September of 2006. A major contributor to the weakness was the category of sales at gasoline stations. Though lower gas prices were expected to result in lower sales totals, the decline was a larger than anticipated 2.4%, a third consecutive monthly drop and the largest since last October. Excluding both the auto and gas station categories, sales were 0.1% lower in August following an 0.8% increase in July.

For September, overall sales are expected to have risen by 0.2% and ex-auto sales by about 0.3%. Some analysts are looking for stronger sales figures, though.

The other major release on Friday is the Producer Price Index (PPI) data for last month. In the last release, the Labor Department said the PPI, a gauge of inflation at the wholesale level, fell in August by 1.4%, the biggest decline since last October and a much bigger drop than the 0.1% analysts were predicting. As expected, the primary reason for the decline was a drop in energy prices, the index for which fell by 6.6%. This was the largest decline since April of 2003. Another volatile category, foods, also saw a price index contraction of 0.2% -- a fifth consecutive monthly decline.

But excluding these two categories, prices of finished wholesale goods rose by 0.2%. While this was an in-trend core reading and not a major inflation alarm, it came after a 0.1% reading in July and was a little higher than analysts were expecting. On a year-over-year basis, core prices were up by 2.2%, a little less than July's Y/Y increase of 2.3%, but it was still the second highest reading since September of 2005.

Forecasts for September call for an overall increase in the PPI of about 0.5% and an increase at the core level of about 0.2%.

The report on business inventories for August will also be released on Friday. July's report was more bullish than expected. In it, the Commerce Department said that the seasonally adjusted level of inventories rose by 0.5%. Previously released reports on manufacturing and wholesale levels showed 0.2% gains in those categories. The only unknown at the time of the business inventories report was the level of inventories in the retail category. July's report said they rose by 1.0%, the largest jump since May of last year.

Sales were also strong in July, rising by 1.1% following a 0.3% decline in June. The combination of inventory levels and sales pushed the I/S ratio down to 1.26 from June's 1.27. July's reading was only slightly higher than the record low of 1.25.

The latest factory orders report said that manufacturers' inventories were down by 0.1% in August and the forecast for the wholesale sector is for a gain of 0.2% or 0.3%. Despite July's spike in retail inventories, the average monthly change for the year so far is only an increase of 0.3%. If these values are plugged into the weighted calculation of total inventories, it produces a gain of 0.1%. But analysts are apparently looking for another above-trend increase in the retail category since the consensus prediction is for a gain of 0.3%. In any case, the I/S ratio is expected to remain low.

The final economic item on next week's calendar is the initial read on consumer sentiment for the month from the surveys conducted by the University of Michigan. According to news sources, the final index reading for September 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 a twelve-month low of 97.9 from the preliminary 98.3 and August's 98.4.

The preliminary September index is expected to reveal an increase in optimism as higher stock prices improve household wealth and lower interest rates increase buying power and brighten the economic outlook.

10:30 AM EDT :

Bond traders did not like this morning's employment report for September and Treasuries are down sharply. Stocks are up but gains there have been relatively mild because of the mixed nature of the news and the fact that price levels are already high.

Although the seasonally adjusted level of nonfarm payrolls rose by 110,000 last month as expected, August's originally reported decline of 4,000 was revised to a gain of 89,000 and July's previously reported gain of 68,000 was revised to 93,000. The stronger numbers are bullish for the economy and argue against the Fed cutting rates.

Another negative for rate cut prospects was a 0.4% increase in average hourly earnings in September following two months of 0.3% increases. The earnings figure is an inflation indicator and aside from the rate implications, high inflation undercuts the present value of bonds since it means interest and principal payouts in the future will be made in less valuable dollars.

In the goods producing sector, construction payrolls fell by 14,000 and manufacturing fell for a fifteenth consecutive month with a decline in September of 18,000. In the services sector, the biggest gainer was education and health, which saw payrolls increase by 44,000. This marked three years of consecutive monthly expansions in that category. The next highest gainer was in leisure and hospitality services where payrolls grew by 35,000, a twenty-third consecutive gain. Payrolls in business and professional services gained 21,000 jobs.

There were weak spots in services, however. Financial activities -- which include finance, insurance, and real estate -- saw a net loss of 14,000 last month, matching August's decline. Retail trade saw a decline of 5,200.

A key category behind the revisions to July and August was government employment. July's previously reported decline of 52,000 was trimmed to 28,000 and August's originally reported decline of 28,000 was revised to an increase of 57,000. In September, government payrolls grew by 37,000.

Despite the increases in payroll, they were not enough to prevent the unemployment rate from edging up to 4.7%. Though still considered low, the rate is the highest since August of last year. The unemployment rate is the portion of the workforce (over 16 years old and actively seeking employment) without jobs. While the number of jobs can increase, so can the workforce. Today's report said that it rose by 573,000 individuals in September after falling by 340,000 in August.

The report is especially significant since August's reported decline was seen as an important influence on the Fed's decision to cut rates at the last policy meeting on September 18. The improved assessment of the labor situation therefore diminishes expectations for another rate cut at the next meeting slated for the 30th and 31st of this month.

The bond market's reaction to the jobs report may be getting an extra nudge due to a reduced trading window today. The Securities Industry and Financial Markets Association (formerly the Bond Market Association) has recommended an early (2:00 PM EDT) close today ahead of the Columbus Day weekend. The bond market will be closed on Monday though the stock market will remain open.

In the stock market, the bullish economic implications of the payroll number are currently the focus of attention. Traders are even discounting negative guidance from Merrill Lynch and Washington Mutual this morning as backward-looking data that will be followed by improvements in the current quarter. Another supportive factor is a decline in oil futures. In recent trading, the price of a barrel of crude oil for November delivery was down by $0.57 to $80.87.

Market Overview: September 28, 2007

2007-09-28T15:30:00.000-07:00

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

2007-09-21T15:16:00.000-07:00

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

2007-09-07T14:47:00.000-07:00

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.

Market Overview 08/31/07

2007-08-31T14:33:00.000-07:00

5:00 PM EDT :

Treasuries took moderate losses today as stocks finished the month with a rally. In late trading, the 10-Year Treasury Note was down by 6/32, raising its yield to 4.53%; the Dow was up by 119.01 points to 13,357.74; and the Nasdaq was up by 31.06 points to 2,596.36.

News that the administration is addressing the problems of rising mortgage delinquencies and foreclosures with a new FHA refinancing program helped ease credit and liquidity concerns and blocked some of the safe haven flow toward Treasuries. This theme was underscored when Fed chief Ben Bernanke said "The Federal Reserve stands ready to take additional actions [besides recent short-term injections of cash into the monetary system and the cut to the discount rate] as needed to provide liquidity and promote the orderly functioning of markets."

Much of the economic data released today also favored stocks. Personal income and spending rose more than expected last month. Factory orders were also up more than predicted in July. The Chicago PMI indicated a stronger expansion of manufacturing activity in the region than observers were expecting. And the Consumer Sentiment Index edged up slightly in the latter part of August, though it was still much more pessimistic than July's final index reading.

Aside from the economic data and credit situation, the markets were reacting to end-of-month, pre-Labor Day position squaring. The progress in the stock market came despite a rise in oil futures. High energy prices often dampen stock trader sentiment since they act as a brake on the economy. A barrel of light, sweet crude oil for October delivery rose by $0.68 on the New York Mercantile Exchange to settle at $74.04. This was the highest close for a front-month contract since August 3. But for the month, the price fell by $4.17 from the record high close of $78.21 on July 31.

By the end of stock trading, the Dow was up by 0.90%, the S&P 500 by 1.12%, and the Nasdaq by 1.21%. For the week, the Dow edged down by 0.16% and the S&P 500 by 0.36%. The Nasdaq gained 0.76% since last Friday's close. For the month, all three indices made progress with the Dow gaining 1.10%; the S&P 500, 1.29%; and the Nasdaq, 1.97%. And despite today's losses in the bond market, the benchmark 10-Year Treasury Note yield fell by 9 basis points this week (yield moves inversely to price). For the month, the yield fell by 21 basis points. It fell by 29 basis points in July.

Next week's economic calendar contains the two, early-month heavyweights: the national manufacturing index and the employment report. Following the three-day weekend, traders will be facing the manufacturing release on Tuesday. In last month's release, the Institute for Supply Management (ISM) reported that its index came in at 53.8 in July. This was down from June's reading of 56.0. Any reading over 50.0 indicates a general expansion of activity relative to the preceding month and July's represented a sixth consecutive monthly expansion.

The index trended down 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. But the sector has been recovering and June's reading was the strongest in fourteen months. But July's was the weakest in four months and for August, the index is predicted to have slipped once again to about 53.0.

Another important item in the manufacturing data is the price index, a measure of inflation in the sector. July's price index of 65.0 was welcomed by observers. Though it still indicated a solid increase in prices, it was the weakest expansion indicator in five months.

Also out on Tuesday is the report on construction spending for July. In the last report, the Commerce Department said the seasonally adjusted, annualized pace of spending fell by 0.3% in June following four consecutive increases. But spending in the residential sector continued to slide. The rate fell by 0.7% in June, a thirteenth consecutive contraction. Given the state of new home construction, permit issuance, and sales, the weakness in the residential spending pace came as no surprise. Another decline in the residential sector is forecast for July. The overall construction spending rate is expected to have been flat (0.0%).

On Wednesday afternoon, the Federal Reserve will release its latest edition of its Beige Book. The Beige Book, so named for the color of the hard copy cover) is an anecdotal summary of economic conditions in the twelve Fed regions and the monetary policy committee uses it as one of its background resources during its policy deliberations. The next committee meeting is September 18.

Though the summary is often overlooked because other reports have already sketched out the economic situation, Wednesday's release will get added attention for what it says about the recent changes in the credit market. Though the last regular policy meeting on the 7th ended with no change in interest rates or policy position, a liquidity crunch caused by a nosedive in demand for certain mortgage-backed securities forced the Fed to inject additional short-term reserves into the monetary system and cut the discount rate (the rate changed to banks for loans directly from the Fed).

(Note: the ISM Services Index, originally reported here that it would be released on Wednesday, will actually be released on Thursday.)

On Thursday, the jobless claims report may also get additional attention because it heralds the approach of Friday's employment report. The data collection periods for the two reports do not coincide (the employment information for the month was collected before this week's jobless claims were made). But the trend in claims can provide insight on the state of the labor market and the latest trend has been bearish. In yesterday's report, the Labor Department said that the seasonally adjusted level of initial claims for state unemployment benefits rose last week by 9,000 to 334,000. The unexpected increase was the largest since the week ending June 16 and the level was the highest since the week ending April 14. The four-week moving average, which smoothes out some of the short-term volatility, rose by 6,250 to 324,500, the highest reading since the week ending April 28. The average weekly reading for the year to date is 318,118.

Continuing claims for the week ending August 18 (continuing claims must be at least a week old) rose by 13,000 to 2.579 million, the highest level since the week ending April 14. The four-week average rose by 11,250 to 2.561 million, its highest level since the week ending January 14. The average weekly reading for the year so far is 2,525,545.

While the claims data still indicate that hiring continues to exceed layoffs, the rising claims levels point to a diminishing gap between the two processes.

The revised report on productivity for the second quarter also comes out on Thursday. The preliminary report, released on the 7th, said the seasonally adjusted, annualized rate of nonfarm business productivity (output per hour) rose in the second quarter by 1.8% following a 0.7% rise in the first quarter. The average cost per hourly unit of output -- or unit labor costs (ULC) -- rose by 2.1% in the second quarter according to the preliminary report. This was a deceleration from a 3.0% rise in the first quarter.

The upward revision to gross domestic product growth in the second quarter from 3.4% to 4.0% suggests that the initial productivity estimate will also be revised higher. Analysts are looking for a 2.3% gain in Thursday's release. Strong productivity usually eases labor costs, reducing inflation pressures and giving the Fed more leeway to cut interest rates. This is good for both stocks and bonds. High productivity is additionally beneficial for stocks since it reflects greater efficiency and suggests improved corporate earnings. The preliminary ULC number is expected to have been trimmed in the final report to about 1.7%.

Also on Thursday, the ISM will release its index data on the non-manufacturing, or services, sector of the economy. 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 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).

July's index came in at 55.8. As is the case with the manufacturing index, any reading over 50.0 indicates general growth and July's reading represented a fifty-second consecutive monthly expansion. However, this was down from June's fourteen-month high of 60.7. The drop was the largest since September of 2005. The index for August is expected to show another slip to about 54.5.

The main event on Friday is the release of the employment report for August. Forecast misses are frequent and have been known to roil the markets so traders have learned to exercise caution ahead of the monthly releases. July's report was weaker than expected. The Labor Department said that the seasonally adjusted level of nonfarm payrolls rose by just 92,000, the smallest increase in five months and the second smallest increase since November of 2004. Moreover, June's originally reported rise of 132,000 was revised down by 6,000 to 126,000.

The report said that the unemployment rate, the portion of the active workforce without jobs, edged up to 4.6% in July from June's rate of 4.5%. The increase was the first since April and the rate was the highest since January. Nevertheless, it is still considered low by historical standards.

For August, forecasters are predicting a payroll increase of about 120,000. The unemployment rate is expected to have remained at 4.6% or to have edged up to 4.7%. A 4.7% reading would be the highest in the last twelve months.

The final economic news scheduled for next week is the report on wholesale inventories and it is likely to be overshadowed by the jobs report. For one thing, the wholesale sector is only one component of the inventory picture. A report on business inventories -- which includes data from the manufacturing, wholesale, and retail sectors -- will be released on the 14th. For another thing, the information is somewhat dated as Friday's report is for the month of July.

Wholesale inventory growth has been relatively steady this year so far. The average monthly change has been an increase of 0.4%. Inventories were up by 0.5% in both May and June and an increase of 0.4% or 0.5% is predicted for July. Sales have been strong, averaging 0.9% increases in the first six months of the year. They were up by 0.6% in June following a 1.3% rise in May.

The combination of inventory and sales changes has kept inventories at extremely lean levels. The inventory-to-sales (I/S) ratio was a record low 1.11 in both May and June. 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. Even if sales were soft in July, the I/S ratio would only be marginally affected.

10:30 AM EDT :

Treasuries are down this morning and stocks are up as the flight to the government backed sector is waning on talk of bailing out mortgagors caught between rising payments and falling home values. News reports this morning say President Bush will be recommending a set of initiatives today aimed at addressing the mortgage situation. The development lends some support to securities backed by mortgages and the complex structure of financial relationships into which such securities are intermixed.

This news was followed up by a speech this morning by Federal Reserve Board Chairman, Ben Bernanke. In his keynote address at a central bank symposium at Jackson Hole, Wyoming, he spoke on "Housing, Housing Finance and Monetary Policy." His discourse outlined the development of the U.S. housing industry and its impact on the economy. Of particular note are his comments on the Fed's recent actions and their relationship to the current housing / mortgage situation.

Some critics have said that the Fed has no business bailing out financial market participants. Mr. Bernanke responded in his address this way, "It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy."

With regard to upcoming Fed decisions on monetary policy, Mr. Bernanke said, "economic data bearing on past months or quarters may be less useful than usual for our forecasts of economic activity and inflation. Consequently, we will pay particularly close attention to the timeliest indicators, as well as information gleaned from our business and banking contacts around the country. Inevitably, the uncertainty surrounding the outlook will be greater than normal, presenting a challenge to policymakers to manage the risks to their growth and price stability objectives. The Committee continues to monitor the situation and will act as
needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets."
(BERNANKE ADDRESS)

The economic data released today was also unfavorable to bonds; that is, it was more bullish than anticipated, which lessens pressure on the Fed to cut interest rates. In the first release of the day, the Commerce Department said that 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 (originally reported as 0.1%). While the gains were a bit higher than analysts had predicted, both readings were right in line with the monthly averages of the previous twelve months.

Later, in a separate report, the Commerce Department said that the seasonally adjusted level of factory orders rose in July 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%. Analysts had predicted an increase of between 3.0% and 3.5% due to last week's reported increase of 5.9% in durable goods orders. In today's report, the increase in the durables category was revised up to 6.0%. Nondurable goods orders rose by 1.3%.

The volatile transportation sector was a large contributor to the overall gain. Orders there were up by 11.0%. But even excluding the category, orders rose last month by 2.4% following a 0.4% ex-transportation decline in June. Another significant category 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 are 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% last month following a 0.2% decline in June and a 1.5% decline in May.

In other news, the Chicago branch of the National Association of Purchasing Management (now known nationally as the Institute for Supply Management) released its index figures on the highly-industrialized region's manufacturing activity for August. The overall 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 and August's index indicated a stronger expansion than the 53.0 that analysts had predicted. The national index for August will be released next Tuesday.

The last economic release of the day was somewhat anticlimactic. According to news sources, the final Consumer Sentiment Index reading for the month from the University of Michigan came in at 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. The expectations index slipped in the last half of the month to 73.7 from the preliminary 74.1 and July's final reading of 81.5. But the index of present conditions edged up to 98.7 from 97.7. This was still well
below July's final reading of 104.5.

There are a lot of market influences at play this morning so price movements are likely to be erratic. It is the last day of August so any remaining close-out activity for the month has to happen today. Trading volumes will be light as a number of market participants are already on the sidelines and many who are not will be attempting to get there as soon as possible in order to extend the last holiday weekend of the summer. Most bond trading will close at 2:00 PM Eastern Time instead of 3:00 on the recommendation of the Securities Industry and Financial Markets Association.

Market Overview August 24, 2007

2007-08-24T14:11:00.000-07:00

5:00 PM EDT :

The 10- and 30-year Treasury securities made gains today as the shorter end of the maturity spectrum took losses. Stock rallied. In late trading, the 10-Year Treasury Note was up by 6/32, lowering its yield to 4.62%; the Dow was up by 142.99 points to 13,378.87; and the Nasdaq was up by 34.99 points to 2,576.69.

Today's economic news was surprisingly bullish. The level of durable goods orders jumped in July by the largest percentage amount in ten months and the key subcategories indicated that the gains were broad-based. And the report on new home sales for last month revealed a modest bounce in July though analysts had been looking for another decline to a new seven-year low.

The news helped lift stocks. Market sentiment has improved this week on generally easing concerns regarding the credit / liquidity issue. The Federal Reserve made no further cash injections into the monetary system today and this was seen as a positive sign; that is, reserve levels apparently seemed adequate to the Fed. Today's stock gains came even though oil prices moved up for a second day. The price of a barrel of light, sweet crude rose by $1.26 on the New York Mercantile Exchange to settle at $71.09. This was the largest one-day jump since July 31.

But by the end of stock trading, the Dow was up by 1.08%, the S&P 500 by 1.15%, and the Nasdaq by 1.38%. All three made solid gains on the week as well with the Dow gaining 2.29%; the S&P 500, 2.31%; and the Nasdaq, 2.86%.

The action in the bond market was at least partly attributable to position-squaring following the recent run-up in the yield curve. In the first two days of the week, investors made a massive shift out of short-term corporate debt and into Treasuries, sending short maturity Treasury yield sharply lower. On Tuesday, the closing spread between the 2-Year and 10-Year Treasury Note was 57 basis points, the largest gap since May 5, 2005. With losses at the short end of the market since then, today's gap is just 33 basis points. Nevertheless, yields at the short end are still sharply lower than they were in the beginning of the month.

Longer termed Treasuries made progress on the week with the yield of the 10-Year Note falling by 6 basis points. This follows a 13 basis point decline last week (yield moves inversely to price). And with the exception of last Tuesday's closing yield of 4.59%, today's was the lowest since March 28.

Next week’s economic calendar is much heavier than this week’s. Moreover, supply is an issue as there will be two Treasury auctions bringing an estimated $31 billion in new notes to market. The week is also the last of the month and is the time when portfolio managers rebalance their holdings on the basis of such characteristics as risk, yield, and return horizon. The process often entails the purchase of Treasuries though recent heavy buying may dampen the need for more purchases. And the week precedes a three-day weekend (Labor Day). Historically, trading volumes are thin in the last week of August as it is traditionally seen as the tail end of vacation season.

The first economic news comes on Monday in the report on existing home sales for last month. In June’s report, the National Association of Realtors said the seasonally adjusted, annualized rate of existing home sales fell by 3.8% from 5.98 million to 5.75 million. This was a fourth consecutive monthly decline and the pace was the lowest pace since March of 2003.

The report said that inventories of homes on the market fell by 4.2% in June, the first decline since December. But due to the slowdown in sales pace, the inventory represented 8.8 months of sales, matching May’s turnover rate.

Despite the decline in sales, home prices rose. The average price jumped by 6.1% to $276,700 and the median price by 7.4% to $230,100. This was the fifth consecutive monthly increase in both categories and the largest in two years. The average was a record high and the median the highest in eleven months. On a year-over-year basis, both categories were up by 0.3%, the first Y/Y gains since July of 2006.

Forecasts for July’s report call for another decline in the sales pace to about 5.70 million. This would be the lowest reading since November of 2002. But as today’s report on new home sales illustrated, monthly housing data can be relatively volatile since it can be affected by such variables as regional weather, economic, and demographic changes.

On Tuesday, the Conference Board, an independent research firm, will release its Consumer Confidence Index for the month. July’s index was 112.6, up from June’s 105.3 and the strongest indicator of consumer optimism since August of 2001. The healthy job market, falling gasoline prices, and high stock prices are presumed to be factors contributing to the jump in confidence. The expectations index rose to a seven-month high of 94.8 from 88.8 and the index of current conditions rose to 139.2 from 129.9. The current conditions index, like the overall reading, was the highest since August 2001.

For August, the index is expected to have fallen back to between 105.0 and 105.5.

On Tuesday afternoon, the Federal Reserve will release the minutes of its August 7th meeting of the Federal Open Market Committee (FOMC), the Fed’s monetary policy arm. While the meeting ended with no rate or policy position change, the meeting statement did acknowledge tighter credit conditions and the volatile financial markets. In addition, recent comments by board chairman, Ben Bernanke, have underscored the Fed’s concern with the health of the housing market and its influence on the general economy along with the problems with subprime mortgage products and their effect on the financial markets.

While the minutes of the last meeting might provide some clarification of these issues, they will probably not have a deep impact on observers since the credit situation has subsequently deteriorated.

Two weeks ago, Parabis, the largest bank in France, froze three of its hedge funds because they could not be adequately valued due to their U.S. mortgage-backed components. The incident roused liquidity concerns that spurred the European Central Bank to inject huge amounts of cash into its monetary system. Other central banks, including the Federal Reserve, followed suit and continue to stand ready to make additional, short-term monetary infusions.

Last Friday, in another measure to address the situation, the FOMC cut the discount rate—the interest rate charged to banks for loans directly from the Fed. Now, most Fed watchers feel that the FOMC will lower the fed funds rate at the next policy meeting slated for September 18. Some even feel that a cut may be made before then. The fed funds rate is the rate banks charge each other for overnight loans necessitated by daily reserve requirements. While the rate is determined by the borrowing activity, the Federal Reserve sets a target level and adjusts reserves to keep the actual borrowing rate near the target rate. The adjustment is made by injecting funds into or withdrawing funds from the monetary system by selling or buying securities (usually Treasuries or agency debt).

There are no major economic releases scheduled for Wednesday but there are a couple of minor weekly releases that could have an effect on the markets. These are the Mortgage Bankers Association of America’s report on mortgage application activity for this week and the weekly report from the Energy Department on oil inventories.

The bond market may feel some pressure from new supply on Wednesday as the Treasury will be conducting its monthly 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 drew lukewarm participation. Bids exceeded the $18 billion offer amount by 2.59 to 1, down from the 2.80 bid-to-cover ratio in June’s auction and from the average of 2.72 for the twelve auctions preceding July’s. Non-competitive bids, a gauge of individual investor demand, totaled $698 million, the lowest amount for a 2-Year issue since November of 2003. This represented 3.9% of the issue, matching April’s, but the twelve-month average was 4.5%.

Foreign demand was unimpressive. Indirect competitive bids, which include those from foreign central banks, garnered 27.4% of the issue. This was the same award percentage as in June’s auction but it was below the twelve-month average of 33.2%.

Wednesday’s issue is expected to have a face value of $18 billion, the same as in the last six offerings. The deadline for competitive bids is 1:00 Eastern Time.

On Thursday, the initial jobless claims report will focus attention on the employment situation once again. Yesterday’s report did not provide much insight. It said the seasonally adjusted level of initial claims for state unemployment benefits fell by 2,000 last week to 322,000. But the previous week’s originally reported figure of 322,000 was revised up to 324,000. The four-week moving average, which smoothes out some of the short-term volatility, rose by 4,750 to 317,750. The weekly average for the year to date is 317,576.

The initial claims data continue to suggest that hiring is outpacing layoffs, resulting in growing payrolls. But the level of continuing claims is continuing to creep higher. The report said that the level of continuing claims for the week ending August 11 (continuing claims must be at least a week old) rose by 16,000 to 2.572 million, the highest reading in four months. The four-week average was up by 7,750 to 2.553 million, the second highest reading in five months. The weekly average for the year to date is 2.524 million.

Also out on Thursday is the preliminary report on gross domestic product (GDP) 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 advance report, released on August 30, said that GDP grew in the second quarter by 3.4%, the largest increase since the first quarter of 2006. But revisions going back to the beginning of 2004 resulted in eleven of the thirteen quarters being revised down. The average quarterly revision to the growth figures over that time span was a reduction of 0.3%. The originally reported final reading for the first quarter of 2007 was trimmed from 0.7% to 0.6%, the smallest increase since the fourth quarter of 2002.

The inflation signals in the advance report were mixed but a key indicator was particularly encouraging. The overall price index rose by 2.7% following a 4.2% increase in the first quarter but the price index for personal consumption expenditures (consumer spending) was up by 4.3% following a 3.5% rise. However, the chief contributor to the PCE price index growth was a jump in energy prices. Excluding the volatile categories of food and energy, prices were up by just 1.4% following a 2.4% increase in the first quarter. This was the smallest increase since the second quarter of 2003.

Earlier this month, the Commerce Department reported a much smaller trade deficit in June than had been predicted. In addition, May’s originally reported deficit was also revised down. The lower deficit numbers constitute a positive contribution to GDP. The latest retail sales report also indicated revisions in previously reported data that brightens the second quarter growth picture. Projections for Thursday’s report now call for a growth reading of about 4.0%.

More supply comes to market on Thursday in the monthly 5-Year Note auction. Last month’s was less than successful. The bid-to-cover ratio for the $13 billion offer was 2.15, down from June’s 2.73 and the twelve-month average of 2.45. Non-competitive bids totaled $122 million, down from $187 million in June’s auction and below the twelve-month average of $157 million. And foreign demand was weak. Indirect competitive bids garnered 19.7% of the issue, down from June’s award portion of 32.3% and below the twelve-month average of 30.5%. Thursday’s offer size is expected to be $13 billion, matching the last eight issues.

On Friday, the first release is the report on personal income and spending for last month. In June’s report, the Commerce Department said that personal income, the fuel for consumer spending, rose by 0.4%, matching the increase in May. Personal consumption expenditures (PCE or consumer spending) rose by just 0.1%. This was the smallest increase since a 0.1% decline last September, though May’s originally reported rise of 0.5% was revised to a gain of 0.6%.

The retail sales report for July indicated an increase of 0.3% following a decline the month before of 0.7%. This suggests that the PCE figure in next week’s report will show a stronger gain. Forecasts are calling for a 0.4% increase. Personal income is expected to have risen by 0.3%.

The next major release on Friday is the report on factory orders for July. In the last report, the Commerce Department said the seasonally adjusted value of new orders rose by 0.6% in June following a 0.5% decline in May. The increase was the largest since March though observers were expecting a stronger gain. The report said that durable goods orders rose by 1.3% (revised in today’s report to 1.9%) and that nondurable goods orders fell by 0.1%. Excluding transportation, orders were down by 0.5%. Excluding those in the defense sector, orders were up by 0.9% but if commercial aircraft orders were further excluded, orders were down by 0.9%. Ex-defense orders for capital goods minus commercial aircraft, a proxy for core business demand, were flat (0.0%) in June after a 1.5% decline in May.

Recent forecasts were calling for a 0.9% increase in factory orders in July but the much stronger than expected durables report suggests that the gain will be significantly stronger. A better estimate would be between 3.0% and 3.5%.

Also on Friday, the Chicago branch of the National Association of Purchasing Management (now known nationally as the Institute for Supply Management) will release its index figures on the region's manufacturing activity for August. July's release said the organization's Purchasing Managers Index came in at 53.4, down from June's 60.2. Any reading over 50.0 reflects a general increase of activity relative to the preceding month but July’s index was much lower than the 59.0 forecasters had predicted. Little change is anticipated in August's index reading.

The final release of the week is the final read on consumer sentiment according to the survey data compiled by the University of Michigan. In the preliminary reading, released last Friday, the overall index was 83.3, down from July's final reading of 90.4 and the lowest reading since last August. Analysts are predicting a slight improvement in the final reading to about 84.0 but this would still be the lowest final reading in twelve months.

10:30 AM EDT :

Despite stronger than expected economic data released this morning, Treasuries are holding up relatively well with the long end of the market in positive territory. Bullish data often hurts bonds since it diminishes the case for a Fed rate cut. The stock market has also failed to get a significant boost from the news and the indices are currently narrowly mixed.

In the first release of the day, the Commerce Department said that the seasonally adjusted level of durable goods rose by 5.9% in July, a much stronger jump than the 1.0% that analysts had predicted. It was the largest gain since last September. Moreover, June's last reported increase of 1.5% was revised to a gain of 1.9%.

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.

A volatile category is transportation and it saw a gain of 10.8% in July. Within the category, motor vehicle orders were up by 9.8% and orders for commercial aircraft were up by 12.6%. But even excluding transportation, orders were up by 3.7%, the largest gain 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 30.3% but excluding the category, orders were still up by 4.9%. Further excluding commercial aircraft from the ex-defense figures showed a gain in orders of 4.1% last month, 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 2.2% in July, the first increase in three months and the largest increase in four.

Later, in a separate report, the Commerce Department said that the seasonally adjusted, annualized pace of new home sales rose last month by 2.8% to 870,000, up from an upwardly revised 846,000 pace in June (originally reported as 834,000. The increases came as a surprise to analysts, who were predicting a decline in July to 820,000.

The increase was not geographically broad-based as the pace fell in the Northeast by 24.3% and in the Midwest by 0.9%. But in the larger contributing regions, the rate increased. The South saw a rise of just 0.6% but the West saw a spike of 22.4%, its largest increase since March of last year.

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 report said 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%.

This morning's data may still provide some traction for stocks and bond traders may begin to exercise some caution ahead of next week's heavier news calendar and new supply headed to market.

A Hopeful Housing Market Sign

2007-08-24T12:33:00.000-07:00

Source: U.S. Census Bureau

Initial Jobless Claims in Sideward Trend But Continuing Claims Creeping Higher

2007-08-23T10:22:00.000-07:00

Source: U.S. Department of Labor

Market Overview August 17, 2007

2007-08-17T14:39:00.000-07:00

The Fed cut to the discount rate spurred a rally in stocks today, which put some pressure on the bond market. But short-term maturities also found some support from the Fed news while the long end of the market pared earlier losses for a mixed close. In late trading, the 10-Year Treasury Note was down by 6/32, raising its yield to 4.68%; the Dow was up by 233.30 points to 13,079.08; and the Nasdaq was up by 53.96 points to 2,505.03.

The Fed action eased jitters that liquidity problems stemming from the effects of declining values of certain types of debt securities would cripple the economy and financial markets. It also raised expectations that more-enduring fed funds rate cuts may be forthcoming. But the news caught the markets off-guard and stocks soared in early trading as investors who were betting on further losses had to liquidate their short positions.

The stock indices eased back somewhat following the morning scramble then basically maintained a holding pattern until a late session bump higher. The economic news of the day was largely overlooked. The first of two consumer sentiment indices to be released this month indicated a larger erosion of optimism since the end of last month than had been forecast, but the recent turmoil in the stock market suggested that this might be the case.

Stocks were also not hindered by a rise in oil futures today. A barrel of light, sweet crude oil for next month delivery rose by $0.98 on the New York Mercantile Exchange to settle at $71.98. By the end of stock trading, the Dow had gained 1.82% on the day; the Nasdaq, 2.20%; and the S&P 500, 2.46%. All three were lower for the week, however, with the Dow losing 1.21% and the Nasdaq, 1.57%. The S&P 500 fared better with a loss for the week of only 0.53%. The Dow is down by 6.6% from its record closing high of 14,000.41 posted on July 19. The S&P 500 is down by 6.9% from its record high of July 19. And the Nasdaq is down by 7.9% from its six-and-a-half year closing high, also set on July 19.

The yield of the benchmark 10-Year Treasury Note closed only 1 basis point higher than yesterday for its second lowest close since May 10 (yield moves inversely to price). On the week, the yield fell by 14 basis points after a 13 bp rise last week.

Next week, the economic calendar is extremely light so volatility is apt to remain high as the markets may be buffeted by additional news items regarding the credit situation. On Monday, the only scheduled release is the Index of Leading Economic Indicators for last month. In the last release, the Conference Board, an independent research firm, said the index fell in June by 0.3%, the fourth decline of the year to date and the largest since February.

The decline surprised analyst who were expecting a slight increase. Moreover, the originally reported 0.3% rise in May was revised to 0.2%. The heaviest pressures on the index in June came from a decline in building permit issuance, an increase in jobless claims, and a decline in consumer expectations (the Consumer Confidence Index is compiled by the Conference Board).

Although the rate of building permit issuance continued to decline in July, the average level of initial jobless claims declined, and the consumer expectations index rose to its highest level in seven months. The sharp drop in stocks constitutes a negative influence on the index, but analyst still believe that it will show a rebound of about 0.3% from June's reading.

There are no major economic indicators scheduled until Thursday so Wednesday's minor releases may get more than their usual share of attention. These are the Mortgage Bankers Association of America's report on mortgage application activity for this week and the weekly report from the Energy Department on oil inventories.

The only release on Thursday is the jobless claims report. Yesterday's said that the seasonally adjusted level of initial claims for state unemployment benefits rose by 6,000 last week to 322,000, the highest reading since the week ending June 16. This is slightly above the weekly average for the year to date of 317,375. The report said continuing claims for the week ending August 4 (continuing claims must be at least a week old) rose by 17,000 to 2.567 million. The four-week average rose by 1,000 to 2.548 million, in-line with the weekly average for the year so far of 2.523 million.

Despite the recent elevations, the data still suggest that hiring is outpacing layoffs and adding to nonfarm payrolls. In addition, following three weeks of increases, a slight decline in this week's initial claims level would not be too much of a surprise in next Thursday's release.

The heaviest news day next week is Friday with two releases. The first is the report on durable goods orders for July. 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 the report for June, the Commerce Department said the seasonally adjusted value of new orders for durable goods rose by 1.4% June following a 2.3% decline in May. June's increase was revised to 1.3% and May's decline was revised to 2.4% in the subsequent release of the factory orders report. The gain came from a strong jump in the volatile category of transportation, and specifically in the category of orders for commercial aircraft. Excluding transportation, orders were down by 1.0% following a 0.3% decline in May (these and the figures cited below are from the revised data which came out after the last durables report).

Another category that is closely watched is orders excluding those from the defense sector since defense orders are not governed by standard market forces. Defense orders fell by 6.8%, leaving ex-defense orders with a gain of 1.8%. But further excluding the commercial aircraft component, orders were down by 0.3% in June.

The category of ex-defense capital goods minus aircraft is also highly-regarded since it provides some insight on core business demand. Orders were flat (0.0%) in June following a 1.5% decline in May.

For July, durable goods orders are expected to have increased again by about 1.0%.

The last major economic release of the week is the report on new home sales for last month. In June, the seasonally adjusted, annualized pace of new home sales fell by 6.6% to 834,000, the second lowest reading since December of 1997 (March's pace was 830,000). The decline was the fifth in the first six months of the year and the largest since January. Moreover, May's originally reported pace of 915,000 was revised down to 893,000 and April's 930,000 was revised down to 913,000.

Inventory of new homes on the market edged up by 0.2% to 537,000. At sales pace prevailing in June, this represented 7.8 months worth of supply, up from May's 7.4 month turnover rate. The average home price rose by $5,400 to $316,200 but the median price fell by $3,100 to $237,900. On a year-over-year basis, the average price was up by 3.7% but the median price was down by 2.2%.

Most forecasts call for little change in the overall rate of home sales in July but another decline is a clear possibility.

Fed Makes Temporary Cut to Discount Rate

2007-08-17T08:20:00.000-07:00

The Federal Reserve temporarily cut the discount rate by 0.50% today from 6.25% to 5.75%. The discount rate is the interest rate banks must pay for loans directly from the Fed. The central bank's target for the fed funds rate, the rate charged between banks for overnight loans, was left unchanged at 5.25%.

The fed funds rate is actually determined by the needs of the banks which are required to maintain a certain level of reserves on a daily basis. But the Federal Reserve adjusts the level to keep it near the target rate by injecting or withdrawing funds in the monetary system by selling or buying securities (usually Treasuries or agency debt).
(Federal Open Market Operations)

It should be noted that recent short-term injections of cash by the Fed into the banking system have reduced the cost of borrowing money for the time being. Yesterday's effective fed funds rate was 4.90%. In addition to the cut in the discount rate, the Fed made another short-term cash injection of $6 billion this morning.
(DISCOUNT RATE STATEMENT)

Continuing Weakness in Housing Starts

2007-08-16T05:59:00.000-07:00

Source: U.S. Census Bureau

2007-08-15T10:18:00.000-07:00

Credit Tightening Weighing On Builder Confidence In August

Encouraging Inflation News

2007-08-15T06:46:00.000-07:00

The year-over-year trend in the core Consumer Price Index, which excludes the volatile categories of food and energy, has moderated since hitting a ten-and-a-half year high of 2.9% last September.

Source: Bureau of Labor Statistics

Sign of Underlying Inflation Pressures

2007-08-14T06:22:00.000-07:00

The seasonally adjusted core (ex-food and energy) Producer Price Index rose by just 0.1% from June to July. But on a year over year basis, the unseasoned core index was up by 2.3%, the largest Y/Y margin since September of 2005.

Source: U.S. Department of Labor