Friday, November 7th, 2008

Friday: 11/07/08 10:30 AM EST :
Market Update:

The markets are not reacting to today's economic news as one might have expected. Stock traders were bracing for an awful employment report and there fears were fulfilled this morning. But with that out of the way, the market opened on a positive note as traders picked up what they perceived as bargains following two days of exceptionally steep losses. The move has undercut bonds and the decline there has been augmented by profit-taking following price gains in the last four sessions.

In the major economic release of the day, the Labor Department reported that the seasonally adjusted level of nonfarm payrolls declined in October by 240,000. This was a larger decline than the 200,000 that forecasters had predicted. In addition, September's originally reported decline of 159,000 was revised to a drop of 284,000, the biggest decline since November of 2001. August's previously reported decline of 73,000 was revised to a drop of 127,000. While the figures were worse than predicted, many market participants had suspected that this might be the case.

The report indicated that job losses were broad-based. In the goods producing sector, construction payrolls fell by 49,000, a sixteenth consecutive contraction. Manufacturing payrolls lost 90,000 jobs. This was the twenty-eighth consecutive decline and the largest in five-and-a-half years.

In the services sector, the business and professional category shed 45,000 from its payroll figure. Retail sales payrolls fell by 38,000, financial activities payrolls lost 24,000, and leisure and hospitality payrolls fell by 16,000. The only major private sector category to see a significant gain was education and health services. Payrolls there rose by 21,000. Government payrolls expanded by 23,000.

The biggest changes to September's originally reported data was a 16,000 decline in education and health instead of a gain of 25,000, and a 41,000 decline in government payrolls instead of a 9,000 increase.

Besides the larger than expected loss in payrolls, the report said that the unemployment rate -- the percentage of the active workforce without jobs -- jumped from 6.1% in September to 6.5% in October. This was the highest reading since March of 1994.

In other news, the Commerce Department reported that the seasonally adjusted level of wholesale inventories declined in September by 0.1%. This was the first contraction since December of 2006. August's previously reported increase of 0.8% was also trimmed to 0.6%. The level of sales also decline in September, falling by 1.5% after a 1.6% drop in August. This pushed up the inventory-to-sales (I/S) ratio to 1.12 from August's 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. Rising turnover times mean decreasing pressure to replace supplies. September's reading was the highest in a year.

In addition to the stock flow and profit-taking, bonds are also being pressured by the approach of a heavy influx of new supply next week. On Monday, the Treasury will offer a new 3-Year Note issue having a face value of $25 billion. The security was discontinued after an offering in May of last year but was just reinstated because of increased government borrowing needs.

A new 10-Year Note issue with a face value of $20 billion will be offered on Wednesday. Since new issues will have greater liquidity, traders avoid buying the soon-to-be off-the-run issue. Traders who will be bidding at the auction avoid buying the old issue since they want to keep yield levels high (bids are for yield). And many traders take to the sidelines until they learn how well the new issue has been received.

There will also be a $10 billion, 30-Year Bond offering on Thursday; but it will be a reopening of last August's issue, which actually had a maturity of 29-years and 9-months. Thursday's securities, then, will have a maturity of 29-years and 6-months.