Thursday, November 6th, Market Update

Thursday: 11/06/08 5:00 PM EST :
Market Update

Interest rate cuts by a number of foreign central banks helped the short end of the bond market today while the long end (with the exception of the 30-Year Bond) got a mild boost from a shift away from stocks.

In late trading, the 10-Year Treasury Note was up by 3/32, lowering its yield by 1 basis point to 3.69%; the Dow was down by 443.48 points to 8,695.79; and the Nasdaq was down by 72.94 points to 1,608.70.

Stocks found no support from today's economic news. The jobless claims report said the level of initial claims slipped slightly last week but the previous week's figure was revised up and the latest level of continuing claims was the highest in twenty-five years. The news underscores the proximity of tomorrow's employment report and expectations that it will be weak.

Another report this morning said that nonfarm business productivity decelerated in the third quarter and unit labor costs rose sharply. Negative guidance from Cisco and reports of slow sales at major retailers also weighed on stocks.

Oil futures fell again today with the price of a barrel of light, sweet crude for next month delivery dropping by $4.53 on the New York Mercantile Exchange to settle at $60.77. This was the lowest closing price for a front-month contract since March of 2007. Lower energy prices are an economic stimulant since they leave businesses and consumers with more money to spend on other things, but the reason prices are falling is that demand is expected to continue falling as the global economy cools. Falling oil prices also hurt energy-related stocks.

By the end of stock trading, the Dow had lost 4.85% for the day; the Nasdaq, 4.34%; and the S&P 500, 5.03%. In the last two days the Dow has fallen by 929.49 points or 9.66%, the Nasdaq has fallen by 9.63%, and the S&P 500 has fallen by 10.03%.

The rate cuts overseas gave Treasuries a boost in early trading but profit taking following recent gains sent prices lower at the intermediate and long end of the market. But as stocks continued to decline, the losses were pared and the note sector ultimately made progress on the day.
Tomorrow, the major event of the day is the release of the employment report for last month. In September's report, the Labor Department said that the seasonally adjusted level of nonfarm payrolls fell that month by 159,000. Not only was this a much larger decline than recent forecasts of 90,000 to 100,000, but it was the largest since March of 2003.

The weakness was broad-based, hitting both the goods producing and services sectors. While the payroll figure was weaker than anticipated, the unemployment rate, as expected, came in at 6.1%, matching August's reading. However, it was still the highest since September of 2003. The unemployment rate is the percentage of those in the active workforce without jobs.
Analysts feel that October's report will be bleak. They are predicting that payrolls fell by 200,000. They are also predicting that the unemployment rate rose to 6.3%. If the employment rate prediction is true, it would be the highest since June of 2003.

A couple of minor releases also are slated for tomorrow. The report on pending home sales will provide some insight on upcoming sales activity. The report for August surprised observers by showing a substantial pickup in contract activity. The National Association of Realtors reported that its index of sales rose by 7.4%. The rise was corroborated in the latest report on existing home sales which also showed a surprising rise in September. Though the sector continues to struggle, the latest sales data suggests that falling home prices are generating increased buying interest.
Another second-tier release tomorrow is the report on wholesale inventories for September. In August's report, the Commerce Department said that the seasonally adjusted level of inventories rose by 0.8%. Though twice as large as analysts had predicted, latest gain was the weakest in five months.

Rising inventories can be seen as bullish if they are perceived as resulting from preparation for increased demand. But August's report said that the level of sales fell in August by 1.0%. This was the largest decline since January of 2007 and July's previously reported decline of 0.3% was revised to a decline of 0.8%.

The monthly changes resulted in an inventory-to-sales (I/S) ratio for August of 1.10 and July's previously reported 1.07 ratio was revised up to 1.08. 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 increasing pressure to replace supplies. The ratio is still low by historical standards, however. June's 1.06 reading was a record low.

For September, the inventory level is expected to make another small increase but the sale level is expected to have declined again.

The wholesale inventory data is dated. The report is also considered second-tier since it provides only one piece of the inventories picture. A more comprehensive report -- including the manufacturing, wholesale, and retail sectors -- will be released a week from tomorrow.

Thursday Morning 10:30 AM EST :
Morning Market Update

Treasuries are lower this morning on profit-taking following three winning sessions that has trimmed 26 basis points off the yield of the benchmark 10-Year Note (yield moves inversely to price). The retreat comes despite another decline in stocks this morning.
The employment news released this morning was somewhat deceptive. The Labor Department reported that the seasonally adjusted level of initial claims for state unemployment benefits declined last week by 4,000 to 481,000.

But the previous week's originally reported level of 479,000 was revised up by 6,000 to 485,000. The four-week moving average, which smoothes out some short-term volatility was unchanged at 477,000.

Despite the latest decline, the claims level has been trending higher throughout the year. Any reading over 400,000 is considered a sign that layoffs are outpacing hiring activity. For the first forty-four weeks of the year so far, the average weekly reading has been 297,886. For the same period last year, the average was 317,659.

Moreover, today's reports said that continuing claims jumped by 122,000 in the week ending October 25 (continuing claims must be at least a week old) to 3.843 million. This was the highest level in twenty-five years. For the first forty-three weeks of the year, the average continuing claims reading has been 3,150,791. For the same period last year, the average was 2,530,884.
The claims news spotlights the approach of tomorrow's employment report for last month, even though the data collection periods for the two reports did not coincide. A weak report is expected tomorrow and this may be adding pressure on stocks.

In the other economic release of the day, the Commerce Department said that, according to preliminary data, the seasonally adjusted level of nonfarm business productivity (average output per worker per hour) grew at an annualized rate of 1.1% in the third quarter of the year relative to the second. This was the slowest pace of the year so far and the previously reported increase of 4.3% in the second quarter was revised to 3.6%.

A deceleration had been anticipated, however. Last week's initial estimate of gross domestic product for the third quarter showed a 0.3% contraction following a 2.8% expansion in the second quarter. Also not unexpectedly, the lower productivity growth increased unit labor costs (ULC: average cost per unit of output). They grew by 3.6% in the third quarter following a 0.1% decline in the second (revised from the previously reported decline of 0.5%).

Now that today's data has been released, technical factors will take on added significance. Though bonds are currently lower, a significant sell-off in stocks would make Treasuries more attractive. Bonds may also get support from a lower interest rate environment. Earlier this week, Australia cut a key rate and today the Bank of England, the European Central Bank, the Swiss National Bank, and the Czech Republic National Bank cut rates. The Federal Reserve, which cut rates twice in October, is expected to cut again next month.

While these items are positive for Treasuries, traders are also positioning for $55 billion in new supply next week apart from the weekly bill offerings. This activity constitutes a negative influence on the market . . . .