Wednesday, November 19th Market Update

Wednesday: 11/19/08 10:30 AM EST:
Market Update:

The inflation news released today was a plus for both stocks and bonds but the news on the housing sector was bearish and favored bonds. Currently, the stock indices are in negative territory amid choppy trading action. Treasuries are up but the prices have also seen a couple of abrupt moves this morning.

In today's economic news, the Labor Department reported that its Consumer Price Index (CPI), a gauge of inflation at the retail level, declined by 1.0% last month. This was the largest decline in the history of the data series going back to 1947. Analysts had been predicting a decline of about 0.8%.

As expected, a sharp drop in oil prices pulled the energy price index down by 8.6%. This was the largest monthly contraction in this data series going back to 1957.

Another volatile category is food and its price index rose in October by 0.3%, the smallest increase since March. But even excluding the categories of energy and food, the so-called core index declined by 0.1%, the first decline since November of 1982.

Of the non-core components, the energy-related category of transportation saw the biggest drop with a decline of 5.4%, the largest in the history of the data series going back to 1947. But energy was not the whole story behind the PPI data. The index for apparel fell by 1.0%, the biggest drop since last March. The housing price index was flat (0.0) after two months of 0.1% declines. The largest increase outside of food was a 0.3% rise in the miscellaneous category of "other goods and services."

On a year-over-year basis, the CPI was up by 3.7% but this was the best Y/Y margin since the preceding October. The core index was up by 2.2%, also the best margin in a year. The energy price index was still higher by 11.5% but this was the best margin since September of last year. Not all of the Y/Y figures were positive: the index for food was up by 6.3%, the highest margin since March of 1990.

In the other major release of the day, the Commerce Department said that the seasonally adjusted rate of housing starts declined in October by 4.5% to 791,000 from an upwardly revised pace of 828,000 in September (originally reported as 817,000). Though the latest rate was higher than the 780,000 that analysts had predicted, it was still the lowest in the history of the data series going back to 1959.

The report indicated a 31.0% drop in the starts pace in the Northeast and a 13.7% drop in the Midwest. There were some bullish details. The largest regional contributor, the South, saw an increase of 1.5% and the second largest contributor, the West, saw an even bigger increase of 7.5%.

But the outlook for the near term remains bleak. The report said that the seasonally adjusted, annualized rate of building permit issuance fell by 12.0% last month to 708,000. This was the lowest pace in the history of the data series going back to 1960.

In related news, the Mortgage Bankers Association of America reported this morning that its mortgage application index fell last week by 6.2% despite a decline in average fixed mortgage rates. The decline in rates spurred some additional refinance activity and its index rose by 2.6%. Refinances accounted for 49.9% of all application activity, an increase from the previous week's 45.1%. But the purchase index fell by 12.6% to its lowest level since December of 2000.
Registrations for adjustable rate mortgages edged up to 2.6% of all applications versus 2.3% the week before.

This afternoon, the Federal Reserve will release the minutes of last month's monetary policy meetings (an emergency meeting held on the 8th and the regular meeting on the 28th and 29th). The minutes are expected to indicate deep concerns over the financial market and the economy. But even if they turn out less hawkish than anticipated, the weak economic and low inflation indicators released since then point to more rate cuts next month.

Tuesday, 11/18/08 : Tuesday was another volatile day for stocks but the urge to pick up what were perceived to be bargains overcame ongoing worries about the economy. Treasuries rallied on tame inflation data and confidence that the Fed would cut rates in December. An afternoon slide by stocks (though reversed in the last hour of trading) helped keep Treasuries elevated.

In late trading, the 10-Year Treasury Note was up by 1-00/32, lowering its yield by 12 basis points to 3.53%; the Dow was up by 151.17 points to 8,424.75; and the Nasdaq was up by 1.22 points to 1,483.27.

The big news of the day was a record drop in the Producer Price Index for October. The headline overshadowed the fact that the core index rose more than expected and was up from a year earlier by the largest amount in nineteen years.

Low inflation is a good thing for both stocks and bonds. But the congressional testimony by Henry Paulson and Ben Bernanke kept the faltering economy in focus and stocks began to decline at around noon Eastern Time.

More bad economic news came in the afternoon. The National Association of Home Builders Housing Market Index came in at 9 for the month, down from 14 in October. A reading below 50 indicates more negative than positive responses from home builders regarding the state of the market for single home sales. November's reading was the lowest in the history of the data series going back to 1985.

At their low of the day, the Dow was down by 168.14 points or 2.03%, the S&P 500 was down by 2.81%, and the Nasdaq was down by 3.52%. But the late-session rally allowed the Dow to close with a 1.83% gain for the day. The S&P 500 finished with a gain of 0.98% and the Nasdaq made a nominal advance of 0.08%.

In the last three sessions, the yield of the benchmark 10-Year Treasury Note fell by 32 basis points and yesterday's close was the lowest level since October 7 (yield moves inversely to price).
Oil futures moved lower again yesterday. A barrel of light, sweet crude for next month delivery lost $0.56 on the New York Mercantile Exchange to settle at $54.39, the lowest close for a front-month contract since January of last year. The price was down by $90.90 per barrel from the record close of $145.29 posted on July 3 . . . .