Monday, December 8th, 2008

Monday Market Update

Despite the move in stocks, the 10-Year Treasury Note and 30-Year Bond are currently up slightly following steep losses on Friday. However, though these maturities are experiencing some technical bounce, this could easily dissipate due to the allure of rising stocks. Supply pressure from this week's 3-Year and 10-Year Note auctions are also weighing against Treasuries.
This week's economic release calendar starts off slowly.

There are no major economic releases scheduled for today. Tomorrow's only significant economic release is the report on pending home sales for October. In September's report, the National Association of Realtors said that its seasonally adjusted index of sales fell by 4.6% following a 7.5% increase in August.

The jump in August had surprised observers when the news was released in October but a subsequently released report on existing home sales corroborated the data by showing a surprise increase in September. But the pending sales index for September suggests that the sector continues to struggle despite some support from falling home prices. Analysts are anticipating another decline of about 2.3% in October's index.

The pending sales index was first published in 2005 and the data series goes back to 2001. The index is a measure of the seasonally adjusted, annualized rate of contract activity in a month. The NAR asserts that 80% of contracts become sales within two months and a large portion of the rest become sales two months thereafter.

On Wednesday, the report on wholesale inventories for October will be released. In September's report, the Commerce Department said the seasonally adjusted level of inventories declined 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 on manufacturing to replace supplies. September's reading was the highest in a year.

A modest bounce of about 0.2% is anticipated in the inventory level but the I/S ratio is expected to remain above trend.

On Wednesday afternoon, the Treasury will auction a new issue of 3-Year Notes. Last month's auction drew strong demand. Bids exceeded the $25 billion offer amount by 3.07 to 1, up sharply from the 2.39 bid-to-cover ratio in the last such auction in May of last year. In the twelve auctions prior to last month's, the average ratio was 2.29.

Individual investor demand was weak. Noncompetitive bids totaled only a little more than $20 million. They totaled $391 million in the last auction and the twelve-auction average was $317 million.

But foreign demand was strong. Indirect competitive bids, which include those from foreign central banks, received 36.0% of the issue, up from the last award portion of 18.3% and higher than the twelve-auction average of 31.0%.

Also on Wednesday afternoon, the Treasury is expected to release its budget figures for last month. In November of last year, the budget report said that outlays exceeded receipts by $98.2 billion. Because of declining tax receipts due to the economic slowdown and because of increased government spending to rescue the economy, last month's deficit is expected to be about twice as large.

October's deficit was $237.2 billion and the projected November deficit would put the total deficit figure for the 2009 fiscal year (begun in October) at over $400 billion. The total deficit for the 2008 fiscal year was a record $454.8 billion. According to some economists, the deficit for the current fiscal year will be over one-trillion dollars.

On Thursday, the jobless claims report will address the employment situation once again. In last Thursday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits fell the week before by 21,000 to 509,000. This is a second weekly decline for a cumulative total of 34,000 but it followed two weeks of gains totaling 59,000. The latest move may also have been distorted by the adjustment that had to be made for the Thanksgiving holiday.