Tuesday Mortgage Market Update
Stocks are slightly ahead in choppy trading this morning and Treasuries are narrowly mixed. Pre-holiday trading volumes are thin and market participants are attempting to maintain an even keel. However, the lack of liquidity leaves the markets vulnerable to exaggerated price moves. Stocks may be eventually feel the pressure from today's weak housing news and bond traders are facing more supply today.
In today's barrage of economic releases, the Commerce Department reported that, according to its final calculations, the gross domestic product contracted at a 0.5% annualized rate in the third quarter.
As expected, this was no change from the preliminary calculation reported last month but it was still the worst reading since a 1.4% decline in the third quarter of 2001. The advance estimate, released in October, was a contraction of 0.3%.
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.
Today's report indicated that consumer spending declined at a 3.8% rate instead of the 3.7% cited in the preliminary report. But government spending rose at a 5.8% rate instead of the previously reported 5.4%.
The inflation data contained in today's report was positive for the markets. The GDP price index showed an increase of 3.9% for the third quarter, down from the preliminary reading of 4.2%. The core index for personal consumption expenditures (personal spending minus the volatile categories of food and energy) increased by 2.4% instead of the previously reported 2.6%.
Despite the improvements, however, the rise in the overall prices index was the largest since the first quarter of last year and the increase in the core PCE index was the biggest since the fourth quarter of last year.
The GDP news is having little impact on the markets as traders see it as old news. They are now focusing on the current and upcoming quarters. Recent estimates for the October through December period call for a contraction of between 3.0% and 4.5%.
In other news, the housing sales reports for last month were released this morning. The Commerce Department said that the seasonally adjusted, annualized pace of new home sales fell by 2.9% in November to 407,000, the lowest rate since January of 1991. Moreover, October's originally reported pace of 433,000 was revised down to 419,000.
The report said that the pace fell by 16.4% in the Midwest and by 7.1% in the South. The Northeast saw an increase of 14.3% and the West saw an increase of 11.0%.
With slumping sales, home builders are cutting back on new construction. The inventory level of new homes on the market (adjusted and annualized) was 374,000, the lowest level since February of 2004. At last month's sales rate, this represented 11.5 months of sales. Though down slightly from October's turnover time of 11.8 months, it was still high by historical standards
The average new home price rose by $8,000 last month to $287,500 but this was still 9.2% below the average of $316,800 posted in November of last year. The median price rose by $5,800 to $220,400 last month but was down by 11.5% from the previous November's $249,100.
In the larger category of existing home sales, the National Association of Realtors said that the pace fell last month by 8.6% to 4.49 million. October's originally reported rate of 4.98 million was revised down to 4.91 million. Forecasters had predicted a reading of about 4.90 million.
The decline was broad-based. The rate fell by 12.0% in the Northeast, by 10.9% in the South, by 7.4% in the Midwest, and by 4.3% in the West.
Inventories edged up from 4.198 million to 4.203 million. At the prevailing sales pace, this represented 11.2 months of sales, the highest turnover time since April.
The average existing home price fell by $5,500 in November to $224,200 and was down by 12.3% from the previous November's $255,700. The median price fell by $5,200 to $181,300 and was down by 13.2% from the $208,800 median price in November of last year.
The final news release of the day was stronger than expected. The final Consumer Sentiment Index for the month from the twice-monthly surveys conducted by the University of Michigan came in at 60.1, up from the preliminary reading of 59.1 and November's final reading of 55.3. Forecasters had predicted a weaker reading of 55.0.
The improvement came in consumers' outlook over the next six months. The expectations index rose by 54.0 from the preliminary 52.4 and November's final 53.9. The index of current conditions was little changed. It came in at 69.5, a tough higher than the preliminary reading of 69.4 but still a marked improvement over November's 57.5.
Still to come: The Treasury will be conducting its monthly offering of 5-Year Notes today. Last month's auction had mixed results. Bids exceeded the offer amount by 2.44 to 1, the highest in the last four auctions and above the average of 2.15 for the twelve auctions preceding November's. Noncompetitive bids, a gauge of individual investor demand, totaled about $101 million, up from October's $82 million and above the twelve-auction average of $90 million.
Today's offering has a record face value for a 5-year issue of $28 billion. The deadline for competitive bids is 1:00 PM Eastern Time. The deadline for noncompetitive bids is noon.
Tuesday, December 23, 2008
Monday, December 22rd, Mortgage Rate Market Update
Monday Mortgage Market Update
Stocks lost ground yesterday morning and the decline accelerated in mid-afternoon. But stocks bounced in the final hour, leaving the Dow with a modest loss. Despite the late-session improvement, the other major indices still suffered hefty losses. The afternoon plunge helped lend some temporary support to bonds but they also finished well in the red as new supply kept them under pressure.
In late trading, the 10-Year Treasury Note was down by 14/32, raising its yield by 5 basis points to 2.17%; the Dow was down by 59.42 points to 8,519.69; and the Nasdaq was down by 31.97 points to 1,532.35.
A weak sales forecast from Toyota weighed against the auto sector, which had surged on Friday because of the announced government bailout measures for the industry. A poor earnings report from Walgreens pressured the retail sector and the threat of a credit downgrade of Alcoa sent that company's shares down sharply.
The energy sector was also hit by another decline in oil prices. In its first trading day as the front month futures contract, the price of a barrel of light, sweet crude for February delivery fell by $2.45 on the New York Mercantile Exchange to settle at $39.91.
The now-expired January contract closed lower last Thursday and Friday but yesterday's close for the February contract was the third lowest for the front month oil future since July of 2004. The problems in the auto industry may have acted as a reminder of declining demand for oil as the economy contracts.
Last week, the Organization of Petroleum Exporting Countries (OPEC) said that to support oil prices, the cartel would cut its output by 2.2 million barrels per day starting in January. But many analysts feel that some oil producing countries will be inclined to keep producing at higher levels in order to make up for some of the losses associated with the decline in price.
At its worst level of the day, the Dow was down by 206.85 points or 2.41% but by the end of the session it had trimmed the loss to just 0.69%. The S&P 500 had been down by 3.47% but finished with a loss of 1.83%. And the Nasdaq was down by 3.88% at its low, but closed with a loss of 2.04%.
Supply was an obstacle for bonds. The Treasury auctioned its monthly issue of 2-Year Notes on Monday The results of the sale were lukewarm but not terrible considering the record $38 billion offer size. The bid-to-cover ratio was 2.13, up slightly from last month's 2.08 but still the second lowest since July of 2006. Noncompetitive bids totaled about $343 million -- an exceptionally small amount for a 2-year offering.
And foreign demand was soft. Indirect competitive bids received 30.1% of the issue and 30.4% of all accepted competitive bids. The award portion was the lowest since September . . . .
Stocks lost ground yesterday morning and the decline accelerated in mid-afternoon. But stocks bounced in the final hour, leaving the Dow with a modest loss. Despite the late-session improvement, the other major indices still suffered hefty losses. The afternoon plunge helped lend some temporary support to bonds but they also finished well in the red as new supply kept them under pressure.
In late trading, the 10-Year Treasury Note was down by 14/32, raising its yield by 5 basis points to 2.17%; the Dow was down by 59.42 points to 8,519.69; and the Nasdaq was down by 31.97 points to 1,532.35.
A weak sales forecast from Toyota weighed against the auto sector, which had surged on Friday because of the announced government bailout measures for the industry. A poor earnings report from Walgreens pressured the retail sector and the threat of a credit downgrade of Alcoa sent that company's shares down sharply.
The energy sector was also hit by another decline in oil prices. In its first trading day as the front month futures contract, the price of a barrel of light, sweet crude for February delivery fell by $2.45 on the New York Mercantile Exchange to settle at $39.91.
The now-expired January contract closed lower last Thursday and Friday but yesterday's close for the February contract was the third lowest for the front month oil future since July of 2004. The problems in the auto industry may have acted as a reminder of declining demand for oil as the economy contracts.
Last week, the Organization of Petroleum Exporting Countries (OPEC) said that to support oil prices, the cartel would cut its output by 2.2 million barrels per day starting in January. But many analysts feel that some oil producing countries will be inclined to keep producing at higher levels in order to make up for some of the losses associated with the decline in price.
At its worst level of the day, the Dow was down by 206.85 points or 2.41% but by the end of the session it had trimmed the loss to just 0.69%. The S&P 500 had been down by 3.47% but finished with a loss of 1.83%. And the Nasdaq was down by 3.88% at its low, but closed with a loss of 2.04%.
Supply was an obstacle for bonds. The Treasury auctioned its monthly issue of 2-Year Notes on Monday The results of the sale were lukewarm but not terrible considering the record $38 billion offer size. The bid-to-cover ratio was 2.13, up slightly from last month's 2.08 but still the second lowest since July of 2006. Noncompetitive bids totaled about $343 million -- an exceptionally small amount for a 2-year offering.
And foreign demand was soft. Indirect competitive bids received 30.1% of the issue and 30.4% of all accepted competitive bids. The award portion was the lowest since September . . . .
Wednesday, December 17, 2008
Tuesday, December 16th Mortgage Market Update
Mortgage Market Update
Both stocks and Treasuries made strong gains following today's stronger than expected Fed action. In late trading, the 10-Year Treasury Note was up by 2-11/32, lowering its yield by 25 basis points to 2.27%; the Dow was up by 359.61 points to 8,924.14; and the Nasdaq was up by 81.55 points to 1,589.89.
The FOMC unanimously decided to cut its target for the fed funds rate (the overnight borrowing rate between banks) to between 0.0% and 0.25%, meaning a cut of 0.75% to as much as 1.00% from its previous reading of 1.00%. The committee also cut the discount rate by 0.75% to 0.25%.
The policy statement acknowledged the weak economy, tight credit conditions, but low inflation pressures. It also said that the fed funds rate is likely to remain exceptionally low for some time. The committee also noted that it is ready to buy more mortgage agency debt and mortgage-backed securities if necessary and may purchase longer-term Treasuries as well.
Other options are also possible; the statement concluded by saying, "The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity."(FOMC STATEMENT)
Before the announcement, the stock market had been trading in the green but was given a boost by the rate news. The early gains came on news of a record drop in the Consumer Price Index last month. The other news of the day was not as stock-friendly. The pace of housing starts declined by the largest amount since March of 1984 to the lowest level on record going back to 1959. The rate of building permit issuance also fell to a record low.
The bearish housing news and a drop in the value of the dollar tied to the rate cut news weighed against oil prices. Although futures traders are expecting a hefty cut in oil production to be announced tomorrow from the Organization of Petroleum Exporting Countries, the price of a barrel of crude oil for January delivery fell by $1.02 on the New York Mercantile Exchange to close at $43.49. This was a third consecutive session decline totaling $4.49. Today's close was the third lowest for a front-month contract in almost four years.
In the stock market, the Dow gained 4.20%, the S&P 500 gained 5.14%, and the Nasdaq gained 5.41%. The Dow closed higher on the 8th of this month but today's was the second highest since November 7th. The S&P 500 and Nasdaq posted their highest closing levels today in over a month.
The Fed rate cut and reiteration that the central bank may decide to buy long-term Treasuries gave strong support to the long end of the market. The benchmark 10-Year Note yield closed at a record low as did the yield of the 30-Year Bond. The long bond's price rose by over 5 points today (5-09/32).
Tomorrow, the only major release is the report on current account for the third quarter. The current account balance is the difference between dollars leaving and entering the country. In addition to regular imports and exports, the data 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 second quarter, the balance was a deficit of $183.1 billion, the largest in four quarters. A similarly sized deficit is anticipated for the last quarter.
The inflation news of the day was a plus for both the stock and bond markets and both made gains in early trading. But stock traders are also facing more bad news about the economy and a weaker than expected earnings report for last quarter from Goldman Sachs.
Though the fundamentals seem to favor bonds, Treasuries are currently mixed with the long end of the maturity spectrum holding modest gains. Bond traders are taking a cautious position in front of today's conclusion of the Fed's monetary policy meeting.
In today's economic news, the Labor Department reported that its Consumer Price Index (CPI), a gauge of inflation at the retail level, fell by 1.7% last month. This was the largest decline in the history of the data series going back to 1947 and supersedes October's previous record decline of 1.0%. Another large drop was expected due to falling energy prices but the actual decline was larger than the 1.3% that forecasters had predicted.
The major contributor to the decline was indeed in the category of energy. Due to falling oil/gasoline prices, the energy index dropped by 17.0% in November. This was a fourth consecutive monthly decline and the largest in the history of this data series going back to 1957. Another especially volatile category is food and its index rose by 0.2%, the smallest increase in eight months.
Excluding energy and food prices, the so-called core index was virtually unchanged (0.0%) in November. But of the non-core components, the energy-related category of transportation saw the biggest decline, falling by 9.8%. This was also the largest decline in the history of the data series going back to 1947.
The only other decline in the non-core sectors was a 0.1% drop in the housing price index. The largest increase was in the apparel price index with a gain of 0.3% following a 1.0% decline in October. The category of education and communication saw a 0.2% index increase as did the category of medical care.
On a year-over-year basis, the CPI was up by 1.1%. But the increase was the smallest since June of 2002. The core index was up by 2.0%, the smallest Y/Y increase since September of 2005.
The other major news release of the day was the report on housing starts and it was much weaker than forecasters had expected. The Commerce Department said the seasonally adjusted, annualized pace of new home construction plunged by 18.9% in November to 625,000. October's originally reported rate of 791,000 was revised down to 771,000. Not only was November's figure lower than the 730,000 that analysts had predicted, it was the lowest starts rate in the history of the data series that began in January of 1959.
The weakness was broad-based. The rate fell by 34.6% in the Northeast, by 23.1% in the Midwest, by 16.8% in the West, and by 15.6% in the South.
The outlook for near-term starts is also bleak. Today's report said that the pace of building permit issuance fell by 15.6% in November to 616,000 -- the lowest in the history of this data series which began in January of 1960.
The major event of the day will be the release of the Fed's latest statement on monetary policy. The Federal Open Market Committee (FOMC), the Federal Reserve's policy committee, concludes a two-day meeting today and most Fed-watchers expect the meeting statement to reveal another round of rate cuts to stimulate the economy and keep credit flows moving.
Because of the credit crunch and economic downturn, the Fed has cut the discount rate (the interest rate charged for loans directly from the central bank) eleven times since August of last year from 6.25% to its current 1.25%. The central bank's target for the more influential federal funds rate (the overnight borrowing rate between banks) has been cut nine times since September of last year from 5.25% to its current 1.00%. The rate is actually determined by the banks on a daily basis, but the Fed can adjust reserve levels to bring the rate into line with the target.
The Fed has also instituted numerous emergency programs to keep money flowing though the financial system. But even with all of the measures taken, further action is anticipated. Most observers are anticipating a 0.50% cut to both the fed funds target and the discount rate, bringing them down to record lows. Some forecasters are even calling for larger cuts of 0.75%. The bolder the action is, the greater lift it would likely give the markets. A less-aggressive move might have a negative influence.
The results of the meeting will be posted here when they become available . . . .
Both stocks and Treasuries made strong gains following today's stronger than expected Fed action. In late trading, the 10-Year Treasury Note was up by 2-11/32, lowering its yield by 25 basis points to 2.27%; the Dow was up by 359.61 points to 8,924.14; and the Nasdaq was up by 81.55 points to 1,589.89.
The FOMC unanimously decided to cut its target for the fed funds rate (the overnight borrowing rate between banks) to between 0.0% and 0.25%, meaning a cut of 0.75% to as much as 1.00% from its previous reading of 1.00%. The committee also cut the discount rate by 0.75% to 0.25%.
The policy statement acknowledged the weak economy, tight credit conditions, but low inflation pressures. It also said that the fed funds rate is likely to remain exceptionally low for some time. The committee also noted that it is ready to buy more mortgage agency debt and mortgage-backed securities if necessary and may purchase longer-term Treasuries as well.
Other options are also possible; the statement concluded by saying, "The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity."(FOMC STATEMENT)
Before the announcement, the stock market had been trading in the green but was given a boost by the rate news. The early gains came on news of a record drop in the Consumer Price Index last month. The other news of the day was not as stock-friendly. The pace of housing starts declined by the largest amount since March of 1984 to the lowest level on record going back to 1959. The rate of building permit issuance also fell to a record low.
The bearish housing news and a drop in the value of the dollar tied to the rate cut news weighed against oil prices. Although futures traders are expecting a hefty cut in oil production to be announced tomorrow from the Organization of Petroleum Exporting Countries, the price of a barrel of crude oil for January delivery fell by $1.02 on the New York Mercantile Exchange to close at $43.49. This was a third consecutive session decline totaling $4.49. Today's close was the third lowest for a front-month contract in almost four years.
In the stock market, the Dow gained 4.20%, the S&P 500 gained 5.14%, and the Nasdaq gained 5.41%. The Dow closed higher on the 8th of this month but today's was the second highest since November 7th. The S&P 500 and Nasdaq posted their highest closing levels today in over a month.
The Fed rate cut and reiteration that the central bank may decide to buy long-term Treasuries gave strong support to the long end of the market. The benchmark 10-Year Note yield closed at a record low as did the yield of the 30-Year Bond. The long bond's price rose by over 5 points today (5-09/32).
Tomorrow, the only major release is the report on current account for the third quarter. The current account balance is the difference between dollars leaving and entering the country. In addition to regular imports and exports, the data 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 second quarter, the balance was a deficit of $183.1 billion, the largest in four quarters. A similarly sized deficit is anticipated for the last quarter.
The inflation news of the day was a plus for both the stock and bond markets and both made gains in early trading. But stock traders are also facing more bad news about the economy and a weaker than expected earnings report for last quarter from Goldman Sachs.
Though the fundamentals seem to favor bonds, Treasuries are currently mixed with the long end of the maturity spectrum holding modest gains. Bond traders are taking a cautious position in front of today's conclusion of the Fed's monetary policy meeting.
In today's economic news, the Labor Department reported that its Consumer Price Index (CPI), a gauge of inflation at the retail level, fell by 1.7% last month. This was the largest decline in the history of the data series going back to 1947 and supersedes October's previous record decline of 1.0%. Another large drop was expected due to falling energy prices but the actual decline was larger than the 1.3% that forecasters had predicted.
The major contributor to the decline was indeed in the category of energy. Due to falling oil/gasoline prices, the energy index dropped by 17.0% in November. This was a fourth consecutive monthly decline and the largest in the history of this data series going back to 1957. Another especially volatile category is food and its index rose by 0.2%, the smallest increase in eight months.
Excluding energy and food prices, the so-called core index was virtually unchanged (0.0%) in November. But of the non-core components, the energy-related category of transportation saw the biggest decline, falling by 9.8%. This was also the largest decline in the history of the data series going back to 1947.
The only other decline in the non-core sectors was a 0.1% drop in the housing price index. The largest increase was in the apparel price index with a gain of 0.3% following a 1.0% decline in October. The category of education and communication saw a 0.2% index increase as did the category of medical care.
On a year-over-year basis, the CPI was up by 1.1%. But the increase was the smallest since June of 2002. The core index was up by 2.0%, the smallest Y/Y increase since September of 2005.
The other major news release of the day was the report on housing starts and it was much weaker than forecasters had expected. The Commerce Department said the seasonally adjusted, annualized pace of new home construction plunged by 18.9% in November to 625,000. October's originally reported rate of 791,000 was revised down to 771,000. Not only was November's figure lower than the 730,000 that analysts had predicted, it was the lowest starts rate in the history of the data series that began in January of 1959.
The weakness was broad-based. The rate fell by 34.6% in the Northeast, by 23.1% in the Midwest, by 16.8% in the West, and by 15.6% in the South.
The outlook for near-term starts is also bleak. Today's report said that the pace of building permit issuance fell by 15.6% in November to 616,000 -- the lowest in the history of this data series which began in January of 1960.
The major event of the day will be the release of the Fed's latest statement on monetary policy. The Federal Open Market Committee (FOMC), the Federal Reserve's policy committee, concludes a two-day meeting today and most Fed-watchers expect the meeting statement to reveal another round of rate cuts to stimulate the economy and keep credit flows moving.
Because of the credit crunch and economic downturn, the Fed has cut the discount rate (the interest rate charged for loans directly from the central bank) eleven times since August of last year from 6.25% to its current 1.25%. The central bank's target for the more influential federal funds rate (the overnight borrowing rate between banks) has been cut nine times since September of last year from 5.25% to its current 1.00%. The rate is actually determined by the banks on a daily basis, but the Fed can adjust reserve levels to bring the rate into line with the target.
The Fed has also instituted numerous emergency programs to keep money flowing though the financial system. But even with all of the measures taken, further action is anticipated. Most observers are anticipating a 0.50% cut to both the fed funds target and the discount rate, bringing them down to record lows. Some forecasters are even calling for larger cuts of 0.75%. The bolder the action is, the greater lift it would likely give the markets. A less-aggressive move might have a negative influence.
The results of the meeting will be posted here when they become available . . . .
Friday, December 12, 2008
Friday, December 12th, 2008
Morning Market Update
More bad economic news and word that the Senate had rejected the auto bailout package were expected to send stocks into a tailspin this morning. But, though the indices are in the red, news that the Treasury is prepared to back the auto industry has provided some support for the market. Treasuries had been up in early trading but prices have since dropped into negative territory.
In today's economic news, the Commerce Department said that the seasonally adjusted level of retail sales contracted for a fifth consecutive month in November with a decline of 1.8%. Analysts had predicted a smaller decline of 1.4%. Moreover, October's originally reported decline of 2.8% was revised to a slightly steeper drop of 2.9% -- the largest decline in the current data series going back to 1992.
The sales level in the large but volatile category of auto and light trucks fell by 2.8%. But even excluding the category, sales were down by 1.6% following a 2.4% decline in October. Another volatile category is sales at gasoline stations and due to falling prices there, the sales level fell by a steep 14.7%. A bullish detail in the data is that excluding both the auto and gas station categories, sales rose last month by 0.3% after three months of contractions.
Declines were posted for non-store retailers (-1.3%); building materials, garden equipment and supplies dealers (-1.2%); and miscellaneous store retailers (-0.8%). But the other categories posted gains. The largest gainers were in sporting goods, hobby, book, and music stores (+2.8); electronics and appliance stores (+2.8%); and general merchandise stores (+1.2%). Sales at clothing stores rose by 0.8%. This was the first increase in the category since July and the largest since January.
In the other major release of the day, the Labor Department said that its Producer Price Index, a gauge of inflation at the wholesale level, fell in November by 2.2%, a deeper drop than the 1.8% that forecasters had predicted. This was a fourth consecutive monthly contraction and October's 2.8% drop was the largest in the history of the data series going back to 1947.
The declining price of oil is a key contributor to the contractions and today's report indicated an 11.2% decline in the energy price index last month following a 12.8% decline in October. Another volatile category is food and its index was flat (0.0%) last month. Excluding both volatile categories, the so-called core index rose by just 0.1%, the tamest reading in eight months.
Price pressures further down the production pipeline also contracted last month. At the intermediate stage, the price index fell by 4.3% and even excluding food and energy, the index was down by 2.3%. At the initial -- or crude -- stage of production the price index fell by 12.5% in November following an 18.5% drop in October.
The data indicate declining inflation pressures and that constitites a plus for both stocks and bonds. However, the price declines are due to falling demand and that is bad for corporate earnings and, therefore, stocks.
There were also a couple of minor releases today and they were mixed. The Commerce Department reported that the seasonally adjusted level of business inventories fell in October by 0.6%. This was the largest decline since August of 2003 and was worse than the 0.1% decline that had been predicted. In addition, September's previously reported decline of 0.1% was revised to a drop of 0.4%.
The inventory declines reflect the response to falling sales. Today's report said that the sales level decline in October by 3.5%. Consequently, the inventory-to-sales (I/S) ratio rose to 1.34 from September's 1.30 (originally 1.29). 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. October's ratio was the highest since June of 2003.
And lastly, the preliminary read on consumer sentiment for the month from the twice-monthly surveys by the University of Michigan resulted in a sentiment index of 59.0, up from November's final reading of 55.3 and stronger than most observers were expecting. The increase in optimism is being attributed to the decline in gasoline prices which has improved current conditions. But the bleak employment situation is casting a shadow over expectations for the future. News sources report that the index of current conditions spiked up to 69.4 from 57.5 while the expectations index slipped to 52.4 from 53.9.
More bad economic news and word that the Senate had rejected the auto bailout package were expected to send stocks into a tailspin this morning. But, though the indices are in the red, news that the Treasury is prepared to back the auto industry has provided some support for the market. Treasuries had been up in early trading but prices have since dropped into negative territory.
In today's economic news, the Commerce Department said that the seasonally adjusted level of retail sales contracted for a fifth consecutive month in November with a decline of 1.8%. Analysts had predicted a smaller decline of 1.4%. Moreover, October's originally reported decline of 2.8% was revised to a slightly steeper drop of 2.9% -- the largest decline in the current data series going back to 1992.
The sales level in the large but volatile category of auto and light trucks fell by 2.8%. But even excluding the category, sales were down by 1.6% following a 2.4% decline in October. Another volatile category is sales at gasoline stations and due to falling prices there, the sales level fell by a steep 14.7%. A bullish detail in the data is that excluding both the auto and gas station categories, sales rose last month by 0.3% after three months of contractions.
Declines were posted for non-store retailers (-1.3%); building materials, garden equipment and supplies dealers (-1.2%); and miscellaneous store retailers (-0.8%). But the other categories posted gains. The largest gainers were in sporting goods, hobby, book, and music stores (+2.8); electronics and appliance stores (+2.8%); and general merchandise stores (+1.2%). Sales at clothing stores rose by 0.8%. This was the first increase in the category since July and the largest since January.
In the other major release of the day, the Labor Department said that its Producer Price Index, a gauge of inflation at the wholesale level, fell in November by 2.2%, a deeper drop than the 1.8% that forecasters had predicted. This was a fourth consecutive monthly contraction and October's 2.8% drop was the largest in the history of the data series going back to 1947.
The declining price of oil is a key contributor to the contractions and today's report indicated an 11.2% decline in the energy price index last month following a 12.8% decline in October. Another volatile category is food and its index was flat (0.0%) last month. Excluding both volatile categories, the so-called core index rose by just 0.1%, the tamest reading in eight months.
Price pressures further down the production pipeline also contracted last month. At the intermediate stage, the price index fell by 4.3% and even excluding food and energy, the index was down by 2.3%. At the initial -- or crude -- stage of production the price index fell by 12.5% in November following an 18.5% drop in October.
The data indicate declining inflation pressures and that constitites a plus for both stocks and bonds. However, the price declines are due to falling demand and that is bad for corporate earnings and, therefore, stocks.
There were also a couple of minor releases today and they were mixed. The Commerce Department reported that the seasonally adjusted level of business inventories fell in October by 0.6%. This was the largest decline since August of 2003 and was worse than the 0.1% decline that had been predicted. In addition, September's previously reported decline of 0.1% was revised to a drop of 0.4%.
The inventory declines reflect the response to falling sales. Today's report said that the sales level decline in October by 3.5%. Consequently, the inventory-to-sales (I/S) ratio rose to 1.34 from September's 1.30 (originally 1.29). 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. October's ratio was the highest since June of 2003.
And lastly, the preliminary read on consumer sentiment for the month from the twice-monthly surveys by the University of Michigan resulted in a sentiment index of 59.0, up from November's final reading of 55.3 and stronger than most observers were expecting. The increase in optimism is being attributed to the decline in gasoline prices which has improved current conditions. But the bleak employment situation is casting a shadow over expectations for the future. News sources report that the index of current conditions spiked up to 69.4 from 57.5 while the expectations index slipped to 52.4 from 53.9.
Thursday, December 11, 2008
Thursday, December 11, 2008 Market Update
Thursday Market Update
Despite news that was mostly negative for stocks, the indices showed resilience for most of today's session, hovering near unchanged levels until mid-afternoon. But they then lost ground and continued to fall, closing near their lows of the day. The decline spurred a shift into the safety of government-backed Treasuries and they finished with strong gains.
In late trading, the 10-Year Treasury Note was up by 24/32, lowering its yield by 8 basis points to 2.60%; the Dow was down by 196.33 points to 8,565.09; and the Nasdaq was down by 57.60 points to 1,507.88.
Today's economic news was bond-friendly; that is, either indicating economic weakness or low inflation pressures. The weekly jobless claims report showed a huge jump in initial claims last week and in continuing claims the week before.
The trade gap for October was larger than expected, reducing expectations for the current quarter GDP figure (recent predictions call for a decline in GDP in the fourth quarter of between 3.0% and 4.0%). And import prices fell sharply in November, both in the large category of petroleum products, and outside of the category.
Oil futures spiked today. The price of a barrel of light, sweet crude for next month delivery rose by $4.46 on the New York Mercantile Exchange to close at $47.98. The increase was the largest since November 24 and the closing price was the highest since December 1.
Despite waning demand for oil, the price was supported by word that Saudi Arabia had cut production of the commodity. Another factor was a decline in the value of the dollar. Apart from being seen as a trading hedge against a falling dollar, oil investments around the world are priced in dollars and traders demand higher prices when the currency value declines.
Higher oil prices are positive for the energy sector of the stock market but high energy costs are seen as a negative for the broader market since they divert funds from businesses and consumers that might have been spent in other areas of the economy.
The final straw for the stock market today was news that the bailout package for the auto industry has stalled in the Senate. A measure passed the House of Representatives late yesterday but a number of senators are pressing for more stringent conditions for the car makers.
By the end of stock trading, the Dow had lost 2.24%; the S&P 500, 2.85%, and the Nasdaq, 3.68%. The losses helped boost demand for Treasuries despite a tepid reopening auction of last month's 10-Year Note. Bids exceeded the offer amount by 2.44 to 1, not a terrible bid-to-cover ratio for a reopening, especially considering the large offer size -- but it was not exceptional.
Noncompetitive bids, a gauge of individual investor demand, totaled about $33 million, down from the $39 million in the last regular 10-Year Note reopening in September but on the high side of the average in the last couple of years.
Foreign demand was weak. Indirect competitive bids, which include those from foreign central banks, received just 12.7% of today's offering, the lowest award portion since last March. The award was 26.3% in September's auction.
Despite the soft auction results, the gains in the market pushed the yield of the benchmark 10-Year Note down to its second lowest close since perhaps the 1950s (daily records are available going back to 1960). Last Thursday's closing yield of 2.55% was the only one lower than today's in the available data.
Tomorrow brings a couple of heavyweight economic releases. One is the Producer Price Index (PPI), a gauge of inflation at the wholesale level. It fell in October by 2.8%, a third consecutive decline and the largest in the history of the data series going back to 1947.
Once again, a major contributor to the decline was energy prices. The index for this category fell by 12.8%, the biggest drop since July of 1986. Another large and volatile category is food and its index fell by 0.2% in October. But not all of the inflation news was positive. Excluding the categories of energy and food, the so-called core index rose by an above-trend 0.4%.
The year-over-year data was also mixed. The PPI was up by 5.2% from a year earlier but this was the lowest margin since September of last year. The core index was up by 4.4%, the highest margin since September of 1989.
Inflation pressures further down the pipeline were tame. At the intermediate stage of production, the price index declined by 3.9% overall and by 1.7% at the core. At the initial or crude stage of production, the overall index declined by 18.6% and the core index fell by 17.0%. On a year-over-year basis, the intermediate index was up by 10.2% but this was the best margin since last February. The crude index was down by 1.4%, the first Y/Y monthly decline since January of 2007.
With oil prices still declining last month, the overall index is expected to have fallen again by about 1.8%. The core index is expected to have risen by a tame 0.2%.
The other major release is the retail sales report for last month. With the economy shrinking and job losses mounting, consumers have been holding back on spending. In October's report, the Commerce Department said the seasonally adjusted level of sales fell that month by 2.8%. This was a fourth consecutive monthly decline and the largest in the current data series going back to 1992.
A large but volatile category is autos and light trucks. Sales fell there by 5.5%, the largest decline since August of 2005. But even excluding the category, sales were down by 2.2% in October -- also the largest drop in the sixteen year look-back period.
Another large category is sales at gasoline stations. Given the drop in gas prices, it is not too surprising that the sales number there fell sharply. The report indicated a record drop of 12.7%. Excluding both the auto and gas station figures, sales were still down by 0.5% in October following a 0.6% decline in September and a 0.8% decline in August.
Poor auto sales and falling gasoline prices are expected to have resulted in another drop in overall sales last month of between 2.0% and 3.0%. A similar decline is predicted for sales excluding autos.
Though the PPI and retail sales report are tomorrow's major releases, there are a couple of others scheduled as well. The Commerce Department will release its report on business inventories for October. This is more comprehensive than the wholesale inventories report since it also includes the manufacturing and retail sectors.
In September, the inventory level declined by 0.2%, the first contraction since March of last year and the largest since July of 2005. Sales also contracted, falling by 2.0% after a 2.2% decline in August. The comparatively larger rise in outflows pushed the inventory-to-sales (I/S) ratio up from August's 1.27 to 1.29, the highest since February of last year.
The overall inventory level for October is expected to have fallen by 0.1%. A larger decline in sales is expected to have pushed the I/S ratio up again.
Lastly, the preliminary consumer sentiment index for the month from the University of Michigan will be released on Friday. Given the state of the economy, it is not surprising that consumers are pessimistic. The final index for November came in at 55.3, down from October's 57.6 and the lowest reading in twenty-eight years. Forecasters are predicting a bounce to about 58.0 in this month's preliminary reading. Though lower gas prices may be a positive influence, the bleak employment situation may result in a lower than forecast index number.
10:30 AM EST : The economic releases of the day were more bearish than expected but they have not had a major impact on the markets as traders have become accustomed to bad news. The stock indices began with sizeable losses but they have worked their way higher and are currently narrowly mixed. Treasuries are moderately higher.
In today's news, the Labor Department reported that the seasonally adjusted level of initial claims for state unemployment benefits rose last week by 58,000 to 573,000. Though the seasonal manipulation of the data to account for Thanksgiving may have contributed to the spike, the jump was still the largest since September of 2001 and the claims level was the highest in twenty-six years.
The four-week moving average, which smoothes out some short-term volatility, rose by 14,250 to 540,500 -- also a twenty-six year high. For the forty-nine weeks of the year to date, the average initial claims figure has been 412,000. For the same period last year, the average was 319,878.
The report said that continuing claims rose by 338,000 to 4.429 million in the week ending November 29 (continuing claims must be at least a week old). The increase was the largest in thirty-four years. The four-week average rose by 130,750 to 4,133,500. For the first forty-eight weeks of the year, the average continuing claims figure has been 3,248,188. For the same period last year, the average was 2,539,729.
Last week's employment report for November prepared traders for today's news. It said that nonfarm payrolls fell by 533,000, the largest drop since December of 1974. The employment report also said that the percentage of the active workforce without jobs rose from October's 6.5% to 6.7%, the highest unemployment rate since October of 1993.
There were a couple of trade-related releases this morning. The Commerce Department said that the seasonally adjusted value of imports exceeded that of exports in October by $57.2 billion. This was wider than September's gap of $56.6 billion and was larger than the $54.0 billion deficit figure that analysts had forecast.
Their expectation was based on the declining price of oil, a major import. The report indicated, however, that the volume of imported oil increased in October. Overall imports still declined by 1.3% from September to October, but exports dropped by 2.2%.
Net exports are a component of gross domestic product and the larger deficit figure means a larger subtraction from the fourth quarter calculation than previously thought.
Another report released this morning showed that inflation pressures associated with the trade situation are contracting and this is a plus for both stocks and bonds. The Labor Department said that its index of import prices fell by a record 6.7% in November (the data series goes back to December of 1988). October's originally reported decline of 4.7% was revised to a drop of 5.4% and contractions have now occurred in each of the last four months.
Not surprisingly, the major reason for the decline was the drop in prices for petroleum products. The category saw a dive of 25.8% last month. However, even excluding the category, prices were down by 1.8%.
The report said that overall import prices were down by 4.4% from a year earlier with petroleum prices down by 29.0%. Excluding petroleum, prices were up by 2.4%.
Prices also fell on the export side of trade. The overall decline was a record 3.2% in November following a 2.0% decline in October. The large but volatile category of agricultural products saw prices fall by 7.0% following an 8.4% decline in October. But even excluding agriculture, export prices declined by 2.9% last month.
Low inflation preserves the value of stock and bond investments. In addition it diminishes the argument against further interest rate cuts by the Federal Reserve. But the import / export news is also a reminder of declining demand as the global economy slows and this is a negative factor for stocks.
Still to come: the Treasury will be auctioning an additional amount of last month's 10-Year Note issue. The initial issue had an exceptionally large face value of $20 billion and tomorrow's reopening will have an exceptionally large face value of $16 billion.
The last regular reopening auction was in September (there were four atypical reopenings of old issues in October). Despite the fact that it had an offer amount of $12 billion, the highest for a 10-year reopening since December of 2003, it was well-received. Bids exceeded the offer amount by 2.51 to 1 -- in line with the average bid-to-cover ratio of 2.53 for the twelve reopenings preceding September's.
Noncompetitive bids totaled about $39 million, up from the twelve-auction average of $23 million. And foreign demand was also firm with indirect competitive bids receiving 26.3% of the offering, up from the twelve-auction average award portion of 13.7%.
Today's deadline for competitive bids is 1:00 PM Eastern time. The deadline for noncompetitive bids is noon . . . .
Despite news that was mostly negative for stocks, the indices showed resilience for most of today's session, hovering near unchanged levels until mid-afternoon. But they then lost ground and continued to fall, closing near their lows of the day. The decline spurred a shift into the safety of government-backed Treasuries and they finished with strong gains.
In late trading, the 10-Year Treasury Note was up by 24/32, lowering its yield by 8 basis points to 2.60%; the Dow was down by 196.33 points to 8,565.09; and the Nasdaq was down by 57.60 points to 1,507.88.
Today's economic news was bond-friendly; that is, either indicating economic weakness or low inflation pressures. The weekly jobless claims report showed a huge jump in initial claims last week and in continuing claims the week before.
The trade gap for October was larger than expected, reducing expectations for the current quarter GDP figure (recent predictions call for a decline in GDP in the fourth quarter of between 3.0% and 4.0%). And import prices fell sharply in November, both in the large category of petroleum products, and outside of the category.
Oil futures spiked today. The price of a barrel of light, sweet crude for next month delivery rose by $4.46 on the New York Mercantile Exchange to close at $47.98. The increase was the largest since November 24 and the closing price was the highest since December 1.
Despite waning demand for oil, the price was supported by word that Saudi Arabia had cut production of the commodity. Another factor was a decline in the value of the dollar. Apart from being seen as a trading hedge against a falling dollar, oil investments around the world are priced in dollars and traders demand higher prices when the currency value declines.
Higher oil prices are positive for the energy sector of the stock market but high energy costs are seen as a negative for the broader market since they divert funds from businesses and consumers that might have been spent in other areas of the economy.
The final straw for the stock market today was news that the bailout package for the auto industry has stalled in the Senate. A measure passed the House of Representatives late yesterday but a number of senators are pressing for more stringent conditions for the car makers.
By the end of stock trading, the Dow had lost 2.24%; the S&P 500, 2.85%, and the Nasdaq, 3.68%. The losses helped boost demand for Treasuries despite a tepid reopening auction of last month's 10-Year Note. Bids exceeded the offer amount by 2.44 to 1, not a terrible bid-to-cover ratio for a reopening, especially considering the large offer size -- but it was not exceptional.
Noncompetitive bids, a gauge of individual investor demand, totaled about $33 million, down from the $39 million in the last regular 10-Year Note reopening in September but on the high side of the average in the last couple of years.
Foreign demand was weak. Indirect competitive bids, which include those from foreign central banks, received just 12.7% of today's offering, the lowest award portion since last March. The award was 26.3% in September's auction.
Despite the soft auction results, the gains in the market pushed the yield of the benchmark 10-Year Note down to its second lowest close since perhaps the 1950s (daily records are available going back to 1960). Last Thursday's closing yield of 2.55% was the only one lower than today's in the available data.
Tomorrow brings a couple of heavyweight economic releases. One is the Producer Price Index (PPI), a gauge of inflation at the wholesale level. It fell in October by 2.8%, a third consecutive decline and the largest in the history of the data series going back to 1947.
Once again, a major contributor to the decline was energy prices. The index for this category fell by 12.8%, the biggest drop since July of 1986. Another large and volatile category is food and its index fell by 0.2% in October. But not all of the inflation news was positive. Excluding the categories of energy and food, the so-called core index rose by an above-trend 0.4%.
The year-over-year data was also mixed. The PPI was up by 5.2% from a year earlier but this was the lowest margin since September of last year. The core index was up by 4.4%, the highest margin since September of 1989.
Inflation pressures further down the pipeline were tame. At the intermediate stage of production, the price index declined by 3.9% overall and by 1.7% at the core. At the initial or crude stage of production, the overall index declined by 18.6% and the core index fell by 17.0%. On a year-over-year basis, the intermediate index was up by 10.2% but this was the best margin since last February. The crude index was down by 1.4%, the first Y/Y monthly decline since January of 2007.
With oil prices still declining last month, the overall index is expected to have fallen again by about 1.8%. The core index is expected to have risen by a tame 0.2%.
The other major release is the retail sales report for last month. With the economy shrinking and job losses mounting, consumers have been holding back on spending. In October's report, the Commerce Department said the seasonally adjusted level of sales fell that month by 2.8%. This was a fourth consecutive monthly decline and the largest in the current data series going back to 1992.
A large but volatile category is autos and light trucks. Sales fell there by 5.5%, the largest decline since August of 2005. But even excluding the category, sales were down by 2.2% in October -- also the largest drop in the sixteen year look-back period.
Another large category is sales at gasoline stations. Given the drop in gas prices, it is not too surprising that the sales number there fell sharply. The report indicated a record drop of 12.7%. Excluding both the auto and gas station figures, sales were still down by 0.5% in October following a 0.6% decline in September and a 0.8% decline in August.
Poor auto sales and falling gasoline prices are expected to have resulted in another drop in overall sales last month of between 2.0% and 3.0%. A similar decline is predicted for sales excluding autos.
Though the PPI and retail sales report are tomorrow's major releases, there are a couple of others scheduled as well. The Commerce Department will release its report on business inventories for October. This is more comprehensive than the wholesale inventories report since it also includes the manufacturing and retail sectors.
In September, the inventory level declined by 0.2%, the first contraction since March of last year and the largest since July of 2005. Sales also contracted, falling by 2.0% after a 2.2% decline in August. The comparatively larger rise in outflows pushed the inventory-to-sales (I/S) ratio up from August's 1.27 to 1.29, the highest since February of last year.
The overall inventory level for October is expected to have fallen by 0.1%. A larger decline in sales is expected to have pushed the I/S ratio up again.
Lastly, the preliminary consumer sentiment index for the month from the University of Michigan will be released on Friday. Given the state of the economy, it is not surprising that consumers are pessimistic. The final index for November came in at 55.3, down from October's 57.6 and the lowest reading in twenty-eight years. Forecasters are predicting a bounce to about 58.0 in this month's preliminary reading. Though lower gas prices may be a positive influence, the bleak employment situation may result in a lower than forecast index number.
10:30 AM EST : The economic releases of the day were more bearish than expected but they have not had a major impact on the markets as traders have become accustomed to bad news. The stock indices began with sizeable losses but they have worked their way higher and are currently narrowly mixed. Treasuries are moderately higher.
In today's news, the Labor Department reported that the seasonally adjusted level of initial claims for state unemployment benefits rose last week by 58,000 to 573,000. Though the seasonal manipulation of the data to account for Thanksgiving may have contributed to the spike, the jump was still the largest since September of 2001 and the claims level was the highest in twenty-six years.
The four-week moving average, which smoothes out some short-term volatility, rose by 14,250 to 540,500 -- also a twenty-six year high. For the forty-nine weeks of the year to date, the average initial claims figure has been 412,000. For the same period last year, the average was 319,878.
The report said that continuing claims rose by 338,000 to 4.429 million in the week ending November 29 (continuing claims must be at least a week old). The increase was the largest in thirty-four years. The four-week average rose by 130,750 to 4,133,500. For the first forty-eight weeks of the year, the average continuing claims figure has been 3,248,188. For the same period last year, the average was 2,539,729.
Last week's employment report for November prepared traders for today's news. It said that nonfarm payrolls fell by 533,000, the largest drop since December of 1974. The employment report also said that the percentage of the active workforce without jobs rose from October's 6.5% to 6.7%, the highest unemployment rate since October of 1993.
There were a couple of trade-related releases this morning. The Commerce Department said that the seasonally adjusted value of imports exceeded that of exports in October by $57.2 billion. This was wider than September's gap of $56.6 billion and was larger than the $54.0 billion deficit figure that analysts had forecast.
Their expectation was based on the declining price of oil, a major import. The report indicated, however, that the volume of imported oil increased in October. Overall imports still declined by 1.3% from September to October, but exports dropped by 2.2%.
Net exports are a component of gross domestic product and the larger deficit figure means a larger subtraction from the fourth quarter calculation than previously thought.
Another report released this morning showed that inflation pressures associated with the trade situation are contracting and this is a plus for both stocks and bonds. The Labor Department said that its index of import prices fell by a record 6.7% in November (the data series goes back to December of 1988). October's originally reported decline of 4.7% was revised to a drop of 5.4% and contractions have now occurred in each of the last four months.
Not surprisingly, the major reason for the decline was the drop in prices for petroleum products. The category saw a dive of 25.8% last month. However, even excluding the category, prices were down by 1.8%.
The report said that overall import prices were down by 4.4% from a year earlier with petroleum prices down by 29.0%. Excluding petroleum, prices were up by 2.4%.
Prices also fell on the export side of trade. The overall decline was a record 3.2% in November following a 2.0% decline in October. The large but volatile category of agricultural products saw prices fall by 7.0% following an 8.4% decline in October. But even excluding agriculture, export prices declined by 2.9% last month.
Low inflation preserves the value of stock and bond investments. In addition it diminishes the argument against further interest rate cuts by the Federal Reserve. But the import / export news is also a reminder of declining demand as the global economy slows and this is a negative factor for stocks.
Still to come: the Treasury will be auctioning an additional amount of last month's 10-Year Note issue. The initial issue had an exceptionally large face value of $20 billion and tomorrow's reopening will have an exceptionally large face value of $16 billion.
The last regular reopening auction was in September (there were four atypical reopenings of old issues in October). Despite the fact that it had an offer amount of $12 billion, the highest for a 10-year reopening since December of 2003, it was well-received. Bids exceeded the offer amount by 2.51 to 1 -- in line with the average bid-to-cover ratio of 2.53 for the twelve reopenings preceding September's.
Noncompetitive bids totaled about $39 million, up from the twelve-auction average of $23 million. And foreign demand was also firm with indirect competitive bids receiving 26.3% of the offering, up from the twelve-auction average award portion of 13.7%.
Today's deadline for competitive bids is 1:00 PM Eastern time. The deadline for noncompetitive bids is noon . . . .
Tuesday, December 9, 2008
Monday, December 8th, 2008 Afternoon Market Update
Monday: 12/08/08 5:00 PM EST :
Market Afternoon Update
Stocks rallied for a second day on speculation that a massive spending plan proposed by President-elect Obama will lead the economy out of recession. Treasuries were less attractive against stocks and they declined today, though losses were relatively mild.
In late trading, the 10-Year Treasury Note was down by 10/32, raising its yield by 4 basis points to 2.74%; the Dow was up by 298.76 points to 8,934.18; and the Nasdaq was up by 62.43 points to 1,571.74.
Besides the proposed spending plan unveiled this weekend, stock traders were encouraged by news that a rescue package for the auto industry may be close at hand. The prospect sent the auto sector sharply higher.
Oil futures rebounded somewhat today following declines in the previous six trading sessions. The rise came in part as a result of the brighter economic sentiments, which suggest increased demand for the commodity. But they also rose as a result of word over the weekend that the Organization of Petroleum Exporting Countries (OPEC) is leaning toward a significant cut in production limits. Representatives of the cartel will be having a policy meeting on the 17th of the month.
The price of a barrel of light, sweet crude oil for January delivery rose by $2.90 on the New York Mercantile Exchange to close at $43.71. The move helped support the energy sector of the stock market today. Yet, despite the increase, the closing price on the front month crude oil contract was still the third lowest since January 5, 2005.
By the end of stock trading, the Dow had gained 3.46%; the S&P 500, 3.84%; and the Nasdaq, 4.14%. The S&P 500 and Nasdaq closed at their highest levels since November 13. The Dow posted its highest close since November 7. In the last two sessions, the Dow has gained 6.66%, the S&P 500 has gained 7.63%, and the Nasdaq has gained 8.73%.
The pressure on Treasuries was augmented by the competition of a greater than expected amount of supply headed to market this week. The Treasury announced today that Wednesday's issue of 3-Year Notes will have a face value of $28 billion, up from last month's $25 billion. Thursday's 10-Year reopening of last month's issue will have a face value of $16 billion.
Today's losses followed deeper ones on Friday. The yield of the benchmark 10-Year Note has risen by 19 basis points in that time (yield moves inversely to price). But this followed a seven-day rally that had pushed the yield down by 77 basis points. Today's closing yield was the highest in the last six sessions but it is the sixth lowest since possibly sometime in the 1950s (daily closing data before 1960 is unavailable).
Tomorrow brings the report on pending home sales for October. The pace of existing home sales had been falling, reaching an eight year low in June; but the trend has been rising due to falling home prices. However, tight credit conditions and consumer gloom with the economy -- especially accelerating job losses -- are expected to keep sales under pressure. September's report on pending sales indicated a 4.6% decline following a sharp jump the month before of 7.5%. Another decline is anticipated for September of about 3.0%.
Market Afternoon Update
Stocks rallied for a second day on speculation that a massive spending plan proposed by President-elect Obama will lead the economy out of recession. Treasuries were less attractive against stocks and they declined today, though losses were relatively mild.
In late trading, the 10-Year Treasury Note was down by 10/32, raising its yield by 4 basis points to 2.74%; the Dow was up by 298.76 points to 8,934.18; and the Nasdaq was up by 62.43 points to 1,571.74.
Besides the proposed spending plan unveiled this weekend, stock traders were encouraged by news that a rescue package for the auto industry may be close at hand. The prospect sent the auto sector sharply higher.
Oil futures rebounded somewhat today following declines in the previous six trading sessions. The rise came in part as a result of the brighter economic sentiments, which suggest increased demand for the commodity. But they also rose as a result of word over the weekend that the Organization of Petroleum Exporting Countries (OPEC) is leaning toward a significant cut in production limits. Representatives of the cartel will be having a policy meeting on the 17th of the month.
The price of a barrel of light, sweet crude oil for January delivery rose by $2.90 on the New York Mercantile Exchange to close at $43.71. The move helped support the energy sector of the stock market today. Yet, despite the increase, the closing price on the front month crude oil contract was still the third lowest since January 5, 2005.
By the end of stock trading, the Dow had gained 3.46%; the S&P 500, 3.84%; and the Nasdaq, 4.14%. The S&P 500 and Nasdaq closed at their highest levels since November 13. The Dow posted its highest close since November 7. In the last two sessions, the Dow has gained 6.66%, the S&P 500 has gained 7.63%, and the Nasdaq has gained 8.73%.
The pressure on Treasuries was augmented by the competition of a greater than expected amount of supply headed to market this week. The Treasury announced today that Wednesday's issue of 3-Year Notes will have a face value of $28 billion, up from last month's $25 billion. Thursday's 10-Year reopening of last month's issue will have a face value of $16 billion.
Today's losses followed deeper ones on Friday. The yield of the benchmark 10-Year Note has risen by 19 basis points in that time (yield moves inversely to price). But this followed a seven-day rally that had pushed the yield down by 77 basis points. Today's closing yield was the highest in the last six sessions but it is the sixth lowest since possibly sometime in the 1950s (daily closing data before 1960 is unavailable).
Tomorrow brings the report on pending home sales for October. The pace of existing home sales had been falling, reaching an eight year low in June; but the trend has been rising due to falling home prices. However, tight credit conditions and consumer gloom with the economy -- especially accelerating job losses -- are expected to keep sales under pressure. September's report on pending sales indicated a 4.6% decline following a sharp jump the month before of 7.5%. Another decline is anticipated for September of about 3.0%.
Monday, December 8, 2008
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.
Friday, December 5th, 2008
Friday, 12/05/08
Market Update
Despite more bad economic news Friday morning, the stock indices slogged their way from deep in the red to finish with respectable gains for the day. Bond traders got little traction from the economic data and slid further into the red in the afternoon as stocks broke out of negative territory.
In late trading, the 10-Year Treasury Note was down by 1-13/32, raising its yield by 15 basis points to 2.70%; the Dow was up by 259.18 points to 8,635.42; and the Nasdaq was up by 63.75 points to 1,509.31.
The employment report released in the morning revealed a much larger than expected plunge in payrolls last month and the declines in the previous two months were deepened by data revisions. In addition, the unemployment rate rose to its highest level in fifteen years.
But the deteriorating state of the labor market is no secret and neither is the acceleration of mortgage delinquencies -- another item revealed Friday morning. The news did weigh against stocks but the gloom passed and buying picked up in the last hour of trading once the indices had broken into positive territory.
Market commentators note that stock traders may have concluded that the size of the recent job losses will likely spur more government stimulus measures. Atop the list of such measures is another rate cut by the Federal Reserve when its monetary policy committee meets on the 15th and 16th of the month. Such projections for rates often help Treasuries but they had already rallied hard since November 25. Aside from the lure of traders to take back some of their profits, bonds suffered from traders attempting to catch the rise in stocks.
The recovery in stocks was led by the financial sector. Positive guidance from Hartford Financial Services helped spur the sector. The Dow had been down by as much as 257.74 points or 3.08% but it managed to post a gain for the day of 3.09%. The S&P 500 was down by 3.17% at its lowest point of the day but finished with a gain of 3.65%. And the Nasdaq had been down by 2.82% but closed with a gain of 4.41%.
All three still took losses for the week. The Dow lost 2.19%, the S&P 500 lost 2.25%, and the Nasdaq lost 1.71%. The employment news drove oil futures lower. A barrel of light, sweet crude for January delivery fell by $2.86 on the New York Mercantile Exchange to close at $40.81. For the week, the price fell by $13.62 and Friday's close was the lowest for a front-month contract since December 10, 2004.
Despite Friday's losses in the bond market, the yield of the benchmark 10-Year Note closed 22 basis points lower for the week (yield moves inversely to price). The yield has now fallen in five consecutive weeks for a cumulative total of 126 basis points . . . .
Wednesday, December 3, 2008
Wednesday, December 3rd, 2008 Market Update
Wednesday: 12/03/08 10:30 AM EST :
Market Update
Stocks opened with moderately deep losses on a bit of profit-taking following yesterday's rally and bad news on the economy's services sector. But a better than expected report on productivity and a jump in mortgage application activity last week has eased bearish sentiments and stocks have pared their earlier losses. Treasuries opened under technical pressure after huge gains but the initial decline in stocks provided some footing. However, with the improvement in stocks, Treasury notes and the long bond have fallen deeper into the red.
In today's news, the Labor Department reported that the annualized rate of nonfarm business productivity (average output per worker per hour) increased by 1.3% in the third quarter relative to the second. This was up from the preliminary estimate of 1.1% reported in early November. Productivity rose by 3.6% in the second quarter.
The revision surprised forecasters who because of the downward adjustment to the gross domestic product calculation for the quarter (-0.5% instead of the initial estimate of -0.3%) had expected a productivity gain of just 0.9%. The improvement was due to a greater decrease in hours worked (down by 3.1% instead of the originally reported 2.7%) than the downward adjustment to average output (down by 1.9% instead of the originally reported 1.7%).
The better productivity number helps stocks by suggesting greater efficiency and therefore increased projections of corporate earnings. It also helps both stocks and bonds by pointing to reduced labor cost pressure, a welcome inflation measure. This was seen in today's report, which said that unit labor costs (ULC: average cost per unit of output) rose by 2.8% last quarter instead of 3.6% as cited in the preliminary report.
Moreover, today's report revised the second quarter change in ULC to a decline of 2.6% instead of the previously reported decline of 0.1%. On a year-over-year basis, ULC rose by 1.4% in the third quarter instead of the originally reported 2.3%. Second quarter ULC rose by just 0.1% Y/Y instead of the previously reported 0.8%.
Another plus for stocks came in a minor report. The Mortgage Bankers Association of America reported that its mortgage application index surged last week by a record 112.1% as mortgage rates plunged on the announcement that the Fed would buy mortgage backed securities and debt issued directly by the mortgage agencies. It should also be noted, however, that the extent of the move may have been exaggerated by a faulty adjustment factor for the Thanksgiving Day holiday.
The report said that the bulk of the jump came on the refinance side where the index soared by 203.3%. Both the overall application index and the refinance index posted their highest readings since last March. Refinances accounted for 69.1% of application activity last week, the largest portion since last February.
But the purchase index also saw an impressive increase of 38.0% and the reading was the highest since early September. Demand for adjustable rate mortgages was feeble, representing just 1.4% of application activity, down from 3.0% the week before.
But there was also bad news for the economy released today. The Institute for Supply Management (ISM) said that its index on the non-manufacturing -- or services -- sector came in at 37.3 last month, down from 44.4 in October and below the 42.5 that forecasters were predicting. Any reading under 50.0 reflects a general contraction in activity relative to the preceding month.
The current index, the NMI or Non-Manufacturing Index is new -- first published last January. It is a composite of four seasonally adjusted indices: business activity, new orders, employment, and supplier deliveries.
The latest reading is the lowest in the current data series. Before the NMI was instituted, the business activities index was the headline indicator on the services sector, but it is derived from a single question in the survey of business purchasing managers. It came in at 33.0 last month, the lowest reading in the history of the series going back to 1997.
In addition to the weak services sector news, the employment issue was raised this morning with the release of the report from the employment services firm of Automatic Data Processing (ADP) on nonfarm private (non-government) payrolls for November. According to the company's data, the seasonally adjusted payroll figure fell by 250,000. This was a fourth consecutive monthly decline and the largest of them. October's originally reported decline of 157,000 was also revised to a larger drop of 179,000.
The news heralds the approach of Friday's report from the Labor Department. In recent months, the Labor Department's figures have been considerably worse than those from ADP. The last employment report from the Labor Department said that non-government payrolls fell by 263,000 in October. Analysts are looking for an overall decline (including government payrolls) of between 300,000 and 325,000 in Friday's report.
Still to come: this afternoon, the Federal Reserve will release its latest edition of the Beige Book, an anecdotal summary of economic conditions in the twelve Fed regions. The report is used as one of the background resources in the monetary policy committee's deliberations. The next policy meeting is slated for the 15th and 16th of the month.
The Beige Book rarely has much impact on the markets since previously released indicators have already sketched out the economic landscape. But any rhetorical variant, a particular focus or emphasis, could be perceived as a signal of Fed intentions and have some influence on traders. Currently, Fed watchers are anticipating another cut in the committee's target for the fed funds rate (overnight borrowing rate between banks) and the discount rate (rate charged for loans directly from the Fed).
Tuesday, 12/02/08 Stocks rallied yesterday morning, then fell sharply in the afternoon. But before the indices could reach unchanged levels, they rebounded once again and finished near their highs of the day. Treasuries caught a bid when stocks were sliding and remained elevated since much of the recovery in stocks occurred after the bond market closed.
In late trading, the 10-Year Treasury Note was up by 17/32, lowering its yield by 6 basis points to 2.67%; the Dow was up by 270.00 points to 8,419.09; and the Nasdaq was up by 51.73 points to 1,449.80.
Stocks got an initial boost from a technical bounce following sharp losses on Monday. But they retreated from their highs early this afternoon as auto sales figures for last month showed steep declines relative to those in November of last year. General Motors, Ford, Toyota, and Honda all reported Y/Y declines of over 30%.
But the declines in stocks triggered more bargain hunting and the indices moved sharply higher again. The market has been extremely volatile lately as economic data has been bleak but traders have been testing lows for a possible turnaround. On the 19th and 20th of last month, the Dow fell by 872.46 points or 10.36%. It then rose in each of the next five sessions for a gain of 1,276.75 points or 16.91%. This was followed by Monday's decline of 679.95 points or 7.70%. The index gained 3.31% yesterday.
The other indices have followed similar paths. Yesterday the S&P 500 gained 3.99% after declining on Monday by 8.93%. The Nasdaq gained 3.70% yesterday after a decline of 8.95%.
Despite the advance in stocks, oil futures fell again on Tuesday. The price of a barrel of light, sweet crude for next month delivery lost $2.32 on the New York Mercantile Exchange to close at $46.96. This was the lowest closing price for a front-month contract since May of 2005. Yesterday's closing price was down by $98.33 from the record high of $145.29 set on July 3.
Treasuries have been benefiting from the swings in the stock market and from the growing string of weak economic data. Word on Monday from the head of the Federal Reserve that the central bank may lower short-term rates again and make purchases of Treasuries further up the maturity spectrum provided additional support for bonds. The yield of the benchmark 10-Year Note fell by 65 basis points in the last five sessions to an historically low level (yields move inversely to price) . .
Market Update
Stocks opened with moderately deep losses on a bit of profit-taking following yesterday's rally and bad news on the economy's services sector. But a better than expected report on productivity and a jump in mortgage application activity last week has eased bearish sentiments and stocks have pared their earlier losses. Treasuries opened under technical pressure after huge gains but the initial decline in stocks provided some footing. However, with the improvement in stocks, Treasury notes and the long bond have fallen deeper into the red.
In today's news, the Labor Department reported that the annualized rate of nonfarm business productivity (average output per worker per hour) increased by 1.3% in the third quarter relative to the second. This was up from the preliminary estimate of 1.1% reported in early November. Productivity rose by 3.6% in the second quarter.
The revision surprised forecasters who because of the downward adjustment to the gross domestic product calculation for the quarter (-0.5% instead of the initial estimate of -0.3%) had expected a productivity gain of just 0.9%. The improvement was due to a greater decrease in hours worked (down by 3.1% instead of the originally reported 2.7%) than the downward adjustment to average output (down by 1.9% instead of the originally reported 1.7%).
The better productivity number helps stocks by suggesting greater efficiency and therefore increased projections of corporate earnings. It also helps both stocks and bonds by pointing to reduced labor cost pressure, a welcome inflation measure. This was seen in today's report, which said that unit labor costs (ULC: average cost per unit of output) rose by 2.8% last quarter instead of 3.6% as cited in the preliminary report.
Moreover, today's report revised the second quarter change in ULC to a decline of 2.6% instead of the previously reported decline of 0.1%. On a year-over-year basis, ULC rose by 1.4% in the third quarter instead of the originally reported 2.3%. Second quarter ULC rose by just 0.1% Y/Y instead of the previously reported 0.8%.
Another plus for stocks came in a minor report. The Mortgage Bankers Association of America reported that its mortgage application index surged last week by a record 112.1% as mortgage rates plunged on the announcement that the Fed would buy mortgage backed securities and debt issued directly by the mortgage agencies. It should also be noted, however, that the extent of the move may have been exaggerated by a faulty adjustment factor for the Thanksgiving Day holiday.
The report said that the bulk of the jump came on the refinance side where the index soared by 203.3%. Both the overall application index and the refinance index posted their highest readings since last March. Refinances accounted for 69.1% of application activity last week, the largest portion since last February.
But the purchase index also saw an impressive increase of 38.0% and the reading was the highest since early September. Demand for adjustable rate mortgages was feeble, representing just 1.4% of application activity, down from 3.0% the week before.
But there was also bad news for the economy released today. The Institute for Supply Management (ISM) said that its index on the non-manufacturing -- or services -- sector came in at 37.3 last month, down from 44.4 in October and below the 42.5 that forecasters were predicting. Any reading under 50.0 reflects a general contraction in activity relative to the preceding month.
The current index, the NMI or Non-Manufacturing Index is new -- first published last January. It is a composite of four seasonally adjusted indices: business activity, new orders, employment, and supplier deliveries.
The latest reading is the lowest in the current data series. Before the NMI was instituted, the business activities index was the headline indicator on the services sector, but it is derived from a single question in the survey of business purchasing managers. It came in at 33.0 last month, the lowest reading in the history of the series going back to 1997.
In addition to the weak services sector news, the employment issue was raised this morning with the release of the report from the employment services firm of Automatic Data Processing (ADP) on nonfarm private (non-government) payrolls for November. According to the company's data, the seasonally adjusted payroll figure fell by 250,000. This was a fourth consecutive monthly decline and the largest of them. October's originally reported decline of 157,000 was also revised to a larger drop of 179,000.
The news heralds the approach of Friday's report from the Labor Department. In recent months, the Labor Department's figures have been considerably worse than those from ADP. The last employment report from the Labor Department said that non-government payrolls fell by 263,000 in October. Analysts are looking for an overall decline (including government payrolls) of between 300,000 and 325,000 in Friday's report.
Still to come: this afternoon, the Federal Reserve will release its latest edition of the Beige Book, an anecdotal summary of economic conditions in the twelve Fed regions. The report is used as one of the background resources in the monetary policy committee's deliberations. The next policy meeting is slated for the 15th and 16th of the month.
The Beige Book rarely has much impact on the markets since previously released indicators have already sketched out the economic landscape. But any rhetorical variant, a particular focus or emphasis, could be perceived as a signal of Fed intentions and have some influence on traders. Currently, Fed watchers are anticipating another cut in the committee's target for the fed funds rate (overnight borrowing rate between banks) and the discount rate (rate charged for loans directly from the Fed).
Tuesday, 12/02/08 Stocks rallied yesterday morning, then fell sharply in the afternoon. But before the indices could reach unchanged levels, they rebounded once again and finished near their highs of the day. Treasuries caught a bid when stocks were sliding and remained elevated since much of the recovery in stocks occurred after the bond market closed.
In late trading, the 10-Year Treasury Note was up by 17/32, lowering its yield by 6 basis points to 2.67%; the Dow was up by 270.00 points to 8,419.09; and the Nasdaq was up by 51.73 points to 1,449.80.
Stocks got an initial boost from a technical bounce following sharp losses on Monday. But they retreated from their highs early this afternoon as auto sales figures for last month showed steep declines relative to those in November of last year. General Motors, Ford, Toyota, and Honda all reported Y/Y declines of over 30%.
But the declines in stocks triggered more bargain hunting and the indices moved sharply higher again. The market has been extremely volatile lately as economic data has been bleak but traders have been testing lows for a possible turnaround. On the 19th and 20th of last month, the Dow fell by 872.46 points or 10.36%. It then rose in each of the next five sessions for a gain of 1,276.75 points or 16.91%. This was followed by Monday's decline of 679.95 points or 7.70%. The index gained 3.31% yesterday.
The other indices have followed similar paths. Yesterday the S&P 500 gained 3.99% after declining on Monday by 8.93%. The Nasdaq gained 3.70% yesterday after a decline of 8.95%.
Despite the advance in stocks, oil futures fell again on Tuesday. The price of a barrel of light, sweet crude for next month delivery lost $2.32 on the New York Mercantile Exchange to close at $46.96. This was the lowest closing price for a front-month contract since May of 2005. Yesterday's closing price was down by $98.33 from the record high of $145.29 set on July 3.
Treasuries have been benefiting from the swings in the stock market and from the growing string of weak economic data. Word on Monday from the head of the Federal Reserve that the central bank may lower short-term rates again and make purchases of Treasuries further up the maturity spectrum provided additional support for bonds. The yield of the benchmark 10-Year Note fell by 65 basis points in the last five sessions to an historically low level (yields move inversely to price) . .
Monday, December 1, 2008
Monday, December 1st, 2008 Market Update
Monday: 12/01/08 10:30 AM EST :
Market Update
Market Update
Though stock traders expected more bad economic news today, the actual figures, combined with the urge to take some of last week's gains, have sent the indices down sharply this morning. Negative analyst guidance on Goldman Sachs and Morgan Stanley is another weight on the financial sector. The move in stocks has increased the safety allure of Treasuries and they are currently rallying, extending last week's gains.
In today's news, the Institute for Supply Management (ISM) reported that its index on the manufacturing sector came in at a twenty-six year low of 36.2 for November. This was down from October's reading of 38.9 and below analyst predictions of 38.0.
Any reading below 50.0 reflects a general contraction of activity relative to the preceding month. November's index was a fourth consecutive contraction reading and the eighth of the year so far. The average reading in the first eleven months of the year is 46.8.
The news was not entirely unexpected since several regional indicators, previously released, had shown larger than predicted contractions. A positive detail for both stocks and bonds with regard to inflation was a reading of 25.5 in the index of prices paid by manufacturers. This was the lowest reading since May of 1949.
In the other economic release of the day, the Commerce Department said that the seasonally adjusted, annualized rate of construction spending fell in October by 1.2%. This was a larger decline than the 0.9% that had been predicted, but September's originally reported decline of 0.3% was revised to a virtually flat reading (0.0%) and August's previously reported increase of 0.3% was revised to a surprisingly strong increase of 2.4%.
The report showed the pace of spending for residential construction fell in October by 3.5%. September's 1.3% decline was trimmed to a drop of just 0.5% and August's previously reported increase of 1.9% was revised up to 5.4%.
There are no major economic releases slated for tomorrow. On Wednesday, the revised report on productivity for the third quarter will be released. In the preliminary report released early in November, the Labor 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, because of the contraction reported in the advance report on gross domestic product. Also not unexpectedly, the lower productivity growth increased unit labor costs (ULC: average cost per unit of output). According to the initial calculations, 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%).
The revised productivity figure is expected to show even more deceleration with a growth rate of 0.9%.
Wednesday also brings the ISM index for the services sector of the economy. In October, the index came in at 44.4, down sharply from September's reading of 50.2. As is the case with the manufacturing index, any reading of the services index under 50.0 reflects a general contraction in activity relative to the preceding month.
The current index, the NMI or Non-Manufacturing Index is new -- first published last January. It is a composite of four seasonally adjusted indices: business activity, new orders, employment, and supplier deliveries. October's reading is the lowest in the data series so far.
Before the NMI was instituted, the business activities index was the headline indicator on the services sector, but it is derived from a single question in the survey of business purchasing managers. The business activities index for October came in at 44.2, down from September's 52.1. It was the lowest reading since last January's 41.9 and the second lowest since October of 2001 when it came in at 40.5.
For November, the NMI is expected to be 42.5.
On Wednesday afternoon, the Federal Reserve will release its latest edition of the Beige Book, an anecdotal summary of economic conditions in the twelve Fed regions. The report is used as one of the background resources in the monetary policy committee's deliberations. The next policy meeting is slated for the 15th and 16th of December.
The Beige Book rarely has much impact on the markets since previously released indicators have already sketched out the economic landscape. But any rhetorical variant, a particular focus or emphasis, could be perceived as a signal of Fed intentions and have some influence on traders. Currently, Fed watchers are anticipating another cut in the committee's target for the fed funds rate (overnight borrowing rate between banks) and the discount rate (rate charged for loans directly from the Fed).
Thursday brings the weekly report on jobless claims and it will get added attention as it comes out a day before the employment report for November. The data collection periods for the two reports do not coincide but the trend in claims provides insight on the state of the labor market.
In last Wednesday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits fell the week before by 14,000 to 529,000. The decline was not unexpected following two week's of increases totaling 59,000.
In any case, readings over 400,000 are considered a sign that layoffs are outpacing hiring and the latest claims level was the second highest since July of 1992.
The four-week moving average, which smoothes out some short-term volatility, rose by 11,000 to 518,000 -- the highest reading since January of 1983. For the forty-seven weeks of the year so far, the average initial claims reading has been 406,340. For the same period last year it was 319,085.
The report said that continuing claims fell by 54,000 to 3.962 million in the week ending November 15 (continuing claims must be at least a week old). This was the second highest reading since January of 1983. The four-week average rose by 60,250 to 3.929 million -- the highest reading since January of 1983. For the first forty-six weeks of the year, the average continuing claims reading has been 3,203,413. For the same period last year, the average was 2,535,957.
Also on Thursday, the Commerce Department will release its report on factory orders for October. September's report said that the seasonally adjusted level of new orders fell that month by 2.5%. The decline was stronger than the 1.0% that analysts had predicted. August's originally reported decline of 4.0% was also revised to a drop of 4.3%, the largest decline since October of 2006.
All of the key sub-categories also saw sizeable declines. The order level outside the large but volatile category of transportation fell by 3.7% after a 3.6% decline in August. September's drop was the largest in the history of the data series going back to 1992. Within the transportation sector, orders rose by 6.5%, the biggest increase in seven months.
Another closely watched category is that of orders outside the defense sector since those in the sector are not governed by standard market forces. Ex-defense orders fell by 3.3% following a 4.5% decline in August. Defense orders rose by 22.8%, the biggest increase since last December.
Orders for capital goods outside of the defense sector and excluding commercial aircraft are seen as a gauge of core business demand. The category saw a decline of 1.5% in September following a decline of 2.3% in August.
For October, recent predictions have called for a decline in the factory orders level of 2.7%. But last Wednesday's report on durable goods orders, which make up slightly more than half of all factory orders, indicated a drop 6.2%. This suggests that the overall order rate may be a larger decline than previously forecast.
On Friday, the often market-moving employment report comes out. In the report for October, the Labor Department said the seasonally adjusted level of nonfarm payrolls declined that month 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.
The report indicated that job losses were broad-based; losses were posted in both the goods producing and services sector. 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.
For November, payrolls are expected to have fallen by between 250,000 and 300,000. The unemployment rate is expected to have risen to 6.8%. This would be the highest rate since October of 1993.
Friday, 11/28/08 Late positioning for the month spurred buying in both stocks and Treasuries on Friday but light volumes in abbreviated sessions may have exaggerated price moves. Some safety flows favored bonds as news of terrorist activity in India continued to come in throughout the day. Events that may have an impact on the markets often motivate investors to seek areas of less risk before a weekend when they cannot react to the news.
But the safety shift did not extinguish last week's positive sentiment in the stock market as traders picking up what they perceived as bargains.
In late trading, the 10-Year Treasury Note was up by 16/32, lowering its yield by 6 basis points to 2.92%; the Dow was up by 102.43 points to 8,829.04; and the Nasdaq was up by 3.47 points to 1,535.57.
Despite bleak economic news released last week and expectations of more to come, stocks have had a good week. Announcements of new government efforts to facilitate credit flows and the selection of economic officials for the next administration have kindled some optimism and traders began to consider the stock market as being oversold. But analysts note that the bounce is a test of the recent downtrend and it could trigger new waves of selling as more bearish news is released.
Oil futures rose on Friday with a barrel of light, sweet crude for January delivery up by $1.08 on the New York Mercantile Exchange to settle at $55.52. For the week, the price rose by $5.59 and Friday's close was the highest for the front-month contract in two weeks. However, the price was down for the month by $12.29.
By the end Friday's stock trading, the Dow had gained 1.17%; the S&P 500, 0.96%; and the Nasdaq, 0.32%. All three made good gains for the week with the Dow rising by 9.73%; the S&P 500, 12.03%; and the Nasdaq, 10.92%. But they all declined for the month: the Dow lost 5.32%, the S&P 500 lost 7.48%, and the Nasdaq lost 10.70%.
The yield of the benchmark 10-Year Note fell by 28 basis points last week (yield moves inversely to price). For the month, the yield fell by 104 basis points and closed on Friday at an historically low level . . . .
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