Weaker than expected economic data has given a boost to Treasuries this morning and has pulled stocks lower. Oil futures have been fluctuating but were recently up slightly, putting more pressure on stocks.
In today's news, the Labor Department reported that the seasonally adjusted level of initial claims for state unemployment benefits rose last week by 34,000 to 406,000. The report also said that the previous week's originally reported level of 366,000 was revised up by 6,000 to 372,000 -- a jump of 24,000 from the week before.
But the combined increase of 58,000 in the last two week's followed a decline of 56,000 in the week ending July 5 and that plunge seems to have been distorted by a faulty seasonal adjustment factor to account for the closure of state labor offices on Independence Day. The four-week moving average, which smoothes out some of the short-term volatility, rose by just 4,500 to 382,500.
Regardless of the explanation for the recent volatility, the level is still high by recent historical standards. The latest reading matches that in late March as the highest since September of 2003. For the year-to-date (twenty-nine weeks), the average weekly reading has been 364,069. For the same period last year, the average was 314,759.
Today's report said that continuing claims in the week ending July 12 (continuing claims must be at least a week old) fell by 9,000 to 3.107 million. The four-week moving average fell by 7,000 to 3,134,250. Despite the latest declines, the level remains high. For the first twenty-eight weeks of the year, the average reading has been 2,947,536. For the same period last year, the average was 2,512,536.
In the other major economic release of the day, the National Association of Realtors reported that the seasonally adjusted, annualized pace of existing home sales fell by 2.6% to 4.86 million. The drop surprised forecasters who were expecting only a slight decline from May's pace of 4.99 million.
The sales rate fell by 6.6% in the Northeast, by 3.4% in the Midwest, and by 3.1% in the South. The West was the only region that experienced a gain. Its pace increased by 1.0%.
Inventories of homes on the market (seasonally adjusted, annualized) rose by 0.2% to 4.86 million. At the prevailing sales pace, this represented 11.1 months of supply, up from 10.8 months in May. The average home price rose by $4,900 in June to $257,500 but this was 6.8% below the average price a year earlier. The median price rose by $7,200 to $215,100 but this was a 6.2% drop from a year earlier.
Besides the weak data, stocks are contending with disappointing corporate news. This includes worse than expected earnings reports from Ford Motor and Dow Chemical and negative analyst guidance on McDonalds and AT&T. On a positive note, after the bell yesterday, Amazon reported better than expected earnings for last quarter.
Though Treasuries are currently ahead, traders are still facing new supply coming to market. This afternoon, the Treasury will be conducting its monthly auction of 5-Year Notes. Last month's had mixed results but overall demand was strong. Bids exceeded the $20 billion offer amount by 2.48 to 1, the highest bid-to-cover ratio in the last eight auctions. But individual investor demand was a little soft. Noncompetitive bids totaled $91 million, down from $118 million in May and down from the average of $109 million in the twelve auctions preceding last month's.
Foreign demand was also relatively weak for last month's issue. Indirect competitive bids, which include those from foreign central banks, received 21.1% of the issue. Although this was a marked improvement from May's award portion of 16.3%, it was still lower than the twelve-month average of 26.0%.
Today's issue has a face value of $21 billion, the largest amount for a 5-Year Note since February of 2003.
Wednesday, 07/23/08 : Oil continued to decline yesterday, giving stocks another lift. Treasuries suffered by comparison but a successful 2-Year Note auction allowed allowed bonds to pare most of their earlier losses.
In late trading, the 10-Year Treasury Note was down by 5/32, raising its yield to 4.12%. It had been down by about half a percent earlier in the day (-16/32) with its yield up to 4.16% (yield moves inversely to price). The Dow gained 29.88 points on the day to 11,632.38 and the Nasdaq rose by 21.92 points to 2,325.88.
A stronger than expected oil inventories report and a lessening threat from Hurricane Dolly to oil operations in the Gulf of Mexico pulled futures prices lower. The price of a barrel of light, sweet crude oil for September delivery fell by $3.98 on the New York Mercantile Exchange to settle at $124.44. In the last seven sessions, the front month price has fallen six times for a net decline of $21.21. Yesterday's close was the lowest since June 4.
Though the decline does not benefit the energy sector of the stock market, it helps the broader market since it leaves businesses and consumers with more money to spend elsewhere in the economy. By the end of stock trading, the Dow had gained 0.26%; the S&P 500, 0.41%; and the Nasdaq, 0.95%. The closing figures for the Dow and Nasdaq were the highest since June 25. The S&P 500's close was the highest since July 1.
Wednesday's 2-Year Note auction drew mixed demand but was generally successful. Bids exceeded the $31 billion offer amount by 2.42 to 1, down from last month's bid-to-cover ratio of 2.64 and below the average of 2.60 for the twelve auctions preceding yesterday's. But individual investor demand was strong. Noncompetitive bids totaled $823 million, the largest amount since last August. Even though the offer amount was exceptionally high this month, noncompetitive bids represented 2.7% of the issue, the largest percentage since last November.
Foreign demand was also strong. Indirect competitive bids, which include those from foreign central banks, received 35.8% of the issue, the highest award portion since April of last year.
Lastly, the Fed's latest edition of the Beige Book was released yesterday afternoon but it did not contain any real surprises. The summary of economic conditions said, "Reports from the twelve Federal Reserve Districts suggest that the pace of economic activity slowed somewhat since the last report." While this suggests that the Fed may be hesitant to raise interest rates since that would further slow the economy, the threat of inflation argues for such a move. The summary said, "All reporting Districts characterized overall price pressures as elevated or increasing."
Of course, the recent decline in oil prices is seen as a release mechanism for some of that inflation pressure.(BEIGE BOOK)
