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Wednesday: 01/16/08 10:30 AM EST :
The major
economic releases were slightly less bond-friendly than traders were expecting
and they have used the occasion to take back some recent profits. But the
economic data was not exactly stock-friendly either and the indices are down
slightly in early trading action.
The inflation data released today was mixed. The Labor Department
reported that its Consumer Price Index, a gauge of inflation at the retail
level, rose in December by 0.3%. This was a little higher than analysts had
predicted and the increase follows a 0.8% jump in November (the largest surge
in two years).
But energy prices were once again the key factor behind
the headline number. The index of energy prices rose by 0.9% in December -- a
large increase but the smallest in three months. Another volatile category is
food and its price index rose by just 0.1% last month.
Excluding the energy and food categories, the so-called
core index was up by 0.2% last month after a 0.3% rise in November. The
increase was in-trend and in line with predictions. Moreover, of the core
components, the biggest increase was in the energy-dependent transportation
category. Its index rose by 0.5%.
On a year-over-year basis, the CPI was up by 4.1%.
While this was better than the previous month's 4.3% increase, it was the
largest December to December gain in seventeen years. But for all of 2007, the
index was up over 2006 by 2.8%, the lowest increase in three years.
At the core level, the index was in December by 2.4%
over the previous December -- the largest monthly Y/Y increase since last
March. But for the whole year, the index was up by 2.3%, down from the 2.5% Y/Y
increase between 2005 and 2006.
In the other major release of the day, the Federal
Reserve reported that its index of industrial production -- a gauge of output
from the nation's factories, mines, and utilities -- was unchanged (0.0%) in
December following a 0.3% increase in November. While certainly not a bullish
indicator, forecasters had been predicting a decline last month of about 0.2%.
The report said that capacity utilization, the ratio of
output to potential output, was 81.4%, down from an upwardly revised 81.6% in
November (originally 81.5%). While the latest figure was in line with
predictions, the ratio for the manufacturing sector was encouraging at 79.7%,
the lowest reading since last February. High utilization can lead to production
bottlenecks which drive up prices, so a declining figure is a sign of
decreasing inflation pressure.
In industry news, the Mortgage Bankers Association of
America released its latest application data today and the overall, seasonally
adjusted index leapt by 28.4% last week. This follows a 32.2% jump the week
before. The main driver was the refinance category. Its index rose by 43.4%
last week following a 53.9% jump the week before. Refinances accounted for
62.7% of application activity, up from 57.7% the week before and the highest
portion since March of 2004. Both the overall index and the refinance index
posted almost four-year highs.
Purchases also made good progress in the last two weeks
but the gains were less impressive in comparison with the refi
sector. The purchase index rose by 11.4% after a 14.7% rise in the preceding
week.
Applications for both conventional and government
mortgages were up sharply. The conventional index was up by 28.6% after a 34.1%
rise the week before. It was the highest last week since June of 2005. The
government index rose by 26.7% following a rise of 18.2%. Demand for adjustable
rate mortgages continued to decline. They accounted for just 9.2% of
application activity last week.
Some of the increases is the result of declining
mortgage rates but some may well be due to distortions stemming from faulty
seasonal adjustment factors associated with the holidays.
This afternoon, the Federal Reserve will release its
Beige Book, an anecdotal summary of economic conditions in the twelve Fed
districts. The book is used as one of the background resources in the monetary
policy committee's deliberations. The next policy meeting is slated for the
29th and 30th of this month.
The summary does not usually have a large impact on the
markets since the general state of the economy has already been revealed in
other reports. But the latest Beige Book is expected to reinforce the gloomy
economic outlook and this may further boost expectations of a bold rate cut by the
Fed.
Tuesday, 01/15/08 : Treasuries were up
throughout the day Tuesday and reached their highest levels late in the
session. The fuel for the rally was a steep plunge in the stock market
triggered by weak economic data and renewed concerns about the financial
sector.
In late trading, the 10-Year Treasury Note was up by 28/32, lowering its yield to 3.67%; the Dow
was down by 277.04 points to 12,501.11; and the Nasdaq
was down by 60.71 points to 2,417.59.
The big news of the day was that retail sales contracted
last month and the weakness was not confined to the auto sector. Since consumer
spending accounts for the bulk of all economic activity, the sales data
subtracts from gross domestic product estimates for the fourth quarter. This
follows last Friday's report of a larger than anticipated trade deficit for
November -- another negative in the GDP calculation.
Another bearish item released yesterday morning was the
To address the flagging economy, the Fed is expected to
cut interest rates again when the policy committee meets later this month. Some
Fed watchers are even predicting a rate cut before the meeting date.
Also helping to support the rate-cut speculation was
the release of the PPI data for last month. It indicated a slight contraction
in the price of wholesale goods in December following a sharp jump in November.
And excluding food and energy, the core index returned to trend in December
following a larger than normal rise the month before.
Not all of yesterday's economic news was bond-friendly.
Business inventories rose in November and because of strong sales, the
remaining inventories were at their leanest levels in the history of the data
series (1958).
But the inventory news was anticipated and not strong
enough to offset the weak retail sales numbers. Stocks were also pressured by a
dismal earnings report from Citigroup. The news rattled the financial sector
and the broader market followed the sector down. A report that Boeing would
announce more production delays in its 787 line of planes sent its stock sharply
lower.
A decline in oil prices did not provide any lift for
stocks since the decline was due to lowered demand projections based on the
weak economic news. The price of a barrel of light, sweet crude oil for
February delivery fell by $2.30 on the New York Mercantile Exchange to settle
at $91.90, the lowest close since December 20.
By the end of stock trading, the Dow had lost 2.17%;
the S&P 500, 2.49%; and the Nasdaq,
2.45%. The Dow's close was the lowest in nine months and the other indices
closed at their lowest in about ten months.
With stocks plummeting, traders shifted into the safety
of government backed debt securities (Treasuries). The yield of the benchmark
10-Year Note closed at its lowest level in four-and-a-half years . . . .
source: Lion, Inc.