The employment report revealed a somewhat smaller than forecast increase in nonfarm payrolls last month.
The unemployment rate moved up slightly from March but that had been anticipated. And average hourly
earnings increased a less than expected.
Word that Reuters was a takeover target and that Microsoft was making moves to acquire Yahoo helped
energize stock traders. Aside from the effects on the companies involved, such deals encourage traders
who see them as evidence that corporate leaders are comfortable enough with the economy to take aggressive
action. Another support for the market was another decline in oil futures. The price of a barrel of
light, sweet crude oil for June delivery fell by $1.35 on the New York Mercantile Exchange to settle at
$61.84. This was a fifth consecutive decline and the close was lowest for a front-month contract since
April 19. Lower energy prices leaves more corporate and consumer monies for spending in other areas of
the economy.
By the end of stock trading, the Dow had gained 0.18%; the S&P 500, 0.21%; and the Nasdaq, 0.26%. The
Dow's close was a new record high, the Nasdaq's the highest since February 7, 2001, and the S&P 500's the
highest since September 5, 2000. For the week, the Dow gained 1.10%; the Nasdaq, 0.58%; and the S&P 500,
0.77%. The bond market also made progress this week with the benchmark, 10-Year Note yield falling by 5
basis points (yield moves inversely to price).
Next week's events calendar includes such momentous items as three Treasury note auctions and the latest
meeting of the Federal Open Market Committee (FOMC), the central bank's monetary policy arm. The economic
releases are relatively few but include a key inflation indicator (the Producer Price Index) and the
monthly report on retail sales.
On Monday, the only major scheduled event is the Treasury's auction of 3-Year Notes. The offering is
expected to be well-received since it has a face value of just $14 billion, the smallest amount since the
security began to be reissued in 2003 (it had been discontinued in 1998). Another of this issue's
attractions is that it will be the last until such time as the Treasury reinstates it once again. Based
on a reduction in the Treasury's borrowing needs, it will no longer offer the 3-Year security after
Monday's issue.
The last issue was auctioned in February and it was warmly received. At the time, its $16 billion offer
size was the smallest of the new issuance schedule. Bids exceeded the offer amount by 2.97 to 1, the
highest bid-to-cover ratio of the sixteen quarterly offerings in the current cycle. Non-competitive bids,
a gauge of individual investor demand, were soft, however. They totaled just $303 million, the lowest
amount in the last four, 3-Year offerings. But foreign demand was solid. Indirect competitive bids, which
include those from foreign central banks, took 32.3% of all competitive bids and 31.7% of the entire issue.
This award portion was the highest in the last seven auctions.
The arrival of new supply usually keeps bond prices down until the market has a chance to begin digesting
the inventory. Traders who will be making bids refrain from pushing prices up prior to an auction in order
to keep yields up (bids are for yield -- the higher, the better for the auction participants). Other
traders also avoid purchasing the soon-to-be off-the-run issue since the new one will have greater
liquidity. They also assume a wait-and-see posture until the results of the sale are known. And even if,
as expected, the 3-Year auction is successful, the additional supply to come during the week will likely
keep traders in defensive postures.
On Tuesday, the report on wholesale inventories for March will be released. Despite a slight decline last
December and a few months of flat (0.0%) or near flat readings, the seasonally adjusted level of wholesale
inventories has been growing steadily since September of 2003. The last report said that the level rose
by 0.5% in February following a rise of 0.6% in January. In addition, sales were up by 1.2% in February,
leaving the inventory-to-sales (I/S) ratio at 1.15, down from 1.16 in January. The I/S ratio is the value
of remaining inventories divided by the value of sales for the month. The result gives an indication of
how quickly inventory is turning over -- the lower the ratio, the leaner the inventory levels. The record
low is 1.12.
For March, another inventory increase is expected but of only about 0.4%. The I/S ratio is expected to
remain at 1.15.
Tuesday also brings the Treasury auction of new, 10-year notes. The latest issuance schedule began in 2003
with four initial, quarterly auctions per year and four reopenings (sales of an additional amount of an
initial offering). Each reopening auction comes a month after the initial quarterly offering. Tuesday's
issue is the initial offering for the quarter and it has a face value of $13 billion, matching the size of
the previous seven initial offerings. In the last such sale in February, the reception was marginally
successful. The bid-to-cover ratio was 2.41, slightly stronger than the 2.21 seen in last November's
auction. Non-competitive bids totaled $57 million, up from $50 million in November.
But foreign demand was soft. Indirect competitive bids garnered 29.9% of the issue, down from November's
award portion of 33.8%. In fact, the award for this category was the lowest for an initial quarterly
offering since February of 2005.
There are no major economic releases slated for Wednesday and the minor ones (weekly application index
from the Mortgage Bankers Association and the weekly oil inventory report) will be overshadowed by
anticipation of the policy statement to be released following the conclusion of the FOMC meeting. Because
the outcome of the meeting could have a major impact on the markets, traders will reel in long positions
and take to the sidelines until the results are known. The statement is usually released at about 2:15
PM Eastern Time.
Between June of 2004 and June of last year, the FOMC hiked interest rates seventeen times in quarter-percent
increments from its forty-six year low of 1.00% to 5.25%. Since then, the committee has made no further
rate changes but its position has been that inflation risks remain dominant. Observers do not expect the
committee to make any rate changes at Wednesday's meeting, but the policy statement may provide clues to
upcoming actions.
On Thursday, the jobless claims report highlights the employment situation once again. Yesterday's report
said that the seasonally adjusted level of initial claims for state unemployment benefits fell by 21,000
last week to 305,000, the lowest reading in fifteen weeks. The four-week moving average, which smoothes
out some of the short-term volatility, fell by 4,500 to 328,750. The average weekly reading for the year
to date is 322,824.
The report said that the level of continuing claims for the week of April 21 (continuing claims must be at
least a week old) fell by 93,000 to 2.495 million, the lowest reading in four weeks. But the four-week
average rose by 1,500 to 2.534 million, the highest reading in five weeks. The weekly average for the year
to date is 2,520,500.
Today's employment report revealed a smaller than expected increase in nonfarm payrolls last month but if
the claims numbers continue to trend down, it would lead observers to the conclusion that the positive gap
between hiring and layoffs is growing and that payrolls will therefore post larger expansions in upcoming
months. However, after three weeks of declines, a rebound is predicted for this week's initial claims
figure.
A couple of trade related reports also come out on Thursday morning. The first is the report on import
and export prices for last month. In March's report, the Labor Department said that import prices rose by
1.7%, the biggest jump in ten months. A key factor was petroleum imports, which saw a 9.0% surge in
prices, the biggest increase in eleven months. Excluding that category, import prices were up by 0.3%,
the biggest rise in four months. Oil prices rose again last month so another hefty, overall gain of about
1.0% is predicted.
March's report also showed a 0.7% rise in export prices, matching February's rise. The large but volatile
category of agricultural products saw an increase of 2.1%. But even excluding the category, prices were
up by 0.6%, the biggest increase in nine months.
Aside from the inflation aspects of the price data, it also provides some insight on the trade picture.
The trade report also comes out on Thursday but it is for March. February's report said that the value of
imports exceeded that of exports by $58.4 billion following a $58.9 billion deficit in January.
The deficit readings have narrowed considerably from the record high of $68.9 billion, set last August.
But March's is expected to be larger than February's with forecasts ranging between $59.5 billion and $60.0
billion. The higher the deficit, the greater the drag on the economy and while bearish news favors bonds,
high deficits also dilute the value of the dollar and dollar-denominated investments.
The final note auction of the week comes Thursday with the Treasury's latest 30-Year Bond offering.
Actually, the sale is for an additional amount of February's issue so the maturity is really 29-3/4
ears. February's auction had mixed results. The bid-to-cover ratio was 2.46, the highest bid-to-cover
ratio of the three auctions in the current issue cycle (the maturity was discontinued in 2001 and
reinstituted in 2006). But non-competitive bids totaled just $9 million versus $19 million in last
August's auction. Foreign demand was so-so with indirect competitive bids garnering 42.0% of the
issue, up from August's 32.7% but below the previous February's award of 64.8%. Thursday's reopening
will probably find a decent reception since the offer size is only $5 billion.
Also on Thursday afternoon, the Treasury will release its budget figures for last month. Of course, April
is the big tax month and in April of last year, receipts exceeded government outlays by $118.8 billion.
Analysts think that this year's April surplus will be even bigger at $135.0 billion. If this is the case,
it would be the biggest monthly surplus since April of 2001. In addition, such a surplus would translate
into a deficit (more outlays than receipts) for the fiscal year to date (begun last October) of $123.4
billion, a narrower gap than the $184.1 billion posted in the same period in fiscal year 2006. Higher
surpluses and lower deficit numbers are good for currently traded Treasuries because it means fewer will
have to be issued to cover government expenses.
Friday brings a couple of heavyweight reports. The Labor Department will be releasing its Producer Price
Index (PPI), a gauge of inflation at the wholesale level. In March, the index rose by 1.0% following a
1.3% rise the month before. Despite the strong gain (the average for the twelve months preceding March
was a gain of 0.2%), the core reading, which excludes the volatile categories of food and energy, was tame.
It showed no change for the month (0.0%) after a 0.4% increase in February. The report said that energy
prices rose by 3.6% in March and food prices by 1.4%.
A similar price mix is predicted for April's data. Due to additional increases in oil and food prices the
PPI is expected to have risen again but only by about 0.5%, while the core index is expected to have risen
by an in-line 0.2%.
The report on retail sales for last month is another important release slated for Friday. The report for
March indicated a 0.7% increase and February's originally reported rise of 0.1% was revised up to 0.5%.
The volatile category of autos, light trucks, and parts saw an increase of 0.4% but excluding the category,
sales rose by an even more robust 0.8%. Another large but volatile category is sales at gasoline stations.
Due to rising gas prices, sales there rose by 3.1% following a 1.5% rise in February. Excluding both the
auto and gas station categories, sales were up by 0.4%.
Forecasts for April's PPI are for an overall increase of 0.4%. Excluding autos, sales are expected to
have risen by 0.5%.
The final economic release on Friday is somewhat less influential since the information is dated and some
of the data is already known. This is the report on business inventories for March. In February's report,
the Commerce Department said that the seasonally adjusted level of inventories rose by 0.3% following a
0.2% rise the month before. Despite the modest extent of the increase, it was the largest in five months.
Sales were up by 0.4%, leaving the inventory-to-sales level at 1.29.
Last Wednesday's factory orders report said that manufacturers' inventories were up by 0.2% in March. By
Friday, the disposition of wholesale inventories for the month will be known (currently predicted to have
risen by 0.4%). The only unknown will be the retail sector. Inventories there averaged a monthly gain of
0.3% over the last year and if these figures are plugged into the sector weightings, total business
inventories will have risen by 0.3%.
10:30 AM EDT :
Bond traders took defensive positions yesterday ahead of today's release of April's employment report.
The report turned out to be a bit weaker than expected, though not enough to derail stocks. The
loosening of the defensive positions and the lift provided by a tame inflation indicator in the
employment data have pushed Treasuries higher this morning but the approach of new supply and a Fed
policy meeting next week will likely cap the upside for bonds today.
In the only major economic release of the day, the Labor Department reported that the seasonally
adjusted level of nonfarm payrolls rose by 88,000 last month, a slightly smaller increase than the
100,000 that analysts were predicting. March's originally reported gain of 180,000 was also trimmed
slightly to 177,000. April's gain was the smallest since November of 2004 but it marked a
forty-fourth consecutive monthly expansion.
The gains came in the service sector with education and health payrolls posting a 53,000 increase,
the thirty-first consecutive monthly expansion; professional and business payrolls were up by 24,000,
a twenty-ninth consecutive increase; and leisure and hospitality payrolls rose by 22,000, an
eighteenth monthly increase. Losses were seen in the retail trade category, down by 11,000, and in
the category of financial activities, down by 11,000. In the goods producing sector, construction
payrolls fell by 11,000 and manufacturing payrolls by 19,000. Government payrolls added 25,000 jobs.
The report said that the unemployment rate, the ratio of the active workforce without jobs, edged up
to 4.5% in April from 4.4% in March. The increase had been expected. The report also said that
average hourly earnings rose by 0.2% after an increase of 0.3% in March and 0.4% in February.
Forecasters had been looking for another 0.3% rise in April.
Although the payroll and numbers were short of consensus projections, the inflation implications of
the earnings figure are currently providing support for stocks as well as bonds. Recent bullish news
(ISM manufacturing and services indices; firm rise in factory orders) along with a strong string of
positive earnings reports for last quarter has propelled the stock indices to lofty levels. The
twelve highest Dow closes have all come in the last twelve sessions . . . .
source: Lion, Inc.
