Update 1:05 p.m.:
After the Dow recovered from the -155 low, the rest of the day was quite volatile in a narrower range. The Dow traded erratically between -17 and -100 in the last few hours. Buyers did come in late and the Dow closed down 42 points. Volume was much lighter today, and the price action indicates that only short-term trading accounts were active. This late rebound isn’t really a good thing. The market would have been much better prepared going into tomorrow had stocks stayed at depressed levels.
Bond prices closed slightly lower on the day, with the exception of the 30-year bond. The 2-year ended at .63%, the 5-year 1.80%, and the 10-year closed down 3/32s to yield 2.94%. Traders believe the bond market is vulnerable to a very sharp pullback if tomorrow’s number is stronger than expected.
What did not get much attention today were the sharp declines in the commodity markets. Oil was down over $3 a barrel, and gold tumbled by $47 dollars just one day after hitting an all-time high. Most commodities were reacting to the negative economic news here and in China. Gold likely responded more to the strength in the euro vs. the dollar. The euro soared against the dollar, moving from 1.222 to 1.252. I doubt if there is that much enthusiasm for the euro. This is probably a major short-squeeze play. The gold trade has been mostly about fear, and the euro rally lessened that fear. There was also a report from India saying they are seeing a sharp decline in the demand for gold for jewelry production.
As far as tomorrow’s Nonfarm Payroll report goes, your guess is as good as mine or any Wall Street economist. There is simply no way to predict the number of payrolls with so many moving parts. This is especially true given the Bureau of Labor Statistics’ penchant for adjusting the number using “seasonals” or the infamous “birth/death” adjustment. The markets appear to be prepared for a relatively weak number. Economists are predicting private payroll growth of 110k, but traders seem prepared for something between 25k and 50k, matching May’s weak number. The only number that would really hurt stocks and boost bonds would be a negative private payroll number. Tomorrow is for gamblers.
Update 9:55 a.m.:
The Dow hit a low of -155 points earlier, but the index has rallied back to down only 35 points. There is no "good" news for this. This is traders covering shorts and also going long into tomorrow's number. Market pundits are saying stocks are already "cheap" and a really bad number on payrolls has been factored into prices. Ergo, no harm can befall the market tomorrow. At least that's what they think now.
Bond prices remain steady in the short end, but the long-end has given back much of the early gain. The 2-year is .62%, the 5-year 1.77%, and the 10-year is now up only 3/32s to yield 2.92%. The 30-year bond is now higher by just 14/32s.
Update 7:55 a.m.:
Traders were hoping for a good day to start the second half of the year, but the economic news is proving difficult to overcome (see below). The Dow is now down 104 points.
Bond prices continue to move higher on the long-end. The 2-year is .61%, the 5-year 1.77%, and the 10-year is now higher by 10/32s to yield 2.90%. The 30-year bond is higher by 24/32s to yield 3.85%.
I mentioned below that the euro-stock connection had been considerably weakened over the past few sessions, and it looks like that connection has completely broken apart. The euro is up big against the dollar. The euro closed last night just over 1.22 and is now 1.245. Yet, stock prices both here and in Europe are tumbling.
Update 7:05 a.m.:
By the time the market opened, stock traders had shaken off the negative Weekly Jobless Claims report. The talk was all about how "cheap" the market was and the history of July 1 (see below). The Dow opened higher by 20 points but did fade to -22 points before the ISM and Pending Home Sales numbers.
Those reports are now out, and the numbers are not good. The ISM manufacturing index was expected to fall from 59.7 to 59, but the index fell to 56.2. Do remember that anything over 50 is supposed to imply growth, but this was a step in the wrong direction. Pending Home Sales were projected to fall by 14% after a 6% gain in April, but pending sales plunged by 30%. Given the anecdotal news we've gotten, this steep drop should not have been a big surprise - but it was.
The Dow is now down 71 points. Given the news of the day, this isn't really a bad reaction. But these weak economic reports raise the stakes even more heading into tomorrow's number.
Bond prices moved lower once stocks opened but have reversed on the economic news. The 2-year is now .61%, the 5-year 1.77%, and the 10-year is higher by 4/32s to yield 2.92%.
Morning Comment:
The activity in foreign markets was mostly negative, perhaps following what happened in the U.S. yesterday. There was also a weak manufacturing number out of China that didn’t help matters. The only plus was that the euro is stronger, but the euro connection to the markets was weakened considerably.
Dow futures were down about 25 points ahead of Weekly Jobless Claims, but the claims number has caused futures to weaken further. Claims were forecast remain virtually unchanged around the 455k level, but claims rose again to 472k. This does not impact tomorrow’s number, but it does tell us that things in the job market are not getting better. We’re back to hoping that things just don’t get worse.
The financial reform bill vote in the Senate has been officially delayed until mid-July. The House has okayed the bill. Of more immediate importance to some 2,000,000 people is that there is also no chance of reviving the unemployment benefits extension until mid-July as well. In fact, we’re hearing virtually nothing about that bill or aid to states. I’m not sure where the priorities are in Congress. Oh, wait. Scratch that. I am very sure where the priorities are.
Dow futures are now trading down 55 points. Bond prices are unchanged in the short end but still moving on the long end. The 2-year is .62%, the 5-year 1.78%, and the 10-year is now higher by 3/32s to yield 2.92%. The 30-year bond is higher by 13/32s to yield 3.87%.
Later this morning we’ll get the National ISM manufacturing index and Pending Home Sales. But today is really about traders getting set up for tomorrow. Given how much ground stocks have already conceded, I doubt that traders will want to establish much in the way of new short positions. Also on the plus side for stocks today is that the first day of July is usually a good one for stocks. First, as happens every month, money managers have new funds from the monthly 401k contributions. Second, the market has had a strong rally on the first business day in July seventeen of the last twenty years. On the bond side, with yields already so low the risk/reward trade into tomorrow seems to favor more risk than reward. It wouldn't be surprising to see bond prices pull back today.
Most stock market participants are just glad to have the first half of year behind us. After some very high hopes in April, the stock markets turned and ended on a sour note. Stocks ended the first half of the year with a roughly 7% loss. On the other hand, bond traders (government bonds at least) are sad to see the first half end. Treasury bonds did very well. Five to ten year notes were down roughly 90-95 basis points, and the 30-year bond yield fell by 77 basis points. Those yield moves produce some very nice profits, especially on the long-end of the yield curve. But traders are very wary looking ahead. Yields are exceptionally low and the odds are not good that the first half performance can be matched. If bonds do match the performance of the first six months, my 2% 10-year note forecast for the end of 2012 would be realized much sooner than I expected.
I’ll be back with updates.
Dwight Johnston
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