Update 1:05 p.m.:
The Dow was down about 30 points heading into the last hour, but those late-day traders came in again and boosted the Dow to a gain of 30 points during trading. The effort did fall short of posting a gain for the day though, and the Dow ended virtually unchanged at down 1 point. The Dow gained roughly 100 points for the week but posted a very big 750 point gain for the month of July. That takes the sting out of June’s big loss but doesn’t really prove anything. The Dow is up 0.36% for the year, the S&P down 1.2%, and the NASDAQ stands at -.64% for the year. Maybe a 0.55% 2-year treasury note yield isn’t so bad after all.
The bond market closed with big gains across the board. At least some of the initial buying was likely indexed bond fund managers who had to extend to match the index, but that’s only a partial explanation. If that had been the sole reason, prices would have backed off considerably late in the day after the equity recovery. The 2-year closed at .55%, the 5-year 1.59%, and the 10-year ended at the high of the day up 25/32s to yield 2.90%. The 30-year bond posted a huge gain of almost two points to yield 3.98%.
Every day this week we saw weak economic statistics, but those only resulted in temporary stock market selloffs. I still contend that those high-frequency traders who control 60-70% of the volume are responsible for that. This trading strategy only works in rallies. When prices fall, that’s the perfect time to unleash the computers and let them do their magic. Yet bond investors and managers are not subject to some random program trading. This frees them to look coldly at economic statistics, and this was not a good week for the economy.
Today’s GDP report was dismissed by the stock market, but there was an important omen in those numbers for the second half of the year. Including the revisions to the 1st quarter, it’s very clear that the consumer is barely spending while businesses are ramping up inventories. That’s a toxic mix. If consumers continue to be reluctant spenders, businesses will go into inventory reduction mode. The global economy would take a big hit if that is in fact what plays out from hence forth.
We’ll get a lot of data next week. The ISM manufacturing index will be first up on Monday. Then we’ll get Personal Income, Pending Home Sales, Factory Orders, Vehicle Sales, the ADP employment change indicator, ISM Non-manufacturing index, and Weekly Jobless Claims. Whew! That’s a lot to wade through, but those are only appetizers in next week data’s feast. The entree will be Friday’s Nonfarm Payroll report. Economists are hoping to see at least 100k growth in Nonfarm Payrolls.
Have a great weekend.
Update 11:20 a.m.:
The markets have quieted considerably since the early volatility, but the price action has been mixed. The Dow managed to recover all of the early losses and extend the rally to 30 point gain. But the rally stalled there. Since then the Dow has traded as low as -70 but is currently down only 30 points.
The bond market is again the best performing market. The buying was heavy early, and there have been no signs of sellers. Typically we would expect some selling given the comeback in stocks, but that hasn't happened today. The 2-year is .55%, the 5-year 1.61%, and the 10-year is higher by 21/32s to yield 2.92%. The 30-year bond is higher by 1&1/2 points to yield 4.00%.
Update 7:15 a.m.:
The Chicago Purchasing Managers report for July was just released and a bounce to the 62.3 level was reported. Forecasts were for a reading closer to 57. This nearly matches the best reading of the year posted in February at 63.8. Caterpillar Tractor is cited as one of the reasons for the uptick, as its recent earnings report showed them to be enthusiastic about world growth. They are not the only firm in that district, by a long shot. This report somewhat contradicts the GDP reading of earlier, but it is just a survey. Michigan Consumer Confidence improved in July, not by much, but again above expectations. I guess the nearly 1,000-point rally in the Dow over the month was a little bit encouraging.
Equity prices responded to the Chicago PM report with a snap up in price. The Dow was lower by some 120 points going into the release. It jumped back to nearly unchanged, but has faded a little since the knee-jerk reaction took place. The Dow is currenly lower by -35 points.
Bonds are still in a rally mode, although are a little more subdued after the Chiago PM reading. The 2-year is 0.57%, the 5-year is 1.63%, and the 10-year remains well bid at 2.93%.
That pretty much wraps up the data stream for this week. Next week brings the Big Kahuna, Nonfarm Payrolls, on Friday. The early talk is for a headline number of -60k, which includes more Census workers being cut, but a Private payrolls increase of +100k. This is certainly better than losing jobs, but normal demographic growth requires at least 100k per month just to break even. We still have the 7.5 million lost jobs from the recession to replace.
Morning Comment:
Second quarter GDP was expected to come in at 2.6%, and GDP came in close to that at 2.4%. Consumer spending was weaker than expected, but business spending made up the gap. But there is a lot of confusion about this report. The Bureau of Economic Analysis had a huge upward revision to 1st quarter from 2.7% to 3.7%. This is the third revision to the 1st quarter number, and this is highly unusual to have this big of a revision this late in the game. This is being viewed as part of the bad news, as a big inventory accumulation by business could be a drag on growth going forward.
The BEA also reported revisions dating back to the just before the recession began. They said that GDP for the period between 2007 and 2009 fell by 4.1% instead of 3.7%. They also said that household spending fell twice as much in 2009 than originally reported. See why I hate this number? It’s confusing and distorted by things such as trade deficits and inventory builds and reductions. Plus, it’s old news! What matters is jobs and income NOW, not some convoluted number composed of a myriad of data points from the past – all subject to massive revisions.
The stock market was already somewhat lower before this number and is trading even lower in pre-opening trading. Dow futures are down 90 points ahead of the opening. The initial reading of the number is being taken to mean that the consumer sector is weak, and the rebuilding of inventories is the only thing that really moved the economy in the first half of the year. Hey. Didn’t we already know that? Maybe traders just weren’t paying attention. These factors have been in play and commented on for the past few months. This is not new news.
Bond prices are moving sharply higher. The 2-year is .55% - yes, a new low. The 5-year is 1.60%, and the 10-year is higher by 20/32s to yield 2.92%. The 30-year bond is higher by 1&3/8s points to yield 4.01%.
Without a doubt the market will be volatile today, at least between now and the end of the first hour of trading. I’ll be back with updates.
Dwight Johnston
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