Wednesday: 12/13/06 5:00 PM EST :
Treasuries fell hard today on strong economic news and a weak 10-Year Note auction. Stocks got little traction from the bullish economic data and the indices struggled to make negligible gains on the day. In late trading, the 10-Year Treasury Note was down by 23/32, raising its yield to 4.58%; the Dow was up by 1.92 points to 12,317.50; and the Nasdaq was up by 0.81 of a point to 2,432.41.
The news was that the level of retail sales rose much more than expected last month. The report argues a rate cut by the Fed early next year and rate-sensitive bonds fell in response. The other major release of the day had little impact on the markets. Business inventories rose again last month but a loss in sales produced a little more slack that eases production pressures.
Adding to the pressure on the bond market was new supply in the form of a 10-Year Note reopening. The offering met with tepid demand. Bids exceeded the $8 billion offer amount by 2.48 to 1. This was down from the bid-to-cover ratio of 2.91 in the last reopening in September and just slightly higher than the average of 2.44 for the thirteen reopenings (prior to today's) since the current issue schedule went into effect in 2003.
Non-competitive bids, a gauge of individual investor demand, totaled $13 million, down from $14 million in September and below the thirteen auction average of $35 million. Foreign demand was also soft. Indirect competitive bids, which include those from foreign central banks, garnered 12.6% of the issue, down from 18.7% in September and below the thirteen auction average of 15.6%.
The retail sales news initially gave a boost to the stock market but a discouraging oil inventory report roused fears that oil prices would head higher. The Energy Information Administration said that inventories of crude oil fell last week by 4.295 million barrels (one barrel equals forty-two gallons). This was a third consecutive weekly decline and the largest since early last July. On a year-over-year basis, however, inventory levels were 3.9% higher than they were a year earlier.
The report said that inventories of gasoline fell by 174,000 barrels, a third weekly decline that left supplies 3.0% lower than a year earlier. And inventories of distillates, which include diesel and heating fuel, fell by 445,000 barrels, a tenth weekly decline. Supplies of distillates were 1.7% lower than a year ago.
Oil futures did rise, the first time in four trading sessions. But increases were modest. A barrel of light, sweet crude oil for next month delivery rose by $0.35 on the New York Mercantile Exchange to settle at $61.36. Gains in the stock indices were also thin. The Dow advanced just 0.02% and the Nasdaq, 0.03%. The S&P 500 did not do much better with a gain of 0.12%.
Tomorrow brings the jobless claims report. Last Thursday's failed to provide a clear picture of the employment situation. It said that the seasonally adjusted level of initial claims for state unemployment benefits fell by 34,000 the previous week to 324,000. But the decline was essentially just a reversal of a 35,000 jump the week before, suggesting that the moves were a reflection of a faulty adjustment factor associated with the Thanksgiving closure of labor offices in late November. Now that the statistical bump has been assimilated, little change is expected in last week's claims figure.
The report on import and export prices for November also comes out tomorrow. The last report said that import prices fell by 2.0% in October following a same-sized decline in September. The development reduces inflation pressure and is, therefore, a plus for the bond market.
A key factor was the decline in imported petroleum product prices. They fell in October by 8.3% following a 9.7% decline the month before. But even if that category is excluded, import prices still fell by 0.6% in October following a 0.2% increase in September. Recent predictions are calling for another overall price decline of about 0.3%.
The change in export prices is also significant in its implications for the balance of trade. In October, export prices fell by 0.4%, matching September's decline. And, despite a 1.1% spike in the large but volatile category of agricultural products, export prices still fell by 0.5% in October after a 0.3% decline in September.
