Monday: 08/01/05 5:00 PM EDT : Treasuries extended Friday's losses today on brightening prospects of economic growth leading to more rate hikesby the Federal Reserve. Stocks were mixed today as the market was caught in the crosscurrents of severalcontradictory influences. In late trading, the 10-Year Treasury Note was down by 9/32, raising its yield to4.31%, its highest closing level in three-and-a-half months; the Dow was down by 17.76 points to 10,623.15; andthe Nasdaq was up by 10.55 points to 2,195.38.

The economic news of the day was mixed but the focus for bond traders was a stronger than predicted ISM index onthe manufacturing sector in July. News that the pace of construction spending (both overall and in theresidential category) declined in June for a fourth consecutive month was largely overlooked since other housingindicators have been strong. Bond traders were also dispirited as they looked ahead to the remaining economicindicators of the week including the ever-influential employment report and to next week's expected rate hike bythe Federal Reserve.

Even though the manufacturing news was a plus for the stock market, technical pressure weakened the lift astraders were still tempted to take profits after the major indices hit significant closing highs last Thursday. Rising oil prices, due in part to uncertainty regarding what effect the death of Saudi Arabia's king would haveon that country's export policy, also weighed against stocks.

The price of a barrel of light, sweet crude for September deliver rose by $1.00 today to a new record closinghigh of $61.57 on the New York Mercantile Exchange. High energy prices hurt the general economy by siphoningoff funds from businesses and consumers that might have been spent on other things. But the Dow was the onlymajor index to fall today and the decline was only 0.17%. The S&P 500 was able to make a slight gain of 0.09%while the tech-heavy Nasdaq rose by 0.48%.

Tomorrow, the economic releases are expected to favor stocks. The report on personal income and spending isexpected to show that average income rose by 0.4% in June, the largest increase since April. Spending isexpected to have risen by 0.8%, the largest jump since March. The report on factory orders for June is expectedto show a fourth consecutive monthly increase and orders for non-defense capital goods, minus aircraft (a proxyfor core business spending) is expected to show the strongest increase since last January.

10:30 AM EDT : Treasuries are lower this morning on the release of a strong manufacturing indicator and on expectations of morebullish economic news in upcoming releases this week. Although the manufacturing news is a plus for stocks, theindices are currently mixed as a rise in oil prices is providing a headwind that is impeding progress.

The Institute for Supply Management (ISM) reported this morning that its index of manufacturing activity came inat 56.6 in July, topping consensus estimates of 54.0 but not coming as too much of a surprise, given thestrength of the Chicago Purchasing Managers Index for the month, released last Friday. Any reading over 50.0indicates a general expansion of activity relative to the preceding month and today's reading represents atwenty-sixth consecutive monthly expansion. July marks a second increase in the index following six consecutivedeclines and ten declines in the last fourteen months. The pick-up suggests that the manufacturing sector isexperiencing some rejuvenation following a long slowdown in growth.

But a plus for the bond market in today's report is the drop in the prices index to a contraction reading of48.5 after forty straight months of expansion readings. The index is a tame inflation indicator that reducespressure on the Fed to aggressively raise interest rates. However, the renewed overall strength in the sectorsuggests that the Fed can continue to make incremental rate hikes without fear of overly weakening the economy.

The second economic release of the day was more bearish. The Commerce Department said that the seasonallyadjusted, annualized rate of spending fell by 0.3% in June. Analysts had predicted a rise of 0.5%. Moreover,May's originally reported decline of 0.9% was revised to a drop of 1.7%. The report said that the pace ofspending in the residential sector fell by 0.4% and that May's originally reported decline of 1.7% was revisedto a much steeper plunge of 3.4%. Analysts are somewhat puzzled by the data. Annual benchmark revisionsapplied to the data series beginning in May's report upset the previously established, smoothly expanding trend.Now, despite booming new home sales, the construction spending report indicates four consecutive months ofdeclines -- both overall and at the residential level.

Looking ahead: Tomorrow, the report on personal income and spending for June will be the first release of the day. May'sfigures were soft. Income, the fuel for consumer spending, rose by just 0.2%. Not counting January which wasskewed by the offset to December's atypical spike (one-time Microsoft dividend payout), May's income increasewas the weakest since last August. Spending was flat (0.0%), the weakest showing in four months. For June,analysts are looking for an in-trend rise of 0.4% in income and, based on a healthy rise in retail sales, an0.8% rise in personal spending.

The report on factory orders for June will also be released tomorrow. Last Wednesday's report on durable goodsorders for June showed a 1.4% increase, though analysts had been predicting a decline of about 1.0%. New ordersfor non-durable items have risen this year by a monthly average of 0.7%, though the level has been littlechanged in the last two months (-0.1% and +0.1%). If non-durable orders rose by just 0.1% again in June, theoverall factory orders increase would be 0.8%. A non-durable increase of 0.7% would push the total up to 1.1%.While either reading would be a decent gain, it would be a step down from May's reported increase of 2.9% (whichwill be revised higher in tomorrow's report).

On Wednesday, the only major economic release is the ISM Index on the non-manufacturing, or services, sector ofthe economy. The services index does not have the same level of market influence as the manufacturing indexsince it is relatively young (begun in 1997 versus 1948 for the manufacturing series) and the sector is so largeand heterogeneous that strong and weak sub-sectors tend to factor each other out.

In June, the index came in at 62.2, up from May's two-year low of 58.5. The data series has reflected growth(any reading over 50.0) for twenty-seven consecutive months. Another expansion indicator of about 61.5 ispredicted for July.

The only major release on Thursday will be the jobless claims report. The seasonally adjusted level of initialclaims for unemployment benefits rose by 5,000 in the week of July 23 to 310,000 -- on the low side of this year's range sofar (296,000 - 352,000). Another increase for last week would not be unexpected as the level fell by a large,32,000 in the week of July 16. The data series has been volatile this year but the underlying trend has beensloping down. The report will not be directly related to Friday's employment report (the surveys for theemployment data were conducted before last week's claims were made) but the claims report will focus attentionon the labor situation and act as a reminder that the release of the employment report is looming.

Traders are likely to take defensive positions on Thursday afternoon in deference to the uncertaintiesassociated with the employment report. Numerous forecast misses over the last year have jolted the markets, sotraders are wary of holding vulnerable positions. The maneuvering often entails reining in aggressively longpositions and covering short positions.

Friday's report is expected to indicate that nonfarm payrolls grew by about 185,000 in July following a 146,000increase in June. This would be the twenty-sixth consecutive expansion. Moreover, the unemployment rate, thepercentage of the workforce without jobs, is expected to remain at 5.0%, its lowest level since September of2001 . . . .

 

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