Market Commentary

With no fresh economic news slated for today for guidance, bonds are currently hovering around unchanged levels. The stock indices began their session with gains but they have since fallen back and are now narrowly mixed.

The impetus for the early gain in stocks was more merger and acquisition news. Of note was word that DaimlerChrysler is selling its Chrysler division to a private equity firm for $7.4 billion. An analyst upgrade of General Motors also lent support. But stocks have been climbing for over a year with the Dow setting records almost daily for the past month. Some traders are concerned that the market may be overbought and are exercising caution.

This week's economic calendar begins tomorrow with the release of the Consumer Price Index, a gauge of inflation at the retail level. In March, it rose by 0.6%, the largest increase since last April. But the move was expected because of the rise in energy prices. The data confirmed forecasts as the energy index jumped by 5.9%, the largest increase since September of 2005. Another volatile category is food but it had little effect on the headline number as its index rose by a relatively mild 0.3%.

The part of the report that excited traders was that the core index, which filters out the food and energy categories, rose by just 0.1%. Details of the core data were also encouraging. The biggest contributor to the rise was a 2.8% increase in the transportation sector, which was also related to the jump in energy prices. Like the energy index, the transportation index saw its biggest gain since September 2005.

On a year-over-year basis, the CPI was up by 2.8%, its biggest Y/Y margin since last August. But the core index was up by 2.5% its smallest Y/Y margin since May of last year.

For April, the CPI is predicted to have risen by 0.5% and the core by 0.2%.

The other release tomorrow is the New York Fed index on the region's manufacturing sector. It came in at 3.80 in April, up from March's 1.85 but still the second weakest reading since May of 2005. Any reading over 0.0 reflects a general expansion of activity relative to the preceding month. Forecasters are looking for a stronger growth reading for this month of 8.5. This would be the highest reading since February but still well below that month's reading of 24.35.

The New York data series is relatively young and the region is small so the monthly release is not usually a market-mover. But it is the first manufacturing indicator of the month. Moreover, the region is next to the Philadelphia region, so the index is seen (erroneously) as a predictor of how the more-influential Philadelphia index will move.

On Wednesday comes the latest report on housing starts. The seasonally adjusted, annualized pace has slowed over the past year. In January of 2006, the rate was the highest in almost thirty-three years; but last January, the pace was the lowest since August of 1997. It rebounded by 7.6% in February and then edged up by 0.8% in March to 1.518 million units. However, the gain in March was due to a 44.5% spike in the Midwest while the other regions of the country all saw slowdowns. For April, an overall decline of about 2.8% is expected, pushing the rate down to 1.475 million units.

According to the latest data, the rate of building permit issuance rose in March by 2.1% to 1.564 million units. Despite the increase, the rate has fallen in ten of the last twelve report months. Another decline, also 2.8%, is anticipated for April, bringing the rate down to 1.520 million.

A little later on Wednesday morning, the Federal Reserve will release its latest data on industrial production -- the output from the nation's factories, mines, and utilities. Production fell by 0.2% in March following a 0.8% rise in February. The decline was confined to the utilities category, which, because of weather, can be particularly volatile. Utilities output fell by 7.0% following a 7.6% rise in February. Manufacturing saw a 0.7% increase while mining was little changed with a 0.1% rise.

The report said that capacity utilization, the ratio of output to potential output, was 81.4% in March, down from 81.6% in February. Lower utilization is welcomed by inflation watchers since it means there is more slack in the production process and less chance for bottlenecks to occur and drive up prices.

Forecasts call for a 0.3% increase in industrial production for April and capacity utilization is expected to have risen to 81.5%.

On Thursday, the jobless claims report will address the employment situation once again. In last Thursday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits fell by 9,000 the week before to 297,000. This was a fourth consecutive decline and the level was the lowest since the week ending January 13. The four-week moving average, which smoothes out some of the short-term volatility, fell by 11,250 to 317,250. The average weekly level for the year through the week of May 5th is 321,389.

The report said that the level of continuing claims for the week ending April 28 (continuing claims must be at least a week old) rose by 65,000 to 2.555 million. The four-week average rose by 7,750 to 2,540,500. The average weekly level of continuing claims for the year to date is 2,522,235.

After the recent string of declines, analysts are looking for a bounce of between 10,000 and 15,000 in last week's initial claims figure.

The next release on Thursday is the Index of Leading Economic Indicators. In the last report, the Conference Board, an independent research firm, said that the index rose by 0.1% in March following a decline of 0.6% in February and a 0.3% decline in January. April's is expected to be flat (0.0%), further reflecting the current sluggish growth of the economy.

At noon on Thursday, the Philadelphia branch of the Federal Reserve will release its index numbers on the manufacturing sector for the month. Last month, it came in at 0.2, matching the reading in March. As is the case with the New York index, readings above 0.0 reflect expansion. Following these two, near-neutral readings, a slightly stronger index of about 3.0 is anticipated.

The only major release slated for Friday is the first read on consumer sentiment for the month from the University of Michigan. April's final sentiment index surprised observers by rising from the preliminary reading of 85.3 to 87.1, though it was still down from March's final reading of 88.4. The ongoing rise in gasoline prices provides a damper on optimism but the gains in the stock market may offset the gloom. Currently, the consensus forecast is for little change in May's preliminary index from April's final reading.

Friday, 05/11/07 : Treasuries fell on Friday despite tame inflation news and soft retail sales figures -- items that argue for lower interest rates. But bond traders were still digesting the week's influx of new supply and the bounce in the stock market also dimmed the allure of Treasuries. Stocks made hefty gains on the low inflation data and low interest rate prospects. Consequently, the indices recovered much of the ground lost in Thursday's sharp decline. In late trading, the 10-Year Treasury Note was down by 9/32, raising its yield to 4.4.67%; the Dow was up by 111.09 points to 12,326.22; and the Nasdaq was up by 28.48 points to 2,562.22.

The news of the day was generally bond-friendly. Although the PPI rose more than expected last month, the core index was unchanged for a second month. Retail sales fell for the first time in seven months and they were flat in the ex-auto category. And business inventories unexpectedly declined in March, though they became leaner.

The benefactor of the inflation news was the stock market. After Thursday's sell-off on news of a larger than anticipated trade gap in March, traders were looking for a reason to get back to the buy side. By the end of trading, the Dow had gained 0.84% to post its second highest close on record. The S&P 500 gained 0.96% and the Nasdaq, 1.12%. For the week, the Dow was up by 0.46% and the S&P 500 by 0.02%. The Nasdaq slipped by 0.39% since the preceding Friday's close. Treasuries took modest losses for the week with the benchmark, 10-Year Note yield rising by 3 basis points (yield moves inversely to price) . . . .

source: Lion, Inc.