Markets Fail to Rally After Release of More Negative Economic News

By Chris Puplava, November 2, 2006

The markets moved lower in early morning trading after the release of the productivity report and the mixed October sales report. Nonfarm productivity came to a standstill in the third quarter, with the quarter-over-quarter growth rate coming in at 0%, below the consensus of 1.0%, with unit labor costs (ULC) coming in at 3.8%, above expectations of 3.4%. Compared to third quarter of 2005, productivity rose 1.3% while ULC rose 5.3%. The trend since late 2005 has been for falling year-over-year (YOY) rates of change in productivity while the YOY rate of change for ULC has accelerated. Falling or flat productivity against the backdrop of rising ULC adds to inflationary pressures, not what the markets were looking for as many are hoping for the Fed to lower rates in the future.

Figure 1

Source: Econoday, Data: Haver Analytics

More disappointing news came from factory orders which rose 2.1% in September, significantly below the consensus forecast for a 3.7% rise. The growth came from durable goods which rose 8.3% in September while nondurable goods declined 4.6%.

Figure 2

Source: Chris Puplava, FSO, Data: Census Bureau

Table 1. Factory Orders Month/Month % Change

Source: Chris Puplava, FSO, Data: Census Bureau

The drop in nondurable goods orders of 4.6% was the largest in the history of the series.

However, the strong 8.3% advance in durable goods orders shows strong gains in capital spending, which confirms the GDP report for the third quarter that showed private nonresidential investment in equipment and software rising 5.7% from third quarter 2005.

Within the durable goods industry, strong gains were seen by transportation equipment (+28.6%) and construction machinery (+28.8%).

Although durable goods orders put in a strong performance in September, both the durable goods and nondurable goods industries inventory-to-shipments ratio (I/S) rose to their highest levels in over a year, with the overall I/S rising to 1.22, a three-year high. The I/S ratio for durable goods industries rose to 1.39 in September from 1.34 of the previous month, and nondurable goods rose to 1.03 from 0.98 in the prior month.

Another negative economic release was the weekly jobless claims report, with initial jobless claims rising 18,000 to 327,000 last week, well above the consensus estimate of 310,000 claims. The increase in claims last week brought the 4-week moving average up to 311,000 from 306,000.

Figure 3

Source: Econoday, Data: Haver Analytics

Chain store sales came in mixed for October, with the greatest drag being Wal-Mart, whose sales in October rose 0.5%. Overall, chain store sales grew 3.0% in October on a YOY basis while including Wal-Mart, sales grew 3.9%. The strongest gains were seen in drug and department stores, posting gains of 9.4% and 6.2%, while furniture stores and apparel stores posted the largest declines, down 13.7% and 0.2%. According to Thomson Financial, based on 50 merchants that have reported so far, 28 retailers had same-store sales results that missed expectations with 22 beating estimates.

Today's Market

All of the broad market indices were down slightly on the day, with the DJIA posting a loss of 12.48 points to close at 12018.54. The S&P 500 was down 0.47 points to close at 1367.34, and the NASDAQ was also down, falling 0.33 points to close at 2334.02. The 10-year Treasury note yield rose to 4.596%, and the dollar index posted a loss on the day, falling 0.07 points to close at 85.35. Advancing issues represented 42% and 40% for the NYSE and NASDAQ respectively, with up volume representing 45% and 47% of total volume on the NYSE and NASDAQ.

Energy commodities were mixed on the day, with crude and heating oil falling while natural gas rose. Precious metals continued their streak today, with gold breaking above $625/oz intraday before settling at $624.10. Silver and platinum were also up, with silver rising to $12.59/oz and platinum rose to $1105.50/oz.

Base spot metals prices were mixed with nickel and lead posting the largest gains, up 0.73% and 0.53% respectively, and tin posting the largest decline, falling 2.74%. Agriculture and softs were mostly up, with Illinois corn rising 4.16% and sugar posting a decline of 0.74%.

Overseas markets were mostly down, with Brazil's Bolsa Index posting the only gain on the day, up 1.70%. France's CAC-40 Index and Germany's DAX indices posted the largest declines, down 1.13% and 1.09% respectively.

The decline in the markets was mixed with four out of ten S&P 500 sectors finishing up on the day. The telecommunication and health care sectors posted the largest gains, rising 0.48% and 0.47%, with utilities and industrials putting in the largest declines, down 0.76% and 0.30%.

Have a pleasant weekend,

Chris Puplava

© 2006 Chris Puplava

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