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Market Commentary

Friday: 10/15/04 10:30 AM EDT : Treasuries are currently lower as traders sort through the implications of this morning's onslaught of economic data. Stocks are ahead but price movement has been choppy in early trading.

The Commerce Department reported that retail sales rose by 1.5% in September, the biggest advance in six months and much stronger than the 0.5% that analysts had predicted. This follows a decline of 0.2% in August (revised from a drop of 0.3%). And even excluding the volatile auto sector, sales were up by 0.6%, topping recent predictions of 0.2% which would have matched the increase in August. Besides auto related sales, which rose by 4.2% last month following a 1.3% decline in August, other standouts were a 1.4% rise in building equipment and garden supplies and a 1.1% rise in sales at general merchandise stores.

But some of the bullish thrust of the report has been diminished the news that the initial index read on consumer sentiment for the month from the University of Michigan came in at 87.5, a decline from September's final reading of 94.2. The number surprised analysts who were looking for little change in today's index. If the level holds through the month, it will be the lowest sentiment reading since April of 2003. News releases relate that the preliminary index of current conditions fell to 99.6 from last month's 103.7 and the expectations index fell to 79.6 from 88.0.

The inflation news of the day was generally market-friendly. The Labor Department said that its Producer Price Index rose by 0.1% last month. The index has been alternating between a drop and gain of 0.1% now for four months, indicating virtually no inflation over that time period. But excluding the volatile categories of food and energy, the so-called core reading showed a 0.3% gain in September, slightly higher than recent forecasts for a 0.2% gain.

But the report said that energy prices actually fell by 0.9% in September after just a 0.2% in August. Pipeline pressure appears to be under control. Prices at the intermediate stage of production rose by 0.1% last month and at the initial or crude stage, they fell by 4.2%, the third consecutive monthly decline.

The manufacturing data released today was weaker than expected. The New York branch of the Federal Reserve reported that its index of general business conditions fell to 17.43 this month from a downwardly revised 27.26 in September (originally reported as 28.34). The reading still reflects expansion (anything over 0.0) and is the eighteenth consecutive growth reading, but it fell well short of street expectations of a reading between 25.0 and 29.0.

And the Federal Reserve reported that industrial production (the output from the nation's factories, mines, and utilities) rose by just 0.1% last month and August's originally reported gain of 0.1% was revised to a loss of 0.1%. The release cited the recent spate of hurricanes as having a restraining effect on production. The level of manufacturing output slipped by 0.3% and mining output by 2.3%. Only utilities saw an increase with a rise of 5.4%.

Capacity utilization, the ratio of output to potential output, was revised for August from the originally reported 77.3% to 77.2% (77.199%) and September's reading showed virtually no change (77.202%). Most of the slack was in the manufacturing sector which saw a slip in cap utilization to 76.3% from 76.6%. It also fell in mining, dropping to 82.4% from 84.3%. It rose in the utilities sector to 84.5% from August's 80.2%.

However, an indication that manufacturing is still healthy came in the last release of the day. The Commerce Department reported that business inventories rose by 0.7% in August and July's originally reported increase of 0.9% was revised to a 1.0% gain. Inventory levels have now increased for twelve straight months. Sales in August also rose by 0.7% and the inventory-to-sales (I/S) ratio, a measure of inventory leanness, fell to 1.31 from 1.32.

The I/S ratio is the value of stocks on hand divided by the value of sales for the month. It indicates how many months the existing supplies would last at the prevailing sales pace. The lower the figure, the leaner the inventories. August's ratio is only slightly higher than the record low of 1.30 posted in March, April, and May. The ongoing inventory building and the low level of slack suggest that demand pressures on the manufacturing process will continue.

Thursday, 10/14/04 : Treasuries had a slow start yesterday morning but the economic news of the day, rising oil prices, and falling stocks gave bonds a boost. In late trading, the 10-Year Treasury Note was up by 11/32, lowering its yield to 4.01%; the Dow was down by 107.88 points to 9,894.45; and the Nasdaq was down by 17.51 points to 1,903.02.

The economic news was more bearish than expected, thereby reducing upward pressure on interest rates. The level of initial jobless claims rose more than predicted last week, the fourth increase in the last five weeks. In addition, August's trade deficit was much wider than predicted, lowering estimates for third quarter gross domestic product. Lastly, a gauge of inflation in the international trade arena for last month was more benign than had been forecast.

Oil prices hit new closing highs yesterday in response to two government reports which, though citing an increase in crude inventories, said that supplies of distillates including heating oil declined. The rise in oil is a brake on the economy as it draws corporate and consumer spending away from other areas.

Stocks were pressured by the economic and oil price data. A weak earnings report from General Motors also weighed on the market. In addition, news of a major antitrust probe of several insurance companies pummeled that sector. By the end of the session, the Dow had fallen by 1.08% to its lowest closing level in two months; the S&P 500 was down by 0.93%, its lowest close since the end of August; and the Nasdaq was off by 0.91%, its lowest close of the month so far . . . .