Market Commentary

Because of the effect high energy prices have on the world economy, the recent move in oil toward $60 per barrel has had an important influence on the markets. And although the price of a barrel of light crude for August delivery fell today by $0.95 to $58.09, the weekly report on domestic inventories sent a bearish signal. Weak economic news helps interest rate sensitive fixed income securities such as Treasuries.

The Energy Department reported that crude oil inventories fell by 1.6 million barrels last week (one barrel equals 42 gallons), the third consecutive weekly decline. It should be noted, however, that supplies were still up over year ago levels by 8.0%. Gasoline inventories rose by 200,000 barrels and were 4.5% over year ago levels. Distillate stocks, including heating diesel fuel, rose by 1.3 million barrels last week and stood 0.7% above year ago levels.

Analysts note that Treasuries may also have received some lift from the unwinding of short positions by traders who were expecting price declines. The yield of the benchmark 10-Year Note fell below 4.00% on the last day of May but when it broke back on June 10, many saw this as a sign that the downward trend begun in late March had turned. Confidence in the signal faded this morning when the yield fell below 4.00% once again.

The soft, global economic outlook kept stocks in check. Analysts also note that traders may be feeling more defensive after a two month rise in the indices and the start of the quarterly earnings report season fast approaching. By the end of today's session, the Dow was down by 0.11% while the S&P 500 and Nasdaq made nominal, respective gains of 0.2% and 0.5%.

The economic calendar finally heats up tomorrow with the reports on jobless claims and existing home sales. The seasonally adjusted level of initial claims for unemployment benefits has been extremely volatile this year, ranging from an over four-year low of 296,000 to a six-month high of 352,000. The average level has been 328,000, an improvement over the 343,000 weekly average for all of 2004. But new jobless claims have been under 400,000 for almost two years, seen as an indication that hiring is outpacing layoffs. Indeed, nonfarm payrolls have been expanding for twenty-four consecutive months, yet the extent of growth from month-to-month has been uneven and frequent forecast misses have battered the markets.

In contrast to the high volatility, the initial claims level for the week of June 11, at 333,000, was only 1,000 higher than the previous week's. This followed two weeks in which the average change was 23,000. For last week, analyst is predicting another small change. If the forecast is accurate, the report is not likely to have much of an impact on the markets.

The report on existing home sales may also have only an indirect effect on the bond market; that is, if it moves the stock market, it could have an impact on Treasuries. In the report for April, the National Association of Realtors said that the seasonally adjusted, annualized pace of sales soared by 4.5% to a record high 7.18 million. Estimates for May's sales pace range from 7.10 million to 7.15 million but even the lower projection would constitute a second highest reading. And some forecasters, citing falling mortgage rates last month, predict that the rate may even have increased slightly.

Because of low mortgage rates and high demand, the housing sector has been strong over the last few years and traders have become accustomed to indicators exceeding forecast projections. On the other hand, monthly downside surprises have also lost some of their power to move the markets since the factors underpinning the sector have remained in place.

10:30 AM EDT : Treasuries are up this morning with the benchmark 10-Year Note yield falling back below the 4.00% level. Increased concerns of a global economic slowdown tied to high oil prices are cited by analysts as a major factor in the recent advance for bonds (price move inversely to yield). But oil prices are slipping today after hitting an intraday record high yesterday. Consequently, stocks are making modest gains in early trading despite a discouraging earnings outlook issued by Ford after the bell yesterday. There are no major economic releases scheduled for today.

Oil prices are being pressured by the circumvention of a pending labor strike in Norway. However, the inventory report from the Energy Department is expected to show a third consecutive weekly decline in domestic crude oil supplies and the fourth in five weeks.

In industry news, the Mortgage Bankers Association of America reported that its application index fell by 11.3% last week to 786.8 from 887.0. It should be noted that the 887.0 reading was the highest in over a year. The purchase index fell by 9.4% to 479.4 from the previous week's record high of 529.3 while the refinance index, following a combined jump of 38.5% in the previous two weeks, fell by 13.2% to 2,575.0 from 2,967.4 . . . .