BONDS
Yields were roughly unchanged in a holiday-shortened week with little economic news. Now that the Fed has finally made its first move, bond investors are looking for information that will help them determine how fast and how aggressively the Fed intends to alter its federal funds rate target. At this point, market players are anticipating at least a 25 basis point rise at the August meeting. Whether the Fed will raise the target by 50 basis points is still in question. Since the Fed raised the funds rate to 1.25 percent on June 30th, economic news has come in somewhat softer than expectations. This suggests that the Fed will not become overly aggressive in the near term.

Markets at a Glance

Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.

The Economy

Labor market conditions stagnate
New jobless claims fell 39,000 in the week ended July 3 to 310,000, but this was due to a shift in the auto-retooling schedule. Levels are expected to shoot back up in the subsequent week. After declining the past several months, new claims in June were just about unchanged from May's average. New jobless claims need to dip to a lower plateau to suggest that labor market conditions are improving and not remaining stagnant.

Corporate job-cut announcements declined 12.3 percent in June but were 7.8 percent higher than a year ago. These figures are not adjusted for seasonal variation and fluctuate sharply from one month to the next. Consequently, we depicted three-month moving averages in the chart above. (The claims figures are monthly averages, not a 3-month moving average.) Claims are clearly lower than just six months ago but the rate of decline has moderated as indicated by the nearly unchanged figures in May and June. Job-cut announcements will need to moderate further to show significant improvement. The disadvantage of the job-cut announcements is that one doesn't know if job-cuts are imminent or down the road by attrition.

Business activity moderates in June
After reaching lofty levels in the spring, the ISM non-manufacturing survey moderated somewhat from the previous month. The business activity index, which garners the most attention, declined more than five points to 59.9 percent in June from a level of 65.2 percent in May. November and December 2003 saw slightly lower levels but on the whole the index has remained fairly healthy over the past year. There is no question that the average level of the past 12 months has surpassed the average for each of the years since the inception of the index in mid-1997. (The beige bars represent months in which the business activity index stood below 50 percent, and reflects declining activity.)

While the business activity index stumbled in June, new orders, employment, supplier deliveries, inventories and prices all posted increases for the month. Thus, the business activity index, which is not a composite of the survey, may be somewhat misleading with respect to demand. On the whole, it was still a fairly robust report.

Consumer credit picks up in May
Consumer installment credit accelerated for the third straight month in May, expanding by $8.2 billion. While both revolving and nonrevolving credit grew, the bulk of the gain came from the latter which includes auto loans. Motor vehicle sales surged in May and this likely increased demand for credit during the month.

New car loan rates at auto finance companies dipped to 3.32 percent in May from April's 3.60 percent average. Financing rates tend to be significantly lower at finance companies than at commercial banks since these reflect automaker incentives. For instance, automakers may be offering 0-percent interest on selected models. This lowers the average interest rate on all loans offered at auto-financing companies. New car loan rates at commercial banks dipped to 6.47 percent in May from the first quarter average of 6.72 percent. Personal loan rates weren't all that different in May from the first quarter average (11.8 percent versus 11.88 percent). With the prime rate rising on June 30th in tandem with the federal funds rate, personal loan rates are likely to continue to rise.

Oddly enough, many credit card companies are continuing to offer incentive rates - with zero percent financing for as long as a year from now. This probably reflects the strong competitive pressures in the credit card business rather than bankers' belief that interest rates will not continue to climb. While the continuation of zero-rate offers on credit cards may offer temporary relief, borrowers would be wise to start cleaning up balance sheets before debt service burdens are made more severe by higher interest rates.

Housing activity percolates again in latest week
The Mortgage Bankers Associations' home purchase and refinance indexes both increased in the July 2 week. Most likely this was due to a little dip in the average mortgage rate during the week. The 30-year convention loan rate fell 20 basis points in the latest week to 6.01 percent, the lowest level since April 29th. One would have expected the rate to rise after the Fed raised its fed funds rate target on June 30th, but it isn't unusual to see slight dips even after a Fed rate hike. The Treasury market has generally rallied in the past week or so as stock prices have slid and economic news has shown a moderating economy rather than an accelerating one. Consequently, mortgage rates have come back from their highs of the past few weeks (6.34 percent in mid-May).

The Bottom Line
It was a holiday-shortened trading week and economic news was sparse. While new jobless claims fell more than expected, it was likely to due special factors that will be reversed in the coming week. The ISM non-manufacturing survey was generally healthy, although the headline business activity index weakened from the previous month. All in all, this week's set of economic indicators revealed hardly anything new about economic conditions.

The upcoming week is jam-backed with economic news that include big market movers. Market players will definitely focus on retail sales, industrial production and both inflation reports (the PPI and the CPI).

Looking Ahead: Week of July 12 to July 16

Tuesday
The international trade deficit on goods and services widened to $48.3 billion in April after posting a $46.6 billion shortfall in March. Imports were roughly unchanged in April, but exports fell moderately. Despite the April drop in exports, the overall trend shows an upward climb over the past year. But imports have also risen, and that's the rub.

International trade balance Consensus Forecast for June 04: $-48.5 billion
Range: $-49.8 to$-46.5 billion

Over the past ten years, the average Treasury budget surplus amounted to $35.9 billion in June as estimated tax receipts boost Treasury coffers for the month. In the past two fiscal years, the surplus was smaller, averaging $25 billion.

Treasury budget Consensus Forecast for June 04: $16 billion
Range: $12 to $20 billion

Wednesday
Retail sales jumped 1.2 percent in May, boosted by a healthy gain in motor vehicle sales. Excluding the auto group, retail sales increased a solid 0.7 percent, spurred by a jump in sales at gas stations. Excluding both autos and gas, retail sales only inched up 0.3 percent. Motor vehicle sales will not contribute to the retail sector in June as auto and light truck sales plunged in the month.

Retail sales Consensus Forecast for June 04: -0.6 percent
Range: -1.0 to 0.3 percent

Retail sales ex autos Consensus Forecast for June 04: 0.2 percent
Range: -0.1 to 0.6 percent

Export prices inched up 0.3 percent in May after posting significantly larger gains in the four previous months due to rising agricultural export prices. Import prices jumped 1.6 percent in May due largely to a spurt in petroleum import prices.

Import prices Consensus Forecast for June 04: 0.3 percent
Range: -0.1 to 0.3 percent

Export prices Consensus Forecast for June 04: NA
Range:

Thursday
New jobless claims plunged 39,000 in the week ended July 3 to 310,000, bringing the 4-week moving average to 336,000. This was due to seasonal anticipation of auto-retooling shutdowns that were delayed and are likely to hit in the subsequent reporting week (even though it is a 4-day week due to the Independence Day holiday).

Jobless Claims Consensus Forecast for 7/10/04: 345,000 (35,000)
Range: 320,000 to 390,000

The producer price index jumped 0.8 percent in May after posting a nearly as large 0.7 percent hike in April. Both food and energy price hikes contributed to the spurt. Excluding these two volatile components, the core PPI inched up 0.3 percent in May; this was a larger gain than in each of the three previous months.

PPI Consensus Forecast for June 04: 0.2 percent
Range: -0.1 to 0.5 percent

PPI excluding food & energy Consensus Forecast for June 04: 0.2 percent
Range: 0.1 to 0.3 percent

Business inventories increased 0.6 percent in April, with manufacturers' inventories rising 0.5 percent, retail trade inventories increasing 1.1 percent, and wholesale trade inventories dipping 0.1 percent.

Business inventories Consensus Forecast for May 04: 0.5 percent
Range: 0.1 to 0.8 percent

The empire state manufacturing survey remained unchanged in June as the general conditions index amounted to 30.2, a level consistent with healthy growth.

Empire state manufacturing survey Consensus Forecast for July 04: 26
Range: 25 to 29

The index of industrial production increased 1.1 percent in May after a 0.8 percent hike in April, continuing a healthy production growth path. The capacity utilization rate increased 0.6 percentage points in May to reach a level of 77.8 percent, a level that does not point to supply bottlenecks at this time.

Industrial production Consensus Forecast for June 04: 0.0 percent
Range: -0.4 to 0.4 percent

Capacity utilization rate Consensus Forecast for June 04: 77.7 percent
Range: 77.2 to 78.1 percent

The Philadelphia Fed's business outlook survey showed healthy growth in June as the general conditions index increased to 28.9 from a level of 23.8 in May. Any level above zero reflects firm manufacturing activity in this district.

Philadelphia Fed survey Consensus Forecast for July 04: 25
Range: 19.5 to 30.2

Friday
The consumer price index jumped 0.6 percent in May after recording a smaller 0.2 percent hike in April. A spurt in energy prices was primarily responsible for the gain. Excluding food and energy, the CPI rose 0.2 percent in May.

CPI Consensus Forecast for June 04: 0.2 percent
Range: 0.1 to 0.3 percent

CPI excluding food & energy Consensus Forecast for June 04: 0.2 percent
Range: 0.2 to 0.3 percent

The University of Michigan's consumer sentiment index jumped more than five points in June to 95.6 from a level of 90.2 in May. Improving labor market conditions, albeit at a slow rate, and declining gas pump prices, albeit by small amounts, could help keep the index at its new higher level for the mid-July reading.