Tuesday: 12/02/08 5:00 PM EST : Stocks rallied this morning, then fell sharply in the afternoon. But before the indices could reach unchanged levels, they rebounded once again and finished near their highs of the day. Treasuries caught a bid when stocks were sliding and remained elevated since much of the recovery in stocks occurred after bond trading closed.

In late trading, the 10-Year Treasury Note was up by 17/32, lowering its yield by 6 basis points to 2.67%; the Dow was up by 270.00 points to 8,419.09; and the Nasdaq was up by 51.73 points to 1,449.80.

Stocks got an initial boost this morning from a technical bounce following sharp losses yesterday. But they retreated from their highs early this afternoon as auto sales figures for last month showed steep declines relative to those in November of last year. General Motors, Ford, Toyota, and Honda have all reported Y/Y declines of over 30%.

But the declines in stocks triggered more bargain hunting and the indices moved sharply higher again. The market has been extremely volatile lately as economic data has been bleak but traders have been testing lows for a possible turnaround. On the 19th and 20th of last month, the Dow fell by 872.46 points or 10.36%. It then rose in each of the next five sessions for a gain of 1,276.75 points or 16.91%. This was followed by yesterday's decline of 679.95 points or 7.70%. The index gained 3.31% today.

The other indices have followed similar paths. Today the S&P 500 gained 3.99% after declining yesterday by 8.93%. The Nasdaq gained 3.70% today after falling yesterday by 8.95%.

Despite the advance in stocks, oil futures fell again today. The price of a barrel of light, sweet crude for next month delivery lost $2.32 on the New York Mercantile Exchange to close at $46.96. This was the lowest closing price for a front-month contract since May of 2005. Today's closing price was down by $98.33 from the record high of $145.29 set on July 3.

Treasuries have been benefiting from the swings in the stock market and from the growing string of weak economic data. Word yesterday from the head of the Federal Reserve that the central bank may further lower short-term rates and make purchases of Treasuries further up the maturity spectrum provided additional support for bonds. The yield of the benchmark 10-Year Note has fallen by 65 basis points in the last five sessions and stands at an historically low level (yields move inversely to price).

Tomorrow, the Labor Department will release its revised report on productivity for the third quarter. The preliminary report said that the seasonally adjusted level of nonfarm business productivity (average output per worker per hour) grew at an annualized rate of 1.1% in the third quarter of the year relative to the second. This was the slowest pace of the year so far and the previously reported increase of 4.3% in the second quarter was revised to 3.6%.

A deceleration had been anticipated, however, because of the contraction reported in the advance report on gross domestic product. Also not unexpectedly, the lower productivity growth increased unit labor costs (ULC: average cost per unit of output). According to the initial calculations, they grew by 3.6% in the third quarter following a 0.1% decline in the second (revised from the previously reported decline of 0.5%).

Forecasters are looking for a revised productivity growth rate of 0.9% in tomorrow's report.

The ISM index for the services sector of the economy will also be released tomorrow. In October, the index came in at 44.4, down sharply from September's reading of 50.2. Any reading under 50.0 reflects a general contraction in activity relative to the preceding month.

The current index, the NMI or Non-Manufacturing Index is new -- first published last January. It is a composite of four seasonally adjusted indices: business activity, new orders, employment, and supplier deliveries. October's reading is the lowest in the data series so far.

Before the NMI was instituted, the business activities index was the headline indicator on the services sector, but it is derived from a single question in the survey of business purchasing managers. The business activities index for October came in at 44.2, down from September's 52.1. It was the lowest reading since last January's 41.9 and the second lowest since October of 2001 when it came in at 40.5.

November's NMI is expected to come in at 42.5. If accurate, it would be the lowest of the eleven readings so far in the data series.

Tomorrow afternoon, the Federal Reserve will release its latest edition of the Beige Book, an anecdotal summary of economic conditions in the twelve Fed regions. The report is used as one of the background resources in the monetary policy committee's deliberations. The next policy meeting is slated for the 15th and 16th of the month.

The Beige Book rarely has much impact on the markets since previously released indicators have already sketched out the economic landscape. But any rhetorical variant, a particular focus or emphasis, could be perceived as a signal of Fed intentions and have some influence on traders. Currently, Fed watchers are anticipating another cut in the committee's target for the fed funds rate (overnight borrowing rate between banks) and the discount rate (rate charged for loans directly from the Fed).

10:30 AM EST : Stocks have bounced this morning following yesterday's plunge but gains have been relatively moderate so far. Treasuries are holding near unchanged levels with the exception of the long bond, which had risen by almost 12 points in the last four trading sessions.

There are no major economic releases scheduled and, at present, traders are treading gingerly, knowing that conditions are especially vulnerable to exaggerated price swings.

There is technical pressure weighing against Treasuries following recent strong gains and stocks may be getting a lift from traders who might think that yesterday's losses were excessive. Both bond and stock traders will be watching the performance of both markets.

Stocks are getting some additional help from word from Ford Motor Company that it may not need to access the $9 billion credit line it is requesting from the government. However, negative analyst guidance on Goldman Sachs is an offsetting influence.

Stock traders still have to contend with recent bearish economic indicators and expectations of more to come. Of particular concern is the upcoming data on the labor market in Friday's employment report for last month. Current forecasts call for a decline in nonfarm payrolls of 300,000 and a rise in the unemployment rate from 6.5% to 6.8% . . . .

source: LionMTS