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Farrell: Making Sense Out Of This And That

Unemployment claims were released Thursday morningand were an "encouraging" 608,000 for last week. Not that the number isn't horrific unto itself and clearly devastating for those out of work, but the trend for weeks now has been flat to slightly down. Even with the turmoil in the auto industry, it's become increasingly clear that the pace of layoffs has slowed. Hiring has in no way picked up and the labor market is still weak, but the level of new claims is starting to show encouraging signs.

The Philadelphia Fed Index - a measure of manufacturing activity in the Philadelphia area- was a very encouraging -2.2. Zero is the base and while still negative, it is barely so and a whole lot better than the -22 of last month. The -2.2 came as a surprise with the consensus guess among those that guess such things as -17. It clashes with the far bigger Empire State Index which slipped last week to a negative 9 from a negative 4 the prior month. It shows that whatever recovery is occurring is spotty and uneven.

The Treasury announced the auctions for next weekand knocked the bond market for a loop Thursday. There will be a total of $165 billion of notes and bonds to choose from. $61 billion of three and six month notes will be sold, but the weight on the market came from the announcement there will be $40 billion in two year notes offered, $37 billion in five year, and $27 in seven year paper. The existing 10 year note took a swoon at the sight of all this and its yield zoomed to 3.8%. That negates the slightly better interest rate tone in the mortgage market last week when the average 3 year fixed rate mortgage declined in yield to 5.38%. Since mortgages are directly tied to the rate on the ten year, we can expect the interest rate on 30 year mortgages to move back up.

That will be bad news for the refinancing marketwhich has fallen markedly since April. Applications for mortgage refi's have declined 70% since a recent April peak. Mortgage applications in total have declined 15.8%, 14%, 16% and 7%. The dearth of refinancings takes away a prop that could have offered many consumers a source of relief.

The spread between the ten year and the ten year inflationprotected bond has narrowed to 1.73%. That would be read as the expected inflation rate for the next ten years is 1.73% and that is down from 2.07% only five days ago. The inflation scare of the past few weeks is fast ebbing. As we have said before, with unemployment high and still rising, with capacity utilization at record lows and wages flat to down, the near term risk of inflation is very low and more a market fear than an actual near term fear.

Volume continues at a very low pace. Thursday's volume was barely one billion shares on the NYSE and that compares with an average 1.5 billion the past several months. There is little to no conviction in the market and players seem to be on the sideline waiting for it to break one way or the other. We opt to be on the cautious side as historical patterns would indicate an advance such as we have had off the March lows will be corrected.

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