Thursday Look Ahead: The Calm Before the Storm?


Small swings, low volume and a lack of news are making for some of the most sluggish trading days of the year.

Some, who expect volatility to return in September with vacationing traders, might even call it the calm before the storm. Wednesday's markets were uneventful. The Dow seesawed in a narrow range before finishing four points higher at 9543. The S&P 500 was up just a tiny 0.12 at 1028.12.

"You're looking at the smallest moves. Obviously, there's not a lot of talk out there. There's not a lot going on. These are just micro moves. The feeling is here it is the last dying days of the summer, and nobody's going to take any risk or apply anything to complicate what they have," said Peter Costa of Empire Execution.

Costa said he is not seeing a lot of interested buyers and the thin market moves are a bit of a concern.

"It's also the sign of a possible topping in the narrowness of the move," he said.

Once more, the economic data reported Wednesday was better than expected, but the market showed little response. Durable goods orders were up a surprise 4.9 percent and new home sales were better than expected, with a 9.6 percent gain.

There was some talk though that the dollar actually moved higher in response to the better reports, which is counter to its usual reaction to good news these days. Typically, the dollar moves counter to stocks and commodities. Oil slipped slightly, by $0.62, to $71.43 per barrel, while gold fell $0.20 to $944.30 per troy ounce. Copper though gained 0.15 cents per pound, to $2.8555 and silver gained 0.4 percent to $14.2510 per troy ounce.

The dollar moved higher against a basket of currencies, including the euro and yen. The euro was at $1.4255. Treasurys found buyers as the auction of 5-year notes went better than last month's auction of the same duration. The 10-year yield was at 3.438 percent. There is an auction of 7-year notes Thursday at 1 p.m.

"Why is the dollar stronger? ... Generally I'd say we've been trading in a range that we still haven't broken out of ... It's hard to imagine a big break coming out of the dollar's range environment before Labor Day," said Marc Chandler, head currency strategist at Brown Brothers Harriman.

"Historically, the dollar is not always sold when things are good.. That's what I'm looking for — that historical relationship to come back," he said.

Thursday's data includes weekly jobless claims and second quarter GDP, which is the second read for that number. Earnings include American Eagle , Toll Brothers , Royal Bank of Canada and Toronto Dominion , before the open.

Dell , Marvell Tech and Novell report after the close.

Gus Faucher, director of macroeconomics at Moody's, said he expects unemployment claims to come in at about 568,000, down slightly.

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"The labor market is improving in the sense job losses are shrinking. Employers aren't cutting back as quickly as they had," he said. Traders are watching this number closely after two previous weeks of slightly larger-than-expected new claims.

They are also watching it with an eye toward next Friday's key monthly jobs report for August. Faucher said he may tweak his expectations for the August report, if there are surprises in Thursday's data. For now, he expects a decline in payroll employment of 235,000. He sees the unemployment rate rising to 9.5 percent, versus 9.4 percent in July.

"It's still our anticipation that the labor market is getting worse at a slower pace. It's definitely not at the point where we see job gains. We should start to see gains early in 2010," he said.

Faucher said he expects to see the Q2 GDP revised to -1.5 percent. Second quarter GDP was initially reported at -1 percent, better than most economists had expected at the time.

The big decline in inventories in the second quarter is expected to affect that number.

"Industry got rid of a lot more inventory than we originally thought so that's going to be a negative for GDP in the second quarter, but it's going to be positive for GDP in the second half of the year," as companies increase production to rebuild inventory, he said.

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China was big in the news but not much of a factor for markets, as it had been earlier this month when the Shanghai market sold off. Traders are wary about a report from official Chinese news that the state council is studying limits on industries where there is overcapacity, such as steel and cement. Also, Aluminum Corp of China said that smelters, traders and warehouses are all holding as much as 600,00 metric tons of inventories due to surplus output, far more than reported stocks held by the Shanghai Futures Exchange.

Chandler, in a note, said it is also being aggravated by Chinese smelters coming back on line to take advantage of a 30 percent jump in prices.

"We need to be concerned about it because China is one of the engines of the world economy and we need to worry about what it means to us," said Chandler, in an interview. He said China is trying to constrain its growth because it is worried about creating a bubble.

"It's possibly a negative for some commodities, particularly industrial commodities," said Chandler.

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