Friday, 09/04/08, 5:00 PM EDT : Stocks had a number of positive influences on their side today but fears that the economy is on shaky ground spooked traders and the market plummeted. The exodus out of equities translated into a boon for Treasuries. In late trading, the 10-Year Treasury Note was up by 20/32, lowering its yield by 8 basis points to 3.62%; the Dow was down by 344.65 points to 11,188.23; and the Nasdaq was down by 74.69 points to 2,259.04.

The revised productivity growth figure for the second quarter was stronger than expected and unit labor costs showed a decline instead of an originally reported expansion. And the ISM Services Index indicated an increase in activity last month, albeit a small increase.

Another plus for stocks was a decline in oil prices. The Energy Information Administration reported this morning (a day later than normal because of Monday's closure of government offices) that inventories of crude oil fell last week by 1.9 million barrels (one barrel equals forty-two barrels). The decline was the largest in six weeks. Yet, though supplies were down by 5.7% on a year-over-year basis, this was the best Y/Y margin since the first week in May.

The report said that inventories of gasoline fell by 1.0 million barrels last week, a sixth consecutive decline totaling 22.7 million barrels. Moreover, the latest inventory level was the lowest since the week ending November 2, 2007. But levels were only 0.3% lower on a year-over-year basis, an improvement over the 1.1% negative margin in the week before last.

And inventories of distillates, which include diesel and heating fuel, fell by about 400,000 barrels last week. The drop was the first in three weeks and only the second in seventeen weeks. On a year-over-year basis, supplies were down by 1.9%, the worst Y/Y margin since the end of June.

Despite the drop in inventories, oil prices continued to decline on the view that preparation for Hurricane Gustav was a contributing factor. Since the storm did not do significant damage to production facilities, a rebound is anticipated in upcoming inventory reports. Moreover, the economic slowdown projected for the remainder of the year is expected to reduce the demand for oil.

By the end of commodities trading, the price of a barrel of light, sweet crude oil for next month delivery was down by $1.46 on the New York Mercantile Exchange to settle at $107.89. This was the lowest closing price for a front-month contract in five months.

But not all of the market forces were favorable to stocks. The level of initial jobless claims rose last week and the continuing claims level for the preceding week hit an almost five-year high. With the employment report for last month looming, the news took on added significance and trend in claims suggest that the labor market is being challenged.

Several sales reports from major retailers also discouraged stock traders. The recent sharp declines in oil prices, while a support for the general market, hit the energy sector. Renewed concerns about the health of the financial sector also re-emerged today. By the end of trading, the Dow had fallen by 2.99%, the S&P 500 also by 2.99%, and the Nasdaq by 3.20%. It was the worst sell-off since June 26.

In the bond market, recent price gains have pushed yields lower. The closing yield of the benchmark 10-Year Note was the lowest since April 15.

Tomorrow brings the monthly heavyweight economic release: the unemployment report. In July's report, the Labor Department said the seasonally adjusted level of nonfarm payrolls fell by 51,000. This was a smaller decline than the 70,000 - 75,000 that forecasters had predicted. In addition, June's originally reported decline of 62,000 was also revised to a drop of 51,000.

Though the overall payroll number was more bullish than expected, it still represented a seventh consecutive month of job losses. Yet, the biggest surprise was a jump in the unemployment rate, the portion of the active workforce without jobs. It rose from June's rate of 5.5% to 5.7%, the highest level since March of 2004. The jump reflected a 0.1% increase in the civilian workforce and a 3.4% increase in the number of those who were unemployed. Forecasters had predicted an increase in the unemployment rate to 5.6%.

For August, analysts foresee a decline in payrolls of about 70,000 but many observers are bracing for a larger decline. The unemployment rate is predicted to have remained at 5.7% but some analysts believe it may have risen to 5.8%.

10:30 AM EDT : Today's economic news was mixed but stock traders are focusing on the negatives and the indices are currently down sharply. This has provided some lift for Treasuries but recent gains have made further progress harder to come by.

The major economic release of the day was positive for both markets. The Labor Department said that, according to revised data, nonfarm business productivity (average output per hour) rose at a 4.3% annualized rate in the second quarter.

This was a much stronger reading than the 2.2% rate cited in the preliminary report released last month. Analysts were looking for an improvement since last week's revised report on gross domestic product showed an upward revision to a 3.3% growth rate in the quarter versus the initial estimate of 1.9%.

But today's productivity reading easily topped predictions of 2.9%. In the first quarter, the productivity growth rate was 2.6%.

The increase in efficiency suggests better corporate earnings down the line and this is a major plus for stocks. Higher productivity also translates into lower labor costs or a deceleration of their growth. According to today's report, unit labor costs (ULC; a gauge of costs per hour per worker) declined at a 0.5% rate instead of expanding at a 1.3% pace as reported last month. The reduced inflation pressure is a plus for both stocks and bonds.

But another major release of the day was bearish. In a separate report, the Labor Department said that the seasonally adjusted level of initial claims for state unemployment benefits rose last week by 15,000 to 444,000. This followed three weeks of declines totaling 28,000 but this in turn followed four weeks of increases totaling 109,000. The latest reading was the third highest since early 2003.

The four-week moving average fell by 3,250 to 438,000 but this was still the fourth highest reading since early in 2003. For the first thirty-five weeks of the year, the average weekly, initial claims reading has been 377,514. For the same period last year, the average was 316,000.

Today's report said that continuing claims in the week of August 23 (continuing claims must be at least a week old) rose by 6,000 to 3.435 million. The four-week moving average rose by 33,250 to 3,400,250. Both levels were the highest since November of 2003. For the first thirty-three weeks of the year, the average weekly, continuing claims reading has been 3,020,647. For the same period last year, the average was 2,521,618.

The last release of the day was actually somewhat stronger than expected. The Institute for Supply Management said that its index of activity in the services sector came in at 50.6 for August. Any reading over 50.0 reflects a general expansion relative to the preceding month. Though indicating only a slight expansion, August's index was the first positive indicator in three months and was stronger than predictions of 49.5.

The current index, the NMI or Non-Manufacturing Index is new -- first published in January. It is a composite of four seasonally adjusted indices: business activity, new orders, employment, and supplier deliveries. 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 was also positive. It came in at 51.6 in August, up from July's 49.6.

One detail in the report was good for both stocks and bonds. The prices index, an inflation gauge, came in at 72.9. While still reflecting a strong increase, it was weaker than July's reading of 80.8.

But stock traders are also looking at the monthly sales reports from a number of major retailers this morning. Though the largest retailer, Wal-Mart, beat expectations, this was due to heavy discounts. Other reports for last month were weaker than predicted. Reports from car manufacturers yesterday were also weak and this suggests that overall retail sales for August will be disappointing . . . .

LionMTS