Troubling U.S. jobless claims figures and a lackluster manufacturing report out of the Philadelphia area drove the equities markets lower and Treasury prices higher as investors ran for cover in thin trading on Thursday, August 19.
With high unemployment considered a major obstacle to economic recovery, any sign of weakness in the U.S. jobs market is viewed poorly by investors. On Thursday, the Labor Department reported that seasonally adjusted initial claims stood at 500,000 for the week ending August 14, an increase of 12,000 from the previous week's revised figure of 488,000. The four-week moving average was 482,500, an increase of 8,000 from the previous week's revised average of 474,500.
Also on Thursday, results from the Philadelphia Federal Reserve Bank's business outlook survey for August indicated that regional manufacturing activity weakened following two months of already slow activity. Indexes for general activity, new orders, and shipments all registered negative readings, while firms also reported declines in employment and work hours.
The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a reading of 5.1 in July to -7.7 in August. The index's negative turn marked a period of declining monthly activity for the first time since July 2009.
The Standard & Poor's 500 index declined 2% to 1,072 at midday in New York while the Dow Jones industrial average fell 191 points, or 1.84%, and the 10-year Treasury note rose, pushing the yield down to 2.57% from 2.63% on Wednesday.
"The Philly Fed was a bit of a shocker," said Doug Roberts, chief investment strategist for ChannelCapitalResearch.com in Shrewsbury, New Jersey. "The market was expecting an increase and got a decrease, and the initial claims number was substantially higher, where the market had expected a decrease."
Exaggerated market volatility is at least partially connected with the quietness of the market during the last weeks of August.
"When there's not a lot of liquidity and not a lot of trading volume, markets can react particularly strongly to news," Roberts noted. "Figures show that a lot of retail investors aren't participating in the equities market, and a lot of the institutional guys are either reducing their exposure or are on holiday. The people who are in there are more likely traders or program traders, and what happens is they react to the news, and they're not long-term buyers. When the economic news was announced, people just ran for the exits, like a mad rush hour."
In the government bond market, the Federal Reserve policy-making board's August 10 announcement that it will buy Treasury bonds has certainly had a positive impact, Roberts said.
"If the Fed says they're going to be buying Treasuries, then you're getting a lot of people getting in front of it and saying, 'At least the Fed is backstopping this and it's only likely to increase instead of decrease.' That's what we're seeing, particularly in the mid range of 5 to 10 years because the reward isn't as great as going out to 20 or 30 years, but at the same time the risk isn't as high in case they're wrong," he said.
In other economic news on Thursday, the Conference Board's July survey of leading economic indicators for the United States increased 0.1% in July to 109.8, following a 0.3% decline in June and a 0.5% increase in May. Board economists painted a brighter picture of where the nation is headed than the markets suggested.
"The indicators point to a slow expansion through the end of the year," said Ken Goldstein, economist at the Conference Board, in a statement. "With inventory rebuilding moderating, the industrial core of the economy has moved to a slower pace. There appears to be no change in the pace of the service sector. Combined, the result is a weak economy with little forward momentum. However, the good news is that the data do not point to a recession."
Read a story about the Fed's August 10 announcement from the archives of InvestmentAdvisor.com.