Updated from 1:54 p.m. EDTBonds rose and the dollar slumped Thursday, as the market's concern du jour switched from inflation to growth following weak numbers on durable goods and new-home sales. The economic data also contributed to pressure on the stock market, which remained in the red after more bad news for General Motors ( GM), which is now being investigated by the Securities and Exchange Commission. The Dow Jones Industrial Average was recently down 71 points, or 0.7%, to 10,275. The blue-chip average was under pressure from weakness in GM, which slumped 5%, as well as declines in Johnson and Johnson ( JNJ) and Home Depot ( HD). The S&P 500 was down 7 points, or 0.6%, to 1185. The Nasdaq Composite was down 26 points, or 1.3%, to 2079. The benchmark 10-year Treasury bond, which has been falling sharply this week, was up 4/32 in recent action while its yield, which moves inversely to price, fell back to 4.57%. The bond's yield rose to 4.60% on Wednesday, near its March highs. The dollar, meanwhile, was down 0.6% vs. the euro and 0.5% vs. the yen. Both bonds and the greenback have been tumbling this week after Monday's nomination of perceived dove Ben Bernanke as the next Federal Reserve chairman. The outlook for higher rates has lent major support for the dollar this year. A higher growth outlook and rising bond yields in Europe and Japan have also pressured the greenback and U.S. bonds this week. Long-term bonds, meanwhile, have been correcting on concerns that inflation, which erodes the value of fixed-return assets over time, may be running ahead of the Fed's tightening. Energy prices, which first soared after hurricanes Katrina and Rita hit the Gulf Coast, have fanned the fire. But economic data Thursday shined a spotlight on the storms' other impact: its hit to growth. That was particularly evident in the durable goods report.
The Commerce Department said that orders for durable goods fell 2.1% in September, while Wall Street economists had expected a 1.5% drop. Excluding transportation, orders fell 1%. Shipments edged up while inventories fell 0.1%. For Goldman Sachs chief economist Bill Dudley, the report suggests downside risks to his 3.5% forecast in gross domestic product growth in the third quarter. The initial government estimate of the GDP will be released Friday. Markets will still be closely monitoring the inflation index -- the GDP deflator -- in Friday's report. Wall Street economists, on average, expect the deflator to have risen 2.9% in the quarter, according to a Reuters survey. New-home sales, meanwhile, rose 2.1% to an annualized 1.222 million in September, below the 1.25 million expected by Wall Street economists. In addition, August sales were revised down by 3.2% to 1.197 million, the lowest rate in seven months. The average price of a new home also fell to $285,700 in September, from $287,500 in August. "No wonder price gains are slowing," notes Ian Shepherdson, chief U.S. economist at High Frequency Economics. "Builders have over built and have to cut inventory." Amid slowing sales, the supply of new homes on the market has risen sharply and is now up 20% year on year. Concerns that inflated home equity will continue to fuel consumption and inflation, or alternately that a rapid implosion of the housing bubble would cause economic havoc, have fueled the Greenspan Fed's determination to keep raising rates. There's evidence that the housing market is, so far, cooling in an orderly manner. That is probably to Greenspan's liking. In a speech Thursday, the soon-to-be-retired Fed chairman stuck to the day's topic of dedicating a new building for the Dallas Fed.
In the meantime, the cooling housing market could deflate Fed hawks over the next year, and that's likely to encourage more dollar weakness. For bonds, however, the outlook may eventually brighten, according to Bill Gross, manager of bond juggernaut Pimco. Gross is convinced that the Bernanke-led Fed will start cutting rates sometime next year amid weakening growth. "We are due for what appears to a 2% or less GDP growth rate in 2006, a rate sure to stop the Fed and to induce eventual ease at some point later in the year," Gross wrote in Pimco's monthly investment outlook newsletter.