In late trading, the 10-Year Treasury Note, after having been up by almost half-a-point, was down by 21/32, raising its yield by 8 basis points to 3.70%; the Dow was up by 32.73 points to 11,220.96; and the Nasdaq was down by 3.16 points to 2,255.88.

The employment report revealed a larger than expected decline in nonfarm payrolls in August and declines in the preceding two months were revised to larger losses. The most important news was that the unemployment rate rose to its highest level in five years.

At its low for the day, the Dow was down by 150.38 points or 1.34% after having fallen by 344.65 points yesterday. Similar percentage losses were made by the other major indices. But stocks turned on another decline in oil futures and a round of buying spurred by speculation that the market had over-reacted to the prevailing influences.

Though today's decline in oil is being attributed to lower economic growth projections due to the jobs news, the fact remains that lower prices stimulates buying elsewhere. The price of a barrel of light, sweet crude for next month delivery declined by $1.66 on the New York Mercantile Exchange to settle at $106.23. This was a sixth straight decline for a combined total of $11.92. Today's close was the lowest for a front-month contract since April 4.

By the end of stock trading, the Dow had gained 0.29% on the day and the S&P 500, 0.44%. Only the Nasdaq failed to advance for the day but its loss was only 0.14% instead of the 1.86% decline at its session low. All three took solid losses for the week, however. The Dow fell by 2.79%, the S&P 500 by 3.16%, and the Nasdaq by 4.72%.

Despite today's losses in the bond market, the closing yield of the benchmark 10-Year Note was right where it was at the close on Wednesday and it was 11 basis points lower than where it finished last Friday (yield moves inversely to price).

Next week's economic calendar is back-weighted. There are no major releases slated for Monday. On Tuesday, a minor indicator on the housing sector and a second-tier inventory report will be released. The housing release is the report on pending home sales for July. In June's report, the National Association of Realtors said that its seasonally adjusted index of pending sales rose by 5.3%. Though the jump surprised observers who were expecting a decline, the index (unadjusted) was down by 12.1% from June of last year.

The pending sales information is somewhat dated and its significance is diluted by the fact that the index is just an indicator of upcoming actual sales. The data was first published in 2005 with data going back to 2001. The index is a measure of the seasonally adjusted, annualized rate of contract activity in a month. The NAR asserts that 80% of contracts become sales within two months and a large portion of the rest become sales two months thereafter.

For July, the index is expected to have declined by 1.0%.

The other release of the day is the report on wholesale inventories for July. This data is also somewhat dated and it only provides one piece of the overall inventory picture. The more comprehensive, business inventories report will be released at the end of the week.

In the report for June, the Commerce Department said that the seasonally adjusted level of wholesale inventories rose by 1.1%, almost twice as large an increase as analysts had predicted. The level rose by 0.9% in May. Rising inventory levels are bullish if they are perceived as anticipating demand instead of reflecting a back-up due to falling demand. June's increase reflected rising demand as the sales level increased by 2.8%, the largest jump in over four years.

The combination pushed the inventory-to-sales (I/S) ratio down to a record low 1.06 from May's previous record low of 1.08. The I/S ratio is the value of stocks on hand at the end of a month divided by the value of sales for the month. It indicates how many months it would take to entirely deplete existing inventory at the prevailing sales pace. Low turnover times mean there is high pressure to replace supplies and it is, therefore, a positive economic indicator.

A smaller inventory increase of about 0.7% is predicted for July, which, if accurate, would be the smallest rise in four months. The I/S ratio may edge higher but it will still indicate extremely lean inventory levels.

There are no major releases scheduled for Wednesday so a couple of minor releases may get added attention. These are the weekly oil inventory report from the Energy Department and the report on mortgage application activity from the Mortgage Bankers Association of America.

On Thursday, the employment situation will be reviewed once again in the jobless claims report. In yesterday's 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.

The 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.

Thursday also brings a couple of trade related releases. The first is the report on international trade for July. June's report was more bullish than expected. The Commerce Department reported that the seasonally adjusted value of imports exceed that of exports that month by $56.8 billion. The deficit figure was 4.1% smaller than May's revised $59.2 billion and was a much smaller gap than the $61.5 billion that forecasters had predicted.

Higher oil prices helped boost imports by 1.8% to a new record high, but exports rose by 4.0% -- also to a new record high. The decline of the dollar over the last six years has made U.S. goods cheaper abroad, thus spurring increased foreign buying.

Net exports are a component of gross domestic product and the smaller subtraction to the GDP calculation contributed to an upward revision in last week's preliminary report on the second quarter. The advance report had said that GDP grew at a 1.9% rate but this was revised to 3.3%. A final report will be released on the 26th of this month.

July's trade figures will provide the first look at situation for the third quarter. Forecasters are looking for a wider gap of $58.0 billion, but the bearish aspect may be blunted somewhat by expectations of a smaller deficit in August due to a sharp decline in oil prices.

The other trade related news on Thursday will come in the report on import and export prices for last month. In July's report, the Labor Department said its index of import prices rose by 1.7%. This was the smallest increase since February but it was still strong by historical standards and it topped analyst predictions. In addition, June's originally reported increase of 2.6% was revised up to 2.9%.

Of course, a major contributor to the increase was a 4.0% rise in the price index for petroleum products (oil). Though this was also the smallest increase in five months, it was still strong, and excluding the category, prices were still up by 0.9%, matching the increase in June when the index for petroleum products rose by 8.9%.

On a year-over-year basis, the import price index was up by 21.6% in July. It was the highest Y/Y margin going back to at least 1989 (available data before that time is quarterly). The petroleum index was up by 79.2% on a year-over-year basis, down from June's 82.6% margin but the second highest in the history of the available data series. Excluding the category, the price index was up by 8.0%, the highest Y/Y margin in the data series.

Export prices also saw large gains. The overall price index rose in July by 1.4%, the largest jump in four months and the twenty-first consecutive monthly increase. The volatile agricultural product category saw an increase of 6.7%, the largest monthly jump in the available history of the data series. Excluding the category, export prices were up by 0.8% in July following a 0.9% increase in June.

On a year-over year basis, export prices were up by 10.2%, agricultural prices were up by 39.9%, and ex-ag prices were up by 7.5%. All of these margins were the highest in the history of the available data.

The average spot price of crude oil fell last month by the largest amount in almost two years and this is expected to translate into a hefty decline in the overall import price index. This would be welcomed by both stock and bond traders.

On Thursday afternoon the Treasury will release its budget figures for last month. In August of last year, government outlays exceeded receipts by $117.0 billion. Next week's report is expected to show a smaller deficit of about $105.0 billion. The reason for the prediction is partly due to the fact that July's deficit figure of $102.8 billion was much larger than anticipated and may have been skewed by calendar issues.

But even if the prediction is accurate, the running total for the fiscal year to date (begun last October) would be a deficit of $476.4 billion, a far larger gap than the $274.2 billion posted for the same period in the 2007 fiscal year. Large deficits are bad for Treasuries because it means more securities will have to be issued to cover existing debt and government operating expenses.

Friday has a heavy slate of economic releases. A major release is the retail sales report for last month. In July's report, the Commerce Department said the seasonally adjusted level of sales slipped by 0.1%, the first contraction since February. However, the report said that the level rose in June by 0.3% instead of the originally reported 0.1%.

A large but volatile sales category is automobiles and light trucks. Sales there fell by 2.4% in July -- a sixth consecutive contraction. But even excluding the category, sales were up by 0.4%, a weaker increase than June's 0.9%,

Another large and volatile category for obvious reasons is sales at gasoline stations. The level in this category rose by just 0.8% in July. Excluding both the auto and gas station categories, sale rose by 0.3%, the smallest increase since a flat reading (0.0%) in February.

According to recent reports from auto makers, sales remained weak last month and sales at gas stations are expected to be soft because of falling prices. Consequently, predictions call for only a slight gain in overall sales in August and excluding autos, sales are expected to be little changed.

Another major release on Friday is the Producer Price Index (PPI), a gauge of inflation at the wholesale level. It rose by 1.2% in July following a 1.8% rise in June. The volatile category of energy was a major contributor with an increase of 3.1%. Another volatile category, food, rose by just 0.3%. But even if these volatile categories are excluded, the so-called core index rose by 0.7% in July, the largest increase since November of 2006.

On a year-over-year basis, the PPI was up by 9.8%, the largest Y/Y increase since June of 1981. The energy index was up by 28.0% Y/Y, the largest margin since November of 1989. The core index was up by 3.5% from last July, the largest margin since June of 1991.

Price pressures were also high further down the production pipeline. At the intermediate stage of production the price index rose by 2.7% in July following a 2.1% rise in June and a 2.9% rise in May. Excluding food and energy, the index was up by 2.0% last month.

On a year-over-year basis, the intermediate index was up by 16.6%, the largest jump since April of 1980. The core index was up by 10.2%, the largest Y/Y margin since September of 1980.

At the initial or crude stage of production, prices were up by 4.2% in July. On a year-over-year basis, they were up by 52.1%, the largest increase since January of 2001.

August's headline figure is expected to be welcomed by both stock and bond traders. Because of the decline in oil prices, the index is expected to have declined by 0.3%. If this is the case, it would be the first contraction since last December. The core index is expected to have risen by an in-trend 0.2%.

As noted above, the report on business inventories for July will be released on Friday. The report on factory orders has already revealed that manufacturers' inventories rose by 0.5% and by Friday we will know the disposition of the wholesale sector. The only unknown will be the retail sector. If the wholesale level rose by the predicted 0.7% and the retail level rose just slightly, the overall inventories level would have risen by about 0.5%.

This would be a deceleration from June's rise of 0.7% but it would be the sixteenth consecutive expansion. The I/S ratio came in at a record low 1.23 in June and July's is likely to be as low or possibly lower.

The final release of the week is the preliminary report on consumer sentiment from the twice monthly surveys conducted by the University of Michigan. Due to shaky economic data and the rise in gasoline prices over the last year, consumer optimism has been trending down. The overall index hit its lowest reading in June since May of 1980.

But since gasoline prices have eased, the index rose in July and August after nine straight months of declines. Another rise to between 64.0 and 65.0 is predicted for Friday's reading but this would still be sharply lower than the final reading of 83.4 posted in September of last year.

10:30 AM EDT : Treasuries got an early boost from a weaker than anticipated employment report for last month, but recent gains in the market have blunted the effect of the news, blocking the upside for bonds. Yesterday's sharp plunge in the stock market also cushioned the impact of the employment news there and the indices are currently only slightly lower. However, the markets have been volatile lately and this might be reflected in today's action as well.

In today's report, the Labor Department said the seasonally adjusted level of nonfarm payrolls fell in August by 84,000. This was a steeper decline than the 70,000 that analysts had predicted.

Moreover, July's originally reported decline of 51,000 was revised to a drop of 60,000 and June's previously reported decline of 51,000 was revised to a drop of 100,000. August's was the eighth consecutive payroll contraction.

Job losses were broad-based. The goods producing sector continued to shed jobs as construction payrolls declined by 8,000 (a fourteenth consecutive monthly decline) and manufacturing payrolls fell by 61,000 (a twenty-sixth consecutive decline).

The services side of the employment spectrum also saw a net loss last month. The biggest losing category was business and professional services where payrolls fell by 53,000. But losses were also posted in the categories of wholesale and retail trade, transportation, utilities, information, financial activities, and leisure and hospitality. The only major category that posted an expansion was education and health with a gain of 55,000 -- a forty-seventh consecutive increase.

More startling than the payroll number was a jump in the unemployment rate, the percentage of the active workforce without jobs. It rose from July's 5.7% to 6.1%. This was the highest reading since September of 2003.

The news is bearish for the economy; it reflects the reduced need for labor as business activity contracts. It also means that consumers will exercise greater frugality in their spending behavior. This is obviously bad news for stocks but it benefits bonds by diluting the case for interest rate hikes by the Federal Reserve.

The report was not entirely favorable for bonds, however. It said that average hourly earnings, an inflation indicator, rose by 0.4% in August, and July's originally reported rise of 0.3% was also revised to 0.4%. These were the highest increases since June of last year.

But inflation pressure from oil prices continues to ease this morning and this is a plus for both bonds and stocks. The price of a barrel of crude oil for next month delivery was recently down by $1.99 to $105.90. Besides reducing inflation pressure, lower oil prices are an economic stimulant since they leave businesses and consumers with more money to spend on other things.

Traders will be keeping an eye on oil futures since a number of storms are headed toward the Atlantic coast and could disrupt production in the Gulf of Mexico . . . .

LionMTS