In late trading, the 10-Year Treasury Note was up by 1-25/32, lowering its yield by basis points to 3. %; the Dow was down by 427.47 points to 7,997.28; and the Nasdaq was down by 96.85 points to 1,386.42.

The inflation news released in the last two days has been positive. Yesterday's price index for last month on the wholesale sector (the Producer Price Index) and today's index on the retail sector (Consumer Price Index) both fell by the largest amount in the history of each data series going back to 1947.

Though the core PPI figure (ex-food and energy) rose more than expected, the core CPI number declined for the first time in twenty-six years.

Lower inflation helps the domestic markets since it means less erosion of investment assets. It also helps by facilitating interest rate cuts by the Fed. And more cuts are likely as an increasing number of indicators are showing how weak the economy is.

This morning's report on housing starts for last month contained such indicators but the news was not unexpected. The annualized pace of starts was the lowest going back at least as far as 1959 when the current data series began. The pace of building permit issuance also declined to its lowest level since at least 1960.

As the economy contracts, there is less demand for energy and this has helped lift oil inventories in the last couple of months. Today, the Energy Information Administration reported that inventories of crude oil rose last week by 1.6 million barrels (one barrel equals forty-two gallons). This was the eighth consecutive weekly increase totaling 23.4 million barrels. On a year-over-year basis, supplies were up by 3.2%, the best Y/Y margin since July of 2007.

The report said that inventories of gasoline rose by 539,000 barrels. Despite the rise, levels were 1.3% below where they stood a year earlier. This was a worse margin than the previous week's -0.9%.

Not all of the supply data was good. Because the weather is getting colder, inventories of distillates, which include heating fuel, are becoming more important. They fell by 1.5 million barrels last week, the first decline in five weeks. They were 5.7% below year-ago levels, the worst Y/Y margin in three weeks.

The gloomy economic outlook and the increase in crude supplies helped pull oil futures down for a fourth consecutive trading session. The price of a barrel of light, sweet crude for next month delivery fell by $0.77 on the New York Mercantile Exchange to settle at $53.62. This was the lowest close for a front-month contract since January 2002.

By the end of stock trading, the Dow had lost 5.07% on the day; the S&P 500, 6.12%; and the Nasdaq, 6.53%. The indices closed at their lowest levels since early 2003. In the bond market, the yield of the benchmark 10-Year Treasury Note has fallen in each of the last four sessions for a total of 53 basis points. It closed at its lowest level today since last March and before that, June of 2003.

This afternoon, the Federal Reserve released the minutes of last month's monetary policy deliberations. A detail that came as a surprise was that some committee members are becoming concerned with the threat of deflation. The minutes indicated that falling prices could become a problem as some members "saw a risk that if resource utilization remained weak for some time, inflation could fall below levels consistent with the Federal Reserve's dual mandate for promoting price stability and maximum employment, a development that would pose important policy challenges in light of the already-low level of the Committee's federal funds rate target."

The deflation issue suggests that the Fed has an even stronger argument for economic stimulation. However, while the minutes said that the committee felt its easing actions have been appropriate and that more might be needed, nevertheless, "several participants observed that it would be crucial for such policy actions to be unwound appropriately as the financial situation normalized."(FOMC MINUTES)

At the last meeting, the committee submitted its revised economic projections for the next few years. All of the estimates were more bearish than the previous ones submitted in June.

The estimate for gross domestic product growth between the fourth quarter of last year and the fourth quarter of this year is between 0.0% and 0.3%. For next year, the projected change is between a decline of 0.2% and an increase of 1.1%.

Average unemployment for the fourth quarter of this year is expected to be between 6.3% and 6.5% and in the fourth quarter of next year by between 7.1% and 7.6%. (FED ECONOMIC PROJECTIONS)

Tomorrow, the jobless claims report will focus attention on the employment situation once again. In last Thursday's report, the Labor Department said that the seasonally adjusted level of initial claims for state unemployment benefits rose in the previous week by 32,000 to 516,000.

The jump was larger than forecasters were predicting and the level was the highest since the last week of September in 2001 when it was 517,000. The four-week moving average, which smoothes out some short-term volatility, rose by 13,250 to 491,000.

Readings over 400,000 are seen as indications that layoffs are outpacing hiring. The trend in claims this year has been up. For first forty-five weeks of the year, the average initial claims reading has been 400,548. For the same period last year, the average was 318,111.

The report said that the level of continuing claims rose by 65,000 to 3.897 million in the week ending November 1 (continuing claims must be at least a week old). This was the highest level in twenty-five years. The four-week average rose by 43,000 to 3,794,250. For the first forty-four weeks of the year, the average continuing claims reading has been 3,167,500. For the same period last year, the average was 2,532,159.

The reading for last week may be discounted somewhat because of the Veterans Day holiday. Whatever the figures show, the outlook for the labor market it still bleak as more and more companies announce layoff plans.

Later tomorrow morning, the independent research firm, the Conference Board, will release its Index of Leading Economic Indicators for last month. In September, the index rose by 0.3%, the first increase in five months. But August's originally reported decline of 0.5% was revised to a steeper drop of 0.9%.

Since much of October's economic news was negative, the leading indicators index is expected to have declined once more. The recent analyst estimate is that it fell by 0.6%.

The final release of the week is the index of manufacturing in the Philadelphia Fed district for the month. In October the index came in at -37.5, the lowest reading in eighteen years. Any reading below 0.0 indicates a contraction of activity. Another large contraction indicator is anticipated for November but predictions are for a slightly better reading of -30.0.

10:30 AM EST : The inflation news released today was a plus for both stocks and bonds but the news on the housing sector was bearish and favored bonds. Currently, the stock indices are in negative territory amid choppy trading action. Treasuries are up but the prices have also seen a couple of abrupt moves this morning.

In today's economic news, the Labor Department reported that its Consumer Price Index (CPI), a gauge of inflation at the retail level, declined by 1.0% last month. This was the largest decline in the history of the data series going back to 1947. Analysts had been predicting a decline of about 0.8%.

As expected, a sharp drop in oil prices pulled the energy price index down by 8.6%. This was the largest monthly contraction in this data series going back to 1957.

Another volatile category is food and its price index rose in October by 0.3%, the smallest increase since March. But even excluding the categories of energy and food, the so-called core index declined by 0.1%, the first decline since November of 1982.

Of the non-core components, the energy-related category of transportation saw the biggest drop with a decline of 5.4%, the largest in the history of the data series going back to 1947. But energy was not the whole story behind the PPI data. The index for apparel fell by 1.0%, the biggest drop since last March. The housing price index was flat (0.0) after two months of 0.1% declines. The largest increase outside of food was a 0.3% rise in the miscellaneous category of "other goods and services."

On a year-over-year basis, the CPI was up by 3.7% but this was the best Y/Y margin since the preceding October. The core index was up by 2.2%, also the best margin in a year. The energy price index was still higher by 11.5% but this was the best margin since September of last year. Not all of the Y/Y figures were positive: the index for food was up by 6.3%, the highest margin since March of 1990.

In the other major release of the day, the Commerce Department said that the seasonally adjusted rate of housing starts declined in October by 4.5% to 791,000 from an upwardly revised pace of 828,000 in September (originally reported as 817,000). Though the latest rate was higher than the 780,000 that analysts had predicted, it was still the lowest in the history of the data series going back to 1959.

The report indicated a 31.0% drop in the starts pace in the Northeast and a 13.7% drop in the Midwest. There were some bullish details. The largest regional contributor, the South, saw an increase of 1.5% and the second largest contributor, the West, saw an even bigger increase of 7.5%.

But the outlook for the near term remains bleak. The report said that the seasonally adjusted, annualized rate of building permit issuance fell by 12.0% last month to 708,000. This was the lowest pace in the history of the data series going back to 1960.

In related news, the Mortgage Bankers Association of America reported this morning that its mortgage application index fell last week by 6.2% despite a decline in average fixed mortgage rates. The decline in rates spurred some additional refinance activity and its index rose by 2.6%. Refinances accounted for 49.9% of all application activity, an increase from the previous week's 45.1%. But the purchase index fell by 12.6% to its lowest level since December of 2000.

Registrations for adjustable rate mortgages edged up to 2.6% of all applications versus 2.3% the week before.

This afternoon, the Federal Reserve will release the minutes of last month's monetary policy meetings (an emergency meeting held on the 8th and the regular meeting on the 28th and 29th). The minutes are expected to indicate deep concerns over the financial market and the economy. But even if they turn out less hawkish than anticipated, the weak economic and low inflation indicators released since then point to more rate cuts next month . . . .

LionMTS