Rates on Treasuries were lower this morning despite the higher than expected Housing Starts. Traders are taking position while the FOMC begins its meeting, and makes its announcement tomorrow.

Housing Starts were higher than expected and Building Permits were at the low end of predictions.

Housing Starts were anticipated to be 1445k to 1575k. They were 1528k new homes had ground broken in February. That is higher than the previous month’s 1408k.

Building Permits were forecast to be 1530 to 1570, but the actual number was 1532

The high Housing Starts could be seen as good news for the real estate industry, but we need to consider the impact of adding inventory to an already bloated market. That will not be good for prices. It will not get fence sitters to move.

The 10-year Treasury is -.028% with the rate at 4.543%.

TOMORROW 21 March 2007

The FOMC releases its policy statement at 13:15cdt {18:15gmt}. There is not a lot on the economic calendar that has much chance of being heard over that item. The only other items scheduled are the MBA Purchase and the Crude Inventories numbers.

[Publisher’s note: With the exception of Saturday & Wednesday, we will publish only one of the outlook sections each day on a rotating basis, none on Friday. SHORT-TERM OUTLOOK (on Monday) attempts to forecast and discuss up to the next 30 days. MID-TERM OUTLOOK (on Tuesday) looks forward from 15 to 90 days, most often 30 to 90 days. The Mid-term has the most accurate predictions, just like the weather. The LONG-TERM OUTLOOK (on Thursday) will extend out the next six months, maybe one year. When we change an outlook section we will embolden the date and heading.]

MID-TERM OUTLOOK [12 March 2007]

Rates have been pretty good as we enter the last month of the 1^st Quarter. But we need to caution that they may not drop much further. That is, unless the 10-year Treasury goes below the 4.500% level for more than 5 trading sessions. That is the next “psychological floor”. The market has toyed with going below that level, but never for more than a few trading sessions.

We are not as optimistic on rates for the next quarter. As homeowners start to see a rebound in housing their confidence will increase. As confidence increases, so will spending. That will bring back inflationary fears.

The good news is the bond market’s trading in the last three weeks. It is apparent that bond investors are still of the mind that inflation is whipped, and-or the economy is slowing.

The majority of economists seem to see the FED on hold for the next few months. That could be good given that the bond market has a desire to keep long term rates below the FED-Funds rates.

Stephen Stanley, RBS Greenwich Capital was quoted in the Wall Street Journal, “The tweaks at the margin argue for less risk of a move in either direction. So the Fed is on hold for a while with a slight lean toward hiking, whereas the market has the Fed on hold for most of the year with a slight lean toward an ease late in the year.”

But there is still some concern for inflation. Bear Stearns Economics said in February, “If GDP growth continues above 3%, as we expect, and if core inflation pressures show any sign of creeping higher, this statement leaves the Fed flexibly positioned to raise rates before the middle of the year. If January data on employment and retail sales suggest that the economy continued at an above-trend pace, then Bernanke could adopt a more hawkish tone on Feb. 14 (when he delivers his semiannual testimony on monetary policy and the economy to Congress). Our expectations for the Fed's central tendency forecasts for 2007 are 2¾% to 3% on real GDP growth and 2% to 2¼% on core PCE price inflation.”

Regardless of what the FED does within its FOMC, the bond market will react to changes in inflation and economic growth. Joshua Shapiro, of MFR Inc. has an interesting theory, “Our own view is that unusually warm weather (IN JAN) has played a role in boosting activity…data will cool off as weather patterns (presumably) normalize. However, until this is borne out in the data, the Fed and markets will remain concerned about the effect that an upside growth surprise could have on inflation pressures.” The weather should bear watching.

It is our own view that the economy can still grow without impacting inflation. Energy costs – while still high – do not seem to have caused concern on Wall Street; at least not yet. Wages have grown – except at the lower end of the income scale. That has a way of keeping the lid on the wage-price spiral.

We have one great inflation fear in the mid-term; corn prices. With all the talk of alternate fuel and ethanol, corn futures have nearly doubled. That will impact not just corn flakes, but pop/soda, beef, and pig, just about anything we eat.

Commentary: Let’s eat food and burn oil.

Steve Boxmeyer [612] 799 – 6858

steve@LendWithIntegrity.com