The weekly Initial Jobless Claims was lower than expected and that had an impact on rates. The bond market was also doing a natural response to yesterday’s afternoon rally.

316,000 workers filed for initial unemployment insurance last week. Economists were expecting Initial Jobless Claims to be 320,000 to 325,000. Since this is an inverse indicator it gave weight to the idea that the job market was tightening. That can cause a wage-price inflationary spiral.

Leading Economic Indicators were as expected at -0.5% and did not affect rates. Economists were predicting a -0.3% to -0.6% reading.

The 10-year Treasury is at +.039% with the rate at 4.557%. Rates have traded at this level most of the morning.

TOMORROW, 23 March 2007.

Back on 06 March 2007 we commented on Friday’s Existing Home Sales report. Pending Home Sales were low on 06 March, which means we could have a volatile day if forecasts for tomorrow’s Existing Home Sales were not lower than the previous report. Economists are forecasting a small decline from February’s report of 6.46m units. Economists are anticipating Existing Home Sales to be 6.26m to 6.35m units. That may be an accurate guess.

Rates COULD be flat on Friday.

[Publisher’s note: In an attempt to clean up our blog, we will post all three outlooks on Monday only. We will post an outlook on days when one is modified.]

MID-TERM OUTLOOK [22 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.

There may be a problem for rates for the next quarter. IF homeowners start to see a rebound in housing – it appears that there is some small turn around – their confidence will increase. As confidence increases, so will spending. Economic growth is moderate now with problematic inflation. Strong growth could renew strong inflation.

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

Bond investors and traders seem to grab on and hold any negative economic news. The bond market will still respond to inflationary news. But, they trade at a low level for a longer time when the news is bad for the economy.

The problem is the FED. They are not convinced that inflation is whipped. The commentary from FED official will be of concern for rates. We need to consider that when the FOMC minutes are released on 11 April 2007.

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