YESTERDAY 12 April 2007

In mid-trading day a Treasury TIPS Auction reversed the gains that the bond market had made earlier in the day, causing the 10-year Treasury to close almost flat. Compared to Wednesday’s close the 10-year Treasury was -.002% with the yield at 4.739%.

TIPS is short for Treasury Inflation Protected Securities. The auction produced a very low 18.7% indirect bid, the carefully watched category that includes central banks. This ignited concerns about dwindling foreign appetite for U.S. government instruments. The bid-to-cover ratio was 1.88, which is below average. The high yield was 2.284% and the median yield was 2.255%

In short, it means that some investors, especially foreign investors, are losing confidence in the FED and the US economy to keep inflation as low as it has been. Weather this is accurate or not makes no difference in the short term. As in all things in life, perception IS reality.

TODAY, Happy Friday the 13^th.

The market opened with a yawn as PPI was mixed. The aggregate PPI was a bit higher than anticipated, and was reported at +1.0%. The more important core-PPI was lower than expected, having been reported flat at 0.0%.

The mixed PPI caused the bond market to open pretty much flat. Near the opening the 10-year Treasury was -.006% with the rate at 4.731%.

Apparently the bond market ignored the Balance of Trade which was expected to be $60.0B to $61.0B. The Balance of Trade was also made public at the markets opening and was reported at $58.4B. That much lower should have impacted rates.

The market was moved by the University of Michigan’s Consumer Sentiment. Most economists were looking for a reading of 87.0 to 88.0. The actual Consumer Sentiment was published at 85.3. Normally, this would have been GREAT for rates. But the bond market went higher. At one point the 10-year Treasury was up to 4.769%.

Investors were uncertain what to make of the latest Consumer Sentiment reading. Action Economics reported that there were other estimates that Consumer Sentiment would be as low as low as 83.5. Clearly an 85.3 number was stronger than some analysts had expected.

The higher Consumer Sentiment report along with investors taking position for the weekend has moved rates somewhat higher. The 10-year Treasury is +.024% with the rate at 4.761%.

There may be one other thing that is influencing rates; the margin between wholesale energy costs and street gasoline costs has widened to a ‘normal’ level of 62.70 nationally and 50.90 in the Twin Cities. A few weeks back the margin was in the mid-40s. As we approach summer driving the margin may even grow larger. The wires do not mention this, neither do any analysts. But, most investors and traders buy gasoline. They may have unexpressed concerns.

The NYMEX Crude is $63.77/Bbl. The Robb Gasoline is at $219.20/Gal.

[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.]

SHORT-TERM OUTLOOK [09 April 2007]

Monday and Wednesday will be the biggest days next week and each has its own share of heavy data.

Monday holds the Retail Sales Report and the NY Empire State Index. Both have a habit of moving rates. On 03 April we posted our concerns for Monday’s numbers. Both UBS and Redbook indicators have been trending upward. If the predictions do not match that trend, Monday could be a bad day.

The Consumer Price Report is published on Wednesday. Its impact on rates is well known, and obvious.

MID-TERM OUTLOOK [09 April 2007]

There may be a few problems for rates for this quarter.

1.) 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.

2.) IF investors continue to be concerned with the FED’s ability to fight inflation. The confusion of the last FOMC meeting on 21 March, and the subsequent release of the Minutes on 11 April, caused the bond market to issue a collective HUH?!?! Economists and FED watchers echoed the HUH!?!, and added a wha...?.

3.)In February we wrote:

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.

None other than the Western Hemispheres worse dictators agrees with us. (For once He understands economics.)

An open letter signed by Cuban leader Fidel Castro, titled "More Than 3 Billion People in the World Condemned to Premature Death from Hunger and Thirst," circulated in the media Thursday, 05 April 2007. In his first major statement in months, Castro rejects the use of crops for biofuel production. …he is concerned that President Bush and the US Auto Makers enthusiasm for flexfuel vehicles will have disastrous environmental and food-price consequences for developing countries.

Castro and his ally, Venezuelan President Hugo Chavez, probably are concerned that the Brazilian-U.S. ethanol initiative, launched during Bush's recent Latin American tour, threatens Venezuela's influence in Central American and Caribbean countries through its subsidized oil Petrocaribe initiative.

Steve Boxmeyer [612] 799 – 6858
steve@LendWithIntegrity.com