Bond rates are lower in mid-morning as traders and investors correct their view of foreign demand. On last Thursday demand for the TIPs auction was disappointing; especially from foreign buyers. That led the bond market to believe that offshore demand has dried up.

A half hour into trading at 08:00cdt {13:00gmt} Net Foreign Purchases number reversed that belief. The total report was not a surprise for lower rates. There was only one economic agency making a prediction for this event, and they were looking for an aggregate of $80.0B. The NET foreign Purchases were $58.1B. The market was encouraged when it read the details and saw that inflows from overseas were $94.5B.

That 10-year Treasury moved downward after the release to 4.745% or -.016% lower than Friday’s close.

Other items out were basically as expected, or ignored by bonds for whatever reason.

Retail Sales and core-Retail Sales were at or just above expectations. The more important of the two, core-Retail Sales, was expected to be +0.7% to +0.9%, and was reported at +0.8%. The market was looking for total Retail Sales to be +0.4% tom+0.6%. Retail Sales were reported above that number at +0.7%.

NY Empire State Index should have moved rates much lower as it was far below the expected 8.8 to 10.0. The NY FED published its survey at the markets open reporting the index at 3.8. There is no explanation why it did not move rates.

Business Inventories were out at 09:00cdt {14:00gmt} and possessed no surprises. Economists anticipated it at +0.2% to +0.3%, and it came in at +0.3%

TOMORROW 17 APRIL 2007

This will be a very heavy day and could be VERY volatile. There are three important reports, each consisting of two elements. All 6 are important and volatile. Most have fairly tight predictions. We hope to give more detail this afternoon.

CPI and Core-CPI are out at the morning’s opening. Aggregate CPI is predicted to be +0.6% to +0.7%, which is higher than the +0.4%. The more important Core-CPI is predicted to be +0.2%, the same as last month.

Housing Starts and Building Permits are also published at the opening. Housing starts are the more important and are forecast to be 1.490m to 1.520m. Building Permits are forecast at 1.500m to 1.520m.

At 08:15cdt {13:15gmt} the Industrial Production and Capacity Utilization reports are out. Industrial Production is looking for a -0.1% to +0.2%. Capacity Utilization is anticipated to be 81.8% to 82.0%.

[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.]

Last Friday we erred in reporting that CPI would be published on Wednesday. We are not certain why we got this wrong. CPI is out on Tuesday!!!

SHORT-TERM OUTLOOK [13 April 2007]

Monday and Tuesday 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 Tuesday. Its impact on rates is well known, and obvious.

MID-TERM OUTLOOK [13 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