Rates are quiet this morning. The 10-year Treasury is +.002% with the rate at 4.636%. It has been trading no more than a +\-.010% from yesterday’s close of 4.634% all morning. The bond market is waiting on the FED’s FOMC meeting this afternoon.

The FED is expected to announce its decision at 13:15CDT {18:15GMT}. It is widely believed that the FED will keep the very short-term Fed Funds rates at 5.25%. That is not the item that will affect rates this afternoon. The only ‘experts’ that will pay attention to the Fed Funds rates are anchors and business reporters in the Main Stream Media. The important item will be the summary of the meeting.

The summary is the where the FED governors indicate which way they are leaning towards rates for the future. That is called the bias. The problem is, is that the members of the FOMC are good poker players. (Some actually are recreational poker players.) They never want to show too much of their hand. Former FED-Chair Alan Greenspan once said, “If anyone here understands what I am saying, I must have misspoken.”

They are also very good at using what is called ‘Fed-speak’, Greenspan’s predecessor, Paul Volker was asked the question, “Are rates going up, down, or staying at this level?” Volker’s response was, “Yes”.

There is always an amount of up and down movement as analysts try to wade through the Fed-speak and the double talk in the Summary. In the end, the bond market chooses a direction and follows it.

Is that direction up, down, or level. The answer is most likely, yes. The rate of growth in the economy is slowing. At the same time inflation has not slowed down yet. (We will post a long-term outlook on this soon.) Still, we think there is the likelihood that the FEDs bias will be towards lowering rates. Bernanke has often said that he still sees inflation, but there are sings it could slow soon.

We will post more on the FOMC, and tomorrow’s events this evening.

MID-TERM OUTLOOK [09 May 2007]

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

1.) The housing bubble has ‘burst’. The question is, will housing continue to decline? Is it flattening? Or, is it on the verge of a rebound? The data over the last few months has been a resounding maybe to all three. IF homeowners start to see a rebound in housing their confidence will increase. As confidence increases, so will spending. Economic growth is moderate now with problematic inflation. Strong growth could renew strong inflation.

On 08 May 2007 the bond market responded to an unscheduled announcement by the National Association of Realtors (NAR). The NAR reduced its sales forecasts for 2007 and 2008, predicting that stricter lending standards would limit home buying. That only makes sense as stricter guidelines reduce the number of buyers able to get a mortgage. Given the already oversupply of houses, verses the very number of buyers we have a buyers market now. Reducing the number of buyers hits the real estate market with a double whammy.

Sales of existing homes will probably fall about 3% this year to 6.29 million from 6.48 million in 2006. Sales of new homes are projected to fall about 18% to 864,000, compared with a 14% drop predicted last month. Housing starts are expected to drop 19% to 1.46 million.

When there are signs of housing market weakness it helps the price of bonds. Since it is a sing of a slowing economy it instills safe-haven interest.

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