The bond market was up and down most of the day, but not in any significant amounts.

There was some important data at the opening, and interest rates did respond. But, the response was muted as the market waited for this afternoon’s release of the FOMC meeting; that is fortunate.

The market opened with quarterly Productivity Report and the attached Unit Labor Cost. Productivity is an inverse indicator as far as bonds are concerned. It was forecast at 1.5% to 2.2%. Only one source we watch was the 1.5%. The remainder were looking for a 2.0% to 2.2% reading. The one at 1.5% was closer, as the actual number was 1.8%. Normally, that low finding would cause rates to move upward.

Compounding that was Unit Labor Cost. This important measure of inflation was predicted to be 1.6% to 1.8%. IT was far higher at 2.1%.

Again, it was fortunate that there was the FOMC meeting this afternoon. The 10-year Treasury should have been very bad. Instead it vacillated between +.004% to +.016% from the previous day close.

Shortly after the FOMC statement the rate change chart of the 10-year Treasury looked like an EKG. It closed at +.012% at 4.743%. However it never really moved dramatically either way.

Some news that did not impact rates were the UBS Store Sale Index, and the Redbook Survey. The week to week UBS was -0.3%, while year to year was +3.1%

Consumer Credit was far higher than forecast at $13.2B. The predictions were for $3.5B to $7.0B

Now to the big news; the FOMC Statement and Policy

The FED left its key interest rate alone at 5.25%. That was completely expected. What almost always moves the market is the Policy Statement.

The Statesmen did recognize that the economy is growing a bit weaker. That was a change for the FEDs exclusive focus on inflation. Still, the FED did not hint at future rate cuts.

There is even some speculation that the FED’s unstated bias is toward Higher Interest rates in the future. But that is not as likely as the FED added that "the downside risks to growth have increased somewhat" -- meaning it sees a slightly higher probability of weaker economic growth.

Steve Boxmeyer [612] 799 – 6858

steve@LendWithIntegrity.com

Sorry, Friday’s blog did not get posted again. Anyone want to answer why?

Here is what happened on Friday 03 August 2007.

It appears that the trading floor of 4.750% is being tested already. In fact it was established for such a short period of time, it could be said that it was not a floor.

The morning began with depressing news for the economy, but good for rates.

The Payroll Growth was below the expected amount of 135k to 150k. Last Wednesday the ADP Job Index predicted it would be lower (kind of) and it was at 92,000.

Unemployment was at the high end of expectations at 4.6%. It was expected to be 4.5% to 4.6%.

The other two parts of the Employment Situation were as forecast. Hourly Earnings were predicted to be 33.8 to 33.9. The average time-clock puncher worked 33.8 hours a week. Their hourly income continued to grow at +0.3% last month; above inflation.

Even with this bad news the bond market did not react as expected. The 10-year Treasury was only -.002% as the news was released. Within 40 minutes of the Employment Situation report the 10-year Treasury was +.013% to 4.766%; opposite direction it should have been.

It is not easy to explain why. One theory, the low job growth was predicted by the ADP Index. There are two problems with this idea. The ADP does not look at changes in government payrolls. That was the weakest area of fob growth. Second, the bond market did not respond to ADP. It is always possible that traders sat out after the ADP came out, waiting to see what happens Friday.

Traders and Investors eventually were moved by the ISM-Services. Experts were looking for a 58.0 to 59.5 reading. They were shocked by the 55.8 reported.

This convinced traders that they could believe the bad news in the job market. The buyers got off the sidelines and caused the price to go up. This moved the yield -.053% to close at 4.700%.

Not as low as it could have been, but still good considering it broke through a floor.

TODAY; Monday 06 August 2007

There was no data today. The bond market did some minor movement for most of the day; with rates going from -.007% to -.018% and back and forth.

A little more than one hour before trading ended, the bond market began some selling as traders took their profits. It appears that a small rebound in the stock market was the impetus for the change in bonds direction

The 10-year Treasury closed the day +.031% with the rate at 4.731%

Steve Boxmeyer [612] 799 – 6858

steve@LendWithIntegrity.com

This blogger’s home is the Twin Cities of Minnesota. Last night a major bridge of the Twin Cities freeway system collapsed into the Mississippi River. I-35W is a north-south interstate just east of downtown Minneapolis; and is one of the major arteries into downtown Minneapolis. This blogger uses the bridge that about once a month. Not often, but still; close to home.

I was enthralled with the story yesterday, and did not post. The event made international news. For the people of the Twin Cities, this will be one of those events we remember where we were and what we were doing when we heard…”

I was working a 2^nd job last night listening to Jason Lewis on KTLK, 100.3 on FM dial. Jason interrupted his programming and went to the traffic reporter – Kristen Kline – regarding a ‘major traffic problem’. I could tell in the tone of Kristen’s voice that something major had happened. I was shocked to hear, “I-35W, Washington Street Bridge has collapsed causing major delays throughout the system…”

As one can guess, there are several bridges near a major downtown. My mind raced to which bridge and where. Then went to, how?!?!

As of this morning there are still some 23 missing people.

This blogger’s thoughts and prayers are with the family and friends of the survivors and those missing.

YESTERDAY; 01 August, 2007.

The 10-year Treasury closed -.012% with the rate at 4.759%. It was low most of the day. It traded below Tuesday’s close for most of the day. At one point it moved below the trading range, with the rate at 4.741%.

The major item moving rates was the ISM. The Institute of Supply Managers was below he expected range of 55.5 to 56.5. It was reported at 53.8.

Other items for the day also gave force to the selling of bonds. The MBA Purchase Application Index continued last weeks decrease. It was 416.6, which was lower than last weeks 424.2. The 4-week moving average lowered to 435.3 verses last weeks 440.48.

Two employment indicators; the ADP Employment Index, and the Challenger Job Report both indicated a weakening job market. The ADP – which measures new private sector jobs – showed a week growth of 48,000. The Challenger Job Report guessed layoffs at 42,897. Both have not shown great ability to predict Friday’s employment situation report.

Finally, Pending Home Sales were as forecast at +5.0%.

TODAY; 02 August 2007.

The weekly Initial Jobless Claims were forecast to be 310k. 307,000 workers filed for initial jobless numbers. As an inverse indicator, a lower than expected number would account for some of the day’s rate increase.

It cannot account for the opening around +.033% to 4.792%. Rates remained at that level for most of the day.

Factory orders should have brought rates lower as well. It was estimated to be +1.0% to +1.3%. It was reported at +0.6%.

The price on notes (another name for bonds) slid as concern eased that losses on U.S. subprime mortgages will spread to the wider economy. That means analysts believe that the economy is weathering the difficulty in the sub-prime industry. Good for the economy = bad for rates.

In the afternoon the bond market started to trail stocks to a degree, reversing much of the rate gain. The 10-yearr Treasury closed at -.006% with the rate at 4.753%.

SHORT-TERM OUTLOOK [26 July 2007]

There was a trading range around the 5.100% level on the 10-year Treasury. The floor was around the psychological 5.000%. The ceiling was just above the Fed Funds rate at 5.250%. The recent high occurred on 12 June at 5.297%. That trading range was tested on 18 July 2007. The Trading Range was broken on 20 July with the 10-year Treasury closing -.076% with the rate at 4.952%.

A new trading range has emerged! We broke through the old won on 20 July and we seem to be heading towards a new floor. It is this blogs guess that the floor will be established around the 4.750% level.

That floor has been tested for the last few days. So far it has not broken through. If that floor is not broken in the next week it will take a major event to smash it.

This week may produce such an event, even though this week could establish a floor without any important numbers out.

Friday, August 3, 2007

This will be a very big day as it contains the Employment Situation Report including

8:30a.m. July Nonfarm Payrolls.. Previous: +132K.

8:30a.m. July Unemployment Rate. Previous: +4.5%.

8:30a.m. July Hourly Earnings.. Previous: +0.3%.

8:30a.m. July Average Workweek.. Previous: +33.9 hours.

10:00a.m. July ISM Non-Manufacturing Business Index.

Steve Boxmeyer [612] 799 – 6858

steve@LendWithIntegrity.com

Most of the early morning items opened at, or just below expectations. The rate on the 10-year Treasury was 4.825%, +.021% in first of the morning trading.

The most notable exception was Personal Income. Personal Income was forecast to be a high +0.5% to +0.6%. Instead it matched last month’s +0.4% growth. That should have sent bonds lower, but the low end of the new trading range had already been tested yesterday. Traders needed a bigger surprise to move lower.

Personal Spending was forecast to be a lower +0.1% to +0.2%. It did not surprise and came in at the low end of +0.1%.

A portion of the spending half of this report is the Personal Consumption Expenditure (PCE). This is one of the most important indicators of inflation. Most important, it is the inflation gauge that the FED uses most. It is only forecast by a few analysts, but their guess was for a low 0.1% to 0.2%. It also moved in at the low end at +0.1%.

The quarterly Employment Cost Index is very important to bonds, but did not move them today as it came in at +0.9%, where the majority of predictions where.

Chicago PMI was anticipated to be 58.0 to 59.5. It was released at 08:45 and came in low at 53.4. Bond rates responded momentarily by moving lower. They recovered for only a moment.

Construction Spending gave the big shock to the market contracting by -0.3% instead of the anticipated -0.1% to +0.3%. This gave rates their first reason to move lower.

Consumer Confidence was ignored. Analysts were looking for a 105 to 109 reading, but the Conference Board reported it at 112.6.

The rate on the 10-year Treasury closed at-.033% or at 4.771% for the day.

SHORT-TERM OUTLOOK [26 July 2007]

Wednesday, August 1, 2007

The trading floor may be tested tomorrow.

7:00a.m. MBA Mortgage Refinancing Index. Previous: -1.4%.

7:30a.m. July Challenger Layoffs. Previous: -21.6%.

8:15a.m. Non-Farm Payrolls Forecast. Previous: +132K.

9:00a.m. Tsy Refunding Announcement.

10:00a.m. June Pending Home Sales. Previous: -3.5%.

10:00a.m. July ISM Manufacturing Business Index.. Previous: 56.0.

Thursday, August 2, 2007

8:30a.m. Initial Jobless Claims.. Previous: -2K.

10:00 a.m. DJ-BTMU Business Barometer. Previous: -1.1%.

10:00a.m. June Factory Orders. Previous: -0.5%.

Friday, August 3, 2007

This is a very big day as it contains the Employment Situation Report including

8:30a.m. July Nonfarm Payrolls.. Previous: +132K.

8:30a.m. July Unemployment Rate. Previous: +4.5%.

8:30a.m. July Hourly Earnings.. Previous: +0.3%.

8:30a.m. July Average Workweek.. Previous: +33.9 hours.

10:00a.m. July ISM Non-Manufacturing Business Index.

Steve Boxmeyer [612] 799 – 6858

steve@LendWithIntegrity.com

Rates were a small bit lower for the most part today’s morning. The 10-year Treasury hovered around -.013% with the rate at 4.715%. The benchmark 10-year Treasury followed the stock and bond market from that point on. As stocks raised some, money moved out of bonds and into stocks. The 10-year Treasury closed +.016% with the rate at 4.804%.

There was no economic data out today.

This blog’s newest feature is the BoxGuess. The BoxGuess is a short-term technique to see if the range of expectations will be above or below the actual. The methodology is a secret and will not be made public.

Warning: The BoxGuess is theoretical at best. The author is using this blog to test the effectiveness of the BoxGuess. You can do the same. If you use this blog to test the effectiveness of the BoxGuess you do so at your own risk.

SHORT-TERM OUTLOOK [30 July 2007]

There was a trading range around the 5.100% level on the 10-year Treasury. The floor was around the psychological 5.000%. The ceiling was just above the Fed Funds rate at 5.250%. The recent high occurred on 12 June at 5.297%. That trading range was tested on 18 July 2007. The Trading Range was broken on 20 July with the 10-year Treasury closing -.076% with the rate at 4.952%.

A new trading range has emerged! We broke through the old won on 20 July and we seem to be heading towards a new floor. It is this blogs guess that the floor will be established around the 4.750% level.

That floor has been tested for the last few days. So far it has not broken through. If that floor is not broken in the next week it will take a major event to smash it.

This week may produce such an event, even though this week could establish a floor without any important numbers out.

Tuesday has a plethora of items with the potential to move the market. The market opens with the combination of Personal Income and Personal Spending. A portion of the spending half of this report is the Personal Consumption Expenditure (PCE). This is one of the most important indicators of inflation. Most important, it is the inflation gauge that the FED uses most. It is only forecast by a few analysts, but their guess is for a low0.1% to 0.2%.

Personal Income is forecast to be a high +0.5% to +0.6%. Spending is forecast to be a lower +0.1% to +0.2%. That would be good if Income were that much higher than Spending.

The quarterly Employment Cost Index is very important to bonds. It is predicted to be +0.9% to +1.0%.

Chicago PMI is anticipated to be 58.0 to 59.5.

Construction Spending is anticipated at -0.1% to +0.3%.

Consumer Confidence is looking for a 105 to 109 reading.

All of these are due by 09:00cdt {14:00gmt}. So we should have a busy first few hours.

Wednesday, August 1, 2007

7:00a.m. MBA Mortgage Refinancing Index. Previous: -1.4%.

7:30a.m. July Challenger Layoffs. Previous: -21.6%.

8:15a.m. Non-Farm Payrolls Forecast. Previous: +132K.

9:00a.m. Tsy Refunding Announcement.

10:00a.m. June Pending Home Sales. Previous: -3.5%.

10:00a.m. July ISM Manufacturing Business Index.. Previous: 56.0.

Thursday, August 2, 2007

8:30a.m. Initial Jobless Claims.. Previous: -2K.

10:00 a.m. DJ-BTMU Business Barometer. Previous: -1.1%.

10:00a.m. June Factory Orders. Previous: -0.5%.

Friday, August 3, 2007

This is a very big day as it contains the Employment Situation Report including

8:30a.m. July Nonfarm Payrolls.. Previous: +132K.

8:30a.m. July Unemployment Rate. Previous: +4.5%.

8:30a.m. July Hourly Earnings.. Previous: +0.3%.

8:30a.m. July Average Workweek.. Previous: +33.9 hours.

10:00a.m. July ISM Non-Manufacturing Business Index.

Steve Boxmeyer [612] 799 – 6858

steve@LendWithIntegrity.com

This was the first read of last month’s GDP and the attached Chain Deflator. GDP was anticipated to be +3.2% to +3.6%. The Commerce Department reported 1^st quarter Gross Domestic Product at 3.4. No surprise to the BoxGuess or analysts.

Attached to the Commerce Departments report is a measure of inflation called the Chain Deflator is not as widely watched by analysts, but it is by the bond market. If it were to come in different than the 3.4% to 3.6% range of predictions, the bond market will respond accordingly. It was lower at 2.7% and the bond market opened lower with the 10-year Treasury at -.026% with the rate at 4.751%.

Apparently that was too close to what we thought may be the new floor at 4.750%. Shortly after the 10-year Treasury reversed course and was up as high as +.037% with the rate at 4.814%. Traders moved in and took their profits

At 09:00cdt {14:00gmt} the U of Mich. Consumer Sentiment Report was published. It was estimated at 91.0 to 92.4, but came in lower at 90.4. This did not seem to impact rates.

For the rest of the day the bond market traded along with the stock market. The 10year Treasury closed fairly flat at 4.788% +.011%.

This blog’s newest feature is the BoxGuess. The BoxGuess is a short-term technique to see if the range of expectations will be above or below the actual. The methodology is a secret and will not be made public.

Warning: The BoxGuess is theoretical at best. The author is using this blog to test the effectiveness of the BoxGuess. You can do the same. If you use this blog to test the effectiveness of the BoxGuess you do so at your own risk.

Steve Boxmeyer [612] 799 – 6858

steve@LendWithIntegrity.com

Rates are improving today based on some of the economic data, as well as in response to weakness in the equity markets.

Price on bonds rose at the opening, moving rates lower initially in responce to a lower than predicted Durable Goods Orders. Estimates were for a 1.5% to 2.5% reading. There was only one estimating the 1.5%, the remainder were looking for a 1.7 to 2.5%. There was a 1.4% growth rate in big ticket items like big screen televisions and Boeing 787s.

This caused the 10-year treasury's rate to drift lower -.067% to 4.837% within a half an hour after the Durable Goods Orders release.

The bond market ignored the weekly Initial Jobless Claims report. The Labor Department reported that 301,000 workers filed for first time unemployment insurance last week. That was below the forecast 310k to 312k. As an inverse indicator this should have rates to go up. There was no evidence of that so it clearly was overshadowed by Durable Goods orders.

It appears that the bond market also ignored the lower than predicted New Home Sales. Economists were looking for a 890k to 900k reading. Only 834k newly constructed homes were sold in June. Bonds remained mostly flat in light of this number.

Bonds also, and typically, ignored the Help-wanted Index. There were only two expectations, and both were looking for a match of last month’s 27.0. It was at 26.0 this morning. Again, bonds remained mostly flat in light of this number.

What was clear; after 10:00cdt {15:00gmt}, is the bond market followed the stock market’s cue.  The popular Dow Jones Industrial Average has fallen -386.04 to 13,399.03 in mid-afternoon.  The more accurate S&P 500 is at 1469.63 which is -48.46 popints lower.
Most analysts are crediting the New Home Sales item that the bond market ignored. Stock investors sold shares and moved the money over to bonds. This additional demand caused the price on bonds to rise, and rates to drop.

Since that time, the 10-year Treasury has moved to 4.783%, which is -1.21% lower than yesterday’s close.

This blog’s newest feature is the BoxGuess. The BoxGuess did not work on any item today.

The BoxGuess is a short-term technique to see if the range of expectations will be above or below the actual. The methodology is a secret and will not be made public.

Warning: The BoxGuess is theoretical at best. The author is using this blog to test the effectiveness of the BoxGuess. You can do the same. If you use this blog to to test the effectiveness of the BOXguess you do so at your own risk.

SHORT-TERM OUTLOOK [26 July 2007]

A new trading range has emerged! We broke through the old won on 20 July and we seem to be heading towards a new floor. It is this blogs guess that the floor will be established around the 4.750% level. We will find out soon since we are approaching that level today. A new ceiling will have to establish itself after a floor is determined

There was a trading range around the 5.100% level on the 10-year Treasury. The floor was around the psychological 5.000%. The ceiling was just above the Fed Funds rate at 5.250%. The recent high occurred on 12 June at 5.297%. That trading range was tested on 18 July 2007. The Trading Range was broken on 20 July with the 10-year Treasury closing -.076% with the rate at 4.952%.

Unlike last week, this Friday has some valuable numbers out.

This will be the first read of last month’s GDP and the attached Chain Deflator. GDP is anticipated to be +3.2% to +3.6%.

The attached measure of inflation called the Chain Deflator is not as widely watched by analysts, but it is by the bond market. If it comes in different than the 3.4% to 3.6% range of predictions, the bond market will respond accordingly.

The U of Mich. Consumer Sentiment Report is also published. It is estimated at 91.0 to 92.4.

Steve Boxmeyer [612] 799 – 6858

steve@LendWithIntegrity.com

This blog’s newest feature is the BoxGuess. The BoxGuess is a short-term technique to see if the range of expectations will be above or below the actual. The methodology is a secret and will not be made public.

It is still under development!

Warning: The BoxGuess is theoretical at best. The author is using this blog to test the effectiveness of the BoxGuess. You can do the same. If you use this blog to test the effectiveness of the BoxGuess you do so at your own risk.

For the past few weeks this blog has been testing the BoxGuess technique in complete secret. I worked for today’s Existing Home Sales. It was expected that 5.85m to 5.92m used homes were sold in June. In fact 5.75m were sold. That was lower than the expected. That caused rates to move lower.

The 10-year Treasury opened low prior to Existing Home Sales. The 10-year Treasury opened at 4.929% down -.015% from yesterday’s close. Shortly after that the benchmark bond moved close to yesterday’s close. The price recovered closer to the opening price.

Once the Existing Home Sales number was release the 10-year Treasury moved as low as -.042% with the 4.902%.

Rates also moved lower because of weakness in the stock market.

There has been a small amount of profit taking since then and the 10-year Treasury is at 4.911 which is -.033% lower than Tuesday’s close.

The MBA Purchase Application Index was lower than last week at 424.2. Last week it was at 446.5, with the 4-week moving average at 441.65. The 4-week moving average is significant, and was only slightly lower this week at 440.48. It is unlikely that bonds were affected by this item.

SHORT-TERM OUTLOOK [23 July 2007]

On Thursday the Durable Goods Orders is forecast to be 1.5 to 2.5 which can impact rates. The BoxGuess indicates it may come in above the forecast amount.  That may not be good for rates.

The BoxGuess indicates that the other two itmes; Jobless Claims and New home Sales will both be at the high end of the expected results, but probably not enough to influence rates.

The weekly Initial Jobless Claims if expected to be 310k to 311k.

New Home Sales are predicted to be 890k to 900. It will probably come in just at the high end.

Unlike last week, this Friday has some valuable numbers out. The first read of last month’s GDP and the attached Chain Deflator. The U of Mich. Consumer Sentiment Report is also published.

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

The 10-year Treasury traded flat but just below yesterday’s close for most of the day. About one hour before closing the 10-year Treasury closed down -.020% with the rate closing at 4.944%.

Last week’s UBS Store Sale Index surprised the bond market by showing some strength in retail sales. This week’s report was -0.2% in weekly analysis and 3.0% over the same week last year. It is possible that that return to a lower reading moved rates a little lower at the opening.

The Redbook Retail Survey was also a bit lower at 3.0%

At 09:00 the State Street Investor Survey was reported at 87.0. That was considerably lower than 97.2. This caused the DJIA and the S&P 500 to drop for the day.

Money flowing out of the stock market found its way into the bond market which was one of the primary rate movers today.

SHORT-TERM OUTLOOK [23 July 2007]

Wednesday is the first day of the week an important item is released; Existing Home Sales. Existing Home Sales are expected to be 5.85m to 5.97m. There are some sings that the actual number will be lower. That would be good for rates.

The MBA Purchase Application Index is published at the markets opening. There are no estimates for this, but it can move the bond market on occasion.

The FED’s beige book is out at 13:00cdt {1:00pm, 18:00gmt}. It is rare that this will affect rates, but when it does it moves rates hard.

Thursday does have the Durable Goods Orders which can impact rates. The New Home Sales number is published. The weekly Initial Jobless claims may move rate the way it did last week.

Unlike last week, this Friday has some valuable numbers out. The first read of last month’s GDP and the attached Chain Deflator. The U of Mich. Consumer Sentiment Report is also published.

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

The price of Treasuries fell in response to foreign events, technical factors and a stronger than predicted domestic job market.

A rebound in the prices of European and Asian stocks, and a response to strength in emerging-market bond markets, is causing some selling of US bonds. This overseas strength suggested domestic and foreign investors are reducing their demand for the safety of US government debt.

Bonds also moved lower in price due to technical factors. As bonds tested the trading floor yesterday (see short-term Outlook), some traders took profits overnight and the opening today.

Traders and investors also responded to an apparently stronger than expected labor market. First-time claims for jobless benefits unexpectedly fell last week to the lowest in two months, a sign that the U.S. labor market remains resilient. The weekly Initial Jobless Claims was predicted to be 310k to 315k. The Labor department reported that 301,000 employees filed for first-time unemployment insurance. As an inverse indicator, a number below expectations indicates a stronger sector of the economy. Good for the economy = bad for rates.

The rate on the 10-year Treasury was 5.047% or, +.037% shortly after the opening.

The bond market had some response to two economic items released in mid-morning. The first, the Leading Economic Indicators was below the anticipated +0.1% to -0.1%. The LEI was -0.3%.

Analysts were looking for the Philadelphia Fed Index to be 10.0 to 15.0. The Philly FED reported its index at 9.2.

The combination of those two items brought the rate on the 10-year Treasury a bit lower. The 10-year Treasury is +.027% with the yield at 5.037%.

There has been little action in the bond market in late morning and early afternoon trading. But, bare in mind, FED Chair Bernanke is in front of the Senate today. A sneeze may impact rates.

SHORT-TERM OUTLOOK [19 July 2007]

A trading range has emerged around the 5.100% level on the 10-year Treasury. The floor is around the psychological 5.000%. The ceiling looks as if it is just above the Fed Funds rate at 5.250%. The recent high occurred on 12 June at 5.297%. The low around 5.040% has been tested on a few occasions, most recently today.

That trading range was tested yesterday on 18 July 2007. At one point the 10-year Treasury was at a low of 4.991%. Treasuries gained yesterday after Federal Reserve Chairman Ben S. Bernanke predicted in congressional testimony that inflation will recede and said housing market weakness may slow the world's largest economy

There is no significant data on Friday.

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

All in all it was a good day for interest rates. Only one item may have spooked the bond market; aggregate CPI. Total CPI was forecast to be +0.1% but was reported at +0.2%.

Core CPI was at the predicted +0.2%.

Housing Starts were predicted to be 1450k to 1460k but were higher at 1467k. That should have caused rates to skyrocket as it shows strength in the economies weakest sector. It may have been tempered some by building permits, which were a low 1406k. Building Permits are not as valuable as starts.

The market thankfully ignored the numbers and concentrated instead on sub-prime mortgage concerns and the testimony of FED Chair Ben Bernanke.

Prior to Mr. Bernanke’s speech the 10-year Treasury was -.016 with the rate at 5.062%.

"Overall, the U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy's underlying trend," Mr. Bernanke said

Economic growth should pick up despite the continued housing drag, Mr. Bernanke added in testimony before Congress, and against that backdrop inflation has remained the "predominant" policy risk, he said, suggesting that the likeliest scenario remains a lengthy continuation of the Fed's year-long pause in interest rates.

But Mr. Bernanke warned that possible declines in the economy's underlying rate of productivity may keep a lid on growth. Indeed, the Fed lowered its 2008 central tendency growth domestic product growth forecast to between 2.5% and 2.75% from its February forecast of between 2.75% and 3%. It also lowered its 2007 GDP forecast due to the weak housing sector.

Bernanke, in prepared testimony to the House Financial Services Committee, said that core inflation "should edge a bit lower, on net, over the remainder of this year and next year."

"If energy prices level off as currently anticipated, overall inflation should slow to a pace close to that of core inflation in coming quarters

Mr. Bernanke called the Fed's expectation for 2008 GDP growth "close to the economy's underlying trend," suggesting that the economy isn't as able to grow rapidly without inflation as it was in the past. The economy's non-inflationary potential was once thought to be above 3%.

The Sub-prime mortgage market is also causing concern to the bond traders. Two hedge funds that made big bets in the subprime mortgage market are worth virtually nothing, according to a letter the investment bank sent to clients. Fed Chairman Ben Bernanke told Congress that the situation would likely get worse before getting better

After that speech by the FED Chair, and the analysts announced continued concern about the sub-prime mortgage market, the 10-year touched and tested the trading bottom of 5.000%. The low for the day was at 4.991% which was -.087%.

There was some recovery and the 10-year Treasury closed +.068% at 5.010%.

There was an item that did not impact rates, but they did point towards this morning’s increase in Housing Starts. The MBA Purchase Application Index held steady at 446.5 in its weekly number. The 4-week moving average is at 441.65.

SHORT-TERM OUTLOOK [16 July 2007]

Thursday starts out quiet at the morning opening with the weekly Initial Jobless Claims, the Leading Economic Indicators, and Philadelphia Fed Index.

The activity may pick up in mid-morning as FED Chair Ben Bernanke continues his testimony in Washington D.C.

The activity in the afternoon will most likely pick up with the release of the FOMC Minutes. The FOMC Minutes are read closely by bond and stock analysts to know exactly where the bond market is moving.

There is no significant data on Friday.

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

It is important to encourage the Democratic Party’s efforts to wage tonight’s [17 July 2007] theatrics to force debate on the war in Iraq. It is vital for the cause of the terrorists that we leave Iraq. Al Qaeda needs the oil money.

That money will allow the terrorists to defeat the Democratic Party’s real enemy; George W. Bush. For I am convinced that liberals do not hate G. W. Bush because they oppose the war, they oppose the war because they hate G. W. Bush.

Of course to defeat G.W Bush, the Democratic Party will have to repeat the mistakes of Viet Nam. But that’s ok; it has been a long time since the world has witnessed anything like Pol Pot’s killing fields. Then again that can be blamed on G. W. Bush. Like Viet Nam, the media will not question who really caused the genocide.

To defeat G.W Bush, the Democratic Party will have to take the funds away from the Soldiers, Sailors and Marines. These are the very same Soldiers, Sailors and Marines that the Senators voted to send to Iraq.

To defeat G.W Bush, the Democratic Party will have to make a decision before the September report.

To defeat G.W Bush, the Democratic Party will have to twist, ignore and distort evidence.

To defeat G.W Bush, the Democratic Party will have to give the terrorists the biggest victory ever given. They will give the terrorists all the oil funding that enemies of civilization ever wanted. They will give the terrorists a nation upon which they can base their operations.

This will of course encourage the terrorists. But that is also o.k. After all, the enemy of my enemy is my friend. If, the enemy of the Democratic Party is G. W Bush; and if the enemy of the terrorists is G. W. Bush; who is the friend of the Democratic Party?

The most important today was the Producer Price Index (PPI) and the core-PPI, published at the opening bell.

PPI was anticipated to be below last month’s report of +0.9%, with expectations of +0.1% to +0.2%. In fact it was far below that number and prices even went down -0.2%.

The bond market ignored that number, as it usually does and concentrated on core-PPI. Core-PPI excludes wholesale food and energy costs and was expected to match May’s number at +0.2% across the board. The bond market was surprised to a degree with a +0.3% increase. That caused the 10-year Treasury to open at 5.055% or, +.014% above Monday’s close.

In mid-morning the very important Industrial Report which includes Production and Capacity.

Production measures how much goods are coming out of the nations factories, mines etc. The forecast was for +0.3% to +0.6%. Our factories increased production at the high end of predictions at +0.5%. As an inverse number, this could have been good for rates had it been higher.

Industrial Capacity is not an inverse number. It measure what percent of the factories, mines, forests etc. are being used. Anything above 80% is seen as inflationary since new factories need to be built, which means the more dollars chasing the same supply. This blog thought that Capacity may have given rates a bad day if this is higher than the 81.5 to 81.6 predicted. Turned out it was a bit higher than predicted, at 81.7% which

Net Foreign Purchase was out fifteen minutes before the Industrial Report, but it is seen as a low importance indicator and did not affect rates. $126.1B came from foreign investors into the US.

The UBS Store Sales Index and Redbook Survey’s were out in early morning, but are seldom noticed by traders or bond investors. Both indicate a reversal in retail sales and may be noticed by the bond market in August or September. UBS was +0.3% in week to week, and +3.4% in year to year. Redbook was +0.7% in its week to week survey.

The NAHB’s Housing Index is published at 12:00cdt {17:00gmt} and has impacted rates recently. There are no estimates for this item. It was at 24.0, lower than last month’s 28.0. It may have caused rates to drop some, bringing the 10-Year Treasury to its day low of 5.041%, exactly flat with yesterday’s close.

Also at 12:00Kansas City Federal Reserve Bank President Thomas Hoenig (an FOMC voting member) is scheduled to speak about monetary policy & the U.S. economic outlook, in North Platte, Nebraska. Audience Q&A possible. It seems that he made some bearish comments as the 10-year Treasury reversed from the low at 12:30cdt {17:30gmt}.

The 10-year Treasury closed +.037% with the rate at 5.078%.

SHORT-TERM OUTLOOK [16 July 2007]

Wednesday’s market opening sees the very important Consumer Price Index. CPI is forecast at +0.1% across the board, far below last month’s +0.7%. Core-CPI which excludes food and energy also has across the board estimates at +0.2% above last month’s +0.1%.

Along with the CPI is the recently important Housing Starts & Building Permits numbers. Starts are looking to be 1450k to 1460k. Building Permits are less noticed by investors and are expected to be 1480k to 1500k.

There are some less than important numbers (as far as bonds are concerned) out like the MBA Purchase Application Index.

The biggest news of the day will be FED Chair Ben Bernanke’s semi-annual monetary policy testimony to House Financial Services Committee, in Washington at 09:00cdt {14:00gmt}

Thursday starts to quiet down in the morning with the weekly Initial Jobless Claims, the Leading Economic Indicators, and Philadelphia Fed Index.

Soon after the bond market will pay attention to FED Chair Bernanke’s testimony before the Senate.

The activity in the afternoon picks back up with the release of the FOMC Minutes.

There is no significant data on Friday.

Steve Boxmeyer [612] 799 – 6858

steve@LendWithIntegrity.com