A few months back this blogger wrote that the bond market seemed to be looking for any excuse to buy bonds and thus drive rates lower. It appears that that trend has reversed itself. It seems now that the bond market is looking for any reason to sell, and correspondingly raise rates.

Today was one such example. There were six items published today. Even though most of the economic items came in as expected, three did not. Of the three, two were lower than expected and should have moved rates lower.

Instead, the bond market concentrated on the one item that was worse for rates; the Chicago PMI. The Chi-PMI was predicted to be 54.0 to 54.5, but it was published at 61.7. This look at what purchasing managers are doing indicates an economic turnaround. That would not be good for rates.

The bond market moved rates up shortly after that. The 10-year Treasury moved up to 4.921% shortly after the release of Chi-PMI. That was .043% in nest day trading.

What the bond market ignored proves our concern of a higher rate sentiment. The GDP Report is more important economically speaking. It was predicted to be +0.7% to +0.8%. It was only +0.6%. That should have moved rates lower, and did only a small amount at the market’s opening. The lower GDP moved rates down to 4.866%, which was -.012%.

The other part of the GDP report returned as expected. The Chain-deflator was predicted to be +4.0% and was exactly 4.0%.

The weekly Initial Jobless Claims was forecast to be at 310k to 315k and came in at 310k.

Construction Spending was +0.1% which was in the range of the predictions of +0.1% to -0.2%.

Help-wanted Index is often not paid attention to, which was too bad this month. It was anticipated to be 30.0, but was at 29.0.

It is possible that the low GDP eventually got traders and investors attention. Bonds moderated some in the afternoon. The 10-year Treasury closed +.012% with the yield at 4.890%.

SHORT-TERM OUTLOOK [25 May 2007]

Friday is the publication of the Employment Report, Personal Income and Spending, ISM, and finally, Pending Home Sales. This has got to be one of the busiest days in the last few years.

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

Bonds are seeing a mini rally this morning as bonds react to both a drop in the ADP Employment report, and as stocks respond to weakness in stocks. As prices improve, rates drop.

The Dow Jones Industrial Average is -35.19 or -0.26% at 13486.15. The more important, but less popular S&P 500 is 1514.81 which is -3.30 or -0.22%. The fixed-income market – bonds – are benefiting from uneasiness about stocks in the wake of a big wave of selling overnight in the Shanghai market.

Bonds are also gaining assistance from this morning's ADP Employment Report. There are little to no published predictions on this item. Bond traders and analysts look at its comparison to the previous month, and the predictions for Friday’s Payroll numbers.

In month-to-month comparison the ADP was better. Last month was 64,000. This month the ADP reported 97,000 private sector jobs growth.

Usually there are 15,000 to 20,000 government jobs added. That would bring Payroll Growth at 117,000. That is lower than the current predictions of 120k to 140k for Friday. Bad news for job growth = good news for rates.

That has moved the 10-year Treasury to 4.861% which is -.021% lower than yesterday’s close.

There was no major news in the real estate market this morning. The weekly MBA Purchase Application Index was 427.0 in week-to-week analysis. The 4-week moving average moved little at 433.93. That was down only moderately from last week’s 434.00.

Sales numbers are continuing to show some slowing. UBS Store Sales was 0.0% in week-to-week and 2.9 in year-to-year. Redbook Survey was holding steady at 2.4%.

THIS AFTERNOON

Bonds most likely are being influenced by this afternoon’s release of the FOMC Minutes at 13:00cdt {18:00gmt}. The minutes will be closely watched for clues as to the direction the FED is taking.  We will post later today as to how the market has reacted.

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

There has been little movement in rates either direction this morning. The 10-year Treasury is +.011% with the rate at 4.872%. It has been trending upward all morning.

Consumer Confidence was expected to be 103.5 to 105.0. It surprised the bond market by coming in much higher than expectations and last month’s 104.0. The Conference Board reported Consumer Confidence at 108.0.

Normally this would have move rates much higher than this morning’s amount. But, this is not a normal week. MarketWatch has declared this to be “One of the busiest weeks of the year for economic data, will probably be on of the most confusing as well.”

SHORT-TERM OUTLOOK [25 May 2007]

This week will be busy, especially Wednesday Thursday and Friday. According to Rex Nutting of MarketWatch, “The flood of data in the coming week will probably point to weaker growth in the first quarter; stronger hiring and manufacturing output in may as well as more bad news on home prices.”

The market will be closed on Monday. Tuesday will start out with the Consumer Confidence report.

Wednesday presents us with the FOMC minutes from the last meeting. With most of the last week’s activity centered on FED officials’ comments, the Minutes will garner more attention than usual. The market will move hard one way or the other.

Once the market absorbs the FOMC Minutes it will look toward the GDP and attached Chain Deflator Report on Thursday. Add to that the volatile Chicago PMI Thursday will be busy.

Finally, Friday is the publication of the Employment Report, Personal Income and Spending, ISM, and finally, Pending Home Sales. This has got to be one of the busiest days in the last few years.

MID-TERM OUTLOOK [26 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.

The results in May were mixed. New Home Sales for April were up, while Existing Home Sales were down. At the same time, the Mortgage Bankers Association Application Index has been moving upward, indicating more people are looking.

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 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...?.

There has been one more Fed meeting on 09 May, and it caused rates to move up a bit. The FED action that has impacted rates more dramatically has been comments by FED officials since the last FOMC meeting. FED officials, most often Jeffrey Lacker have spooked the Bond market and pushed rates up in the last few weeks.

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. Corn is a staple of many foods that we eat. Increases in corn prices will not just impact corn flakes, but pop/soda, beef, and pig, chicken, candy bars, 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.

Even the best estimates of corn based fuel say that it will never replace the need for fossil fuels. At best it can only reduce the demand some. It would be much better for us to reduce our demand on foreign oil and decrease the price at the pump by; 1.) Drilling where we know that there is oil, 2.) Build refineries, 3.) Eat food as food.

Steve Boxmeyer [612] 799 – 6858

steve@LendWithIntegrity.com

YESTERDAY, 24 May 2007

The bond market corrected Thursday’s rate increases in the afternoon. The 10-year Treasury closed flat at -.002% with the yield at 4.855%. Most of the correction was simple bargain shopping.

TODAY 25 May 2007.

The Bond Market will be closing at 13:00cdt {1:00pm, 18:00gmt} in honor of the Memorial Day holiday. A special thank you to all those who have give the ultimate sacrifice so that all of us can remain free.

Rates opened flat with light activity. The first hour and a half into trading the 10-year Treasury was +.006% with the rate at 4.863%.

At 09:00cdt {14:00gmt} the Existing Home Sales Report was released. Economists were expecting a reading of 6.10m to 6.20m. The actual number disappointed all at 5.99m units. That should have moved rates lower, but they barely budged. The 10-year treasury is -.004% with the rate at 4.855%.

Rates should have dropped hard in response to this. It is possible that the sentiment of traders has changed towards higher rates. At the same time, it is possible that today’s light volume hides real sentiment.

SHORT-TERM OUTLOOK [25 May 2007]

Next week will be busy, especially Wednesday Thursday and Friday. The market will be closed on Monday. Tuesday will start out with the Consumer Confidence report.

Wednesday presents us with the FOMC minutes from the last meeting. With most of the last week’s activity centered on FED officials’ comments, the Minutes will garner more attention than usual. The market will move hard one way or the other.

Once the market absorbs the FOMC Minutes it will look toward the GDP and attached Chain Deflator Report on Thursday. Add to that the volatile Chicago PMI Thursday will be busy.

Finally, Friday is the publication of the Employment Report.

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

Yesterday, 23 May 2007

Bonds continued their sell off on Wednesday afternoon as Richmond Fed Gov. Jeff Lacker continued to express his concerns about inflation on Wednesday.

Kevin Giddis of Morgan Keegan explained it this way to MarketWatch, “More and more Fed officials are saying that the FED needs to keep the funds rate the same and inflation must be the priority fight for the FOMC. The net result is panic selling and a lot of head scratching.”

The 10-year Treasury closed +.028% at 4.859%.

TODAY 24 May 2007

We are seeing more of the same in the bond market. The 10-year Treasury is +.028% to 4.887% in rate.

The bond market is responding to a better than expected New Home Sales Report. The market was expecting the 10:00 release to be 850k to 865k units sold. The Department of Commerce reported 981k units were sold.

The other two major items did not have a major impact on rates. The Durable Goods Orders was below the expected at 0.0% to +1.2%. The majority were looking for a +0.7% to +1.2%, only one source was looking for the 0.0%. It came in at +.6%

The weekly Initial Jobless Claims were in the anticipated 300k to 315k. The Labor department reported 311k workers filed for first time unemployment insurance.

Gasoline inventories were very low yesterday. The price at the pump is continuing to respond. The NYMEX Robb Gasoline Index has the price at +3.76 at 234.80.

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

There is little movement in the bond market today. There is little data out today, so, in all likelihood, the bond market is simply taking a breather from yesterday’s sell off (see yesterday’s post). The 10-year Treasury is +.014% with the rate at 4.845%.

In good news, the MBA Purchase Application moved higher. The weekly reading was 438.1. What was very important is the 4-week moving average was up to 434.0. That is the highest in over a year. That means we MAY be turning the tide on the housing bubble.

SHORT-TERM OUTLOOK [23 May 2007]

Both of these speeches could have an impact on rates:

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

Rates closed at the highest level in three and a half months. This was based on diminishing hopes that the FED will lower the short-term rates anytime soon.

There were some very light data, and it is doubtful that any of the items impacted rates at all. Most of them indicated some slowing. None had any expectations, it is not possible that any surprised the bond market.

Two weekly sales numbers were UBS Store Sales which was -1.5% in week to week comparison, and +1.9% in year to year. That makes it appear that we may have lower retail sales numbers next time they come out.  Redbook was +2.0 verses last weeks +2.5.

Two indicators look as if the business sector is improving. The State Street Investors Survey was 9.9 verses last months 9.7. The Richmond FED survey was -10.0 instead of last month’s -11.0.

Finally, the ABC/Washington Post Consumer Confidence Survey lowered some to -9 from -7.

Given that most of these less than important items showed a slower economy one must question why the 10-year Treasury closed +.043% with the rate at 4.831%, the highest since 02 February. Prices, which move in opposite direction from rates were -11/32 to 97-13/32.

The driver for rates were comments by Richmond Fed President Jeffrey Lacker. Mr. Lacker said that inflation remains his tom concern. He dismissed much of the data suggesting inflation is moderating.

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

FRIDAY, 18 May 2007

We were unable to post on our blogs on Friday. That did not stop the market from moving dramatically. The 10-year Treasury closed at 4.804% which was +.048% from Thursday’s close. Rates were driven by a higher than anticipated Michigan Consumer Sentiment Report. Economists were expecting the Michigan Consumer Sentiment Report to be 84.8 to 87.0. The University of Michigan reported that the mood of consumers had improved with their index at 88.7.

TODAY

Rates are mostly flat as we start the week out. There is no data out today, only some short term treasury auctions. The 10-year Treasury is -.006% with the yield at 4.798%.

MID-TERM OUTLOOK [14 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

The bond market closed with rates at a one month high. The rate on the 10-year Treasury closed at 4.756% with the rate at+.048%. Rates were driven by two economic items and some comments by FED chair Ben Bernanke.

Federal Reserve Chair Ben Bernanke said Thursday that the slowdown in the housing market probably has further to run, but it won't have a significant impact on the rest of the economy. "We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system," Bernanke said at a conference on bank structure at the Chicago Federal Reserve Bank.

This is a double whammy for most readers of this blog. First it means we may still have some slowing in the housing market. Second, it indicates that the bond market will ignore the weakest sector of the economy. That will not be good for rates.

The market opened with a lower than anticipated weekly Initial Jobless Claims. Economists were expecting 310k to 315k report by the labor department. This is an inverse indicator. A lower number than expected is good for the economy. Good for the economy = bad for rates. Today was a case in point. 293k workers filed for first time unemployment insurance.

Many analysts were also crediting the Philadelphia Fed Survey. The Federal Reserve Bank of Philadelphia said its index of manufacturing sentiment rose to 4.2 from 0.2 in April and March. It's the highest reading since January. Readings over zero indicate expansion. Some economists were expecting the index to rise slightly from 1.0 to 3.0. A few economists hit the number dead on at 8.2 to 8.5.

We are not of the belief that the Philadelphia Fed had much of an impact on rates. The 10-year had pretty much settled at its current level by the time of its release at 11:00cdt {16:00gmt}.

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

Rates are flat this morning as the market responds to mixed messages in the economic data. The 10-year Treasury is -.008% which moved the rate to 4.704%. If the benchmark bond stays above the 4.700% or 4.750% marks for long it will become the new floor. Hopefully the market will move rates lower today.

The market opened with the home construction report. 1528k Housing Starts were above the 1475k to 1500k expectations. That should have driven rates up. But the attached forward looking Building Permits were 1429. That was far below the 1520k to 1530k.

The weekly Mortgage Bankers Association Purchase Application Index halted the growing trend it has seen the last 5 weeks. Last week it was 438.3. It was just below that level this week at 432.3. The more important 4-week moving average is still trending upward to 427.23. It is hard to say how much attention the bond market gives this item.

The combination of housing data caused the 10-year Treasury note to open .022% lower than yesterday’s close. The Production report reversed that trend.

Productivity was +0.7%, higher than the predicted +0.1% to +0.3%. Capacity was at the high end of expectations but appears to have caught the bond market’s attention. It was 81.6% which was above the expected 81.4 % to 81.6%

Tomorrow will be posted later today.

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

The price on treasuries fell today for two basic reasons. In part, rates were driven by the CPI. Mostly rates were driven by a sell off bonds in the European market.  European government bond yields were at five- year highs after stronger- than-expected growth reports

"We're being led by the European markets, no question about it,'' said Andrew Brenner, co-head of structured products and emerging markets in New York at Man Securities Inc., a brokerage and trading firm.

"When one market gets hit as severely as the European bond market, they're going to sell similar products in other markets,'' Brenner said, referring to bond investors.

The 10-year Treasury closed +.022% with the rate at 4.712%. At one point the 10-year Treasury was as high as 4.726% which was +.036% over Monday’s closing price.

Most of the day’s economic data was at or slightly below expectations. The CPI was the morning’s most important item. Aggregate CPI was reported at +0.4% which was just below the anticipated +0.5% to +0.6%. The more important core-CPI was at the expected +0.2%. One group estimated core-CPI to be +0.3%.

According to some analysts the ‘surprise’ in aggregate CPI was not strong enough to bring the FED to the side of lowering rates. “There's this consensus developing around the notion that the Fed is on hold indefinitely,'' said David Coard, head of fixed-income trading in New York at Williams Capital Group. “Some people had thought the Fed would ease before the end of the year, maybe they've thrown in the towel.''

The NY Empire Index was much higher than last month’s 3.8 reading which did surprise some analysts. The 8.0 reading was in the line of expectations of 8.0 to 8.5. It is hard to gauge how much the NY Empire Index influenced rates.

$67.6 billion of foreign funds were pumped into the US economy. That was higher than last months $58.5B. This should have lowered rates. The bond market ignored the data.

Another item ignored by the bond market was the National Home Builders Association Housing Market Index. This measure of home builder’s confidence fell from last months 33.0 to 30.0

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

The market has no economic data to respond to this morning and the bond market is treating it with an expected yawn. The 10-year Treasury is +.006% wit the yield at 4.670%.

As all know, energy prices are on the rise. The NYMEX Crude is +.46 with the price at $62.83/bbl. The NYMEX Robb gasoline price is 235.58 which is +.37 in day-to-day trading.

The Crude price is not what has been moving prices at the pump. To put it simple, and realistically, Crude prices are the raw materials. The Robb Gasoline is the price of the finished good out of the factory. The problem in the US is we have not built a new factory (refinery) in 30 years. The price of the raw material is becoming less important.

SHORT-TERM OUTLOOK [14 May 2007]

This week will be on average one.

There is no significcant data on Monday. Tuesday is the most important day with the Counsumer Price Report(CPI), and the NY Empire Index. Wednesday is almost as important, but may even be more volatile. The Production Report; which includes both Productivity and Capacity, will be released and the Housing report will be out. Thursday’s Philadelphia FED Index is moderately important. Friday has the somewhat volatile Michigan Sentiment.

MID-TERM OUTLOOK [04 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

Prices on bonds reversed direction in mid-day trading as a response to funds flowing into an active stock market. Prices were higher at the opening, making the rate, which always moves in the opposite direction from rates. The 10-year Treasury was -.018% to 4.630% within the first ten minutes of trading.

As money moved from bonds to equities the price on the bonds fell. That is true on any commodity. As less money (demand) chases the same amount of any given commodity (supply) the price of that item goes down. In the case of bonds the price going down causes rates to go up. The 10-year Treasury is currently +.026% with the rate at 4.674%.

The lower prices this morning were due to this morning’s economic data coming in at or under the expectations.

Retail Sales were anticipated to be +0.3% to +0.6%. This was probably the biggest surprise by coming in at -0.2%. The more important core-Retail Sales was also below the expected +0.4% to +0.6%. When Retail Sales exclude auto sales the core amount was 0.0%.

Prices at the wholesale level also impressed bonds. PPI was +0.7’ which was in the range of the +0.5% to +0.7%. Once again the core-PPI was below forecast at 0.0%. The market was looking for core-PPI to be +0.2%.

Odd thing is, it analysts are saying it is this good inflation news drive stocks. Stock traders are of the belief that less inflation will be good for interest rates, but there activity is bad for rates.

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

The 10-year Treasury is only slightly lower this morning; but that is not as low as it could have been. The 10-year Treasury is -.010% at 4.658%.

To begin with the market’s opening saw the U.S. Balance of Trade grew the widest since September 2005. That raised speculation that first-quarter economic growth will be revised lower. If the quarterly gross domestic product is lower, there will be increased pressure on the FED to cut interest rates. The U.S. trade deficit widened by 10.4% in March to $63.9 billion, marking the largest trade gap since last September. This was higher than the forecast -$59.5B to -$60.1B.

Import Prices were also lower than the expected +0.9% with prices +0.2%

The weekly Initial Jobless Claims is most likely the moderating factor. It was predicted to be higher than last weeks 305,000. Predictions ranged from 315K to 320K. The Labor Department Reported 297,000 workers filed for unemployment insurance for the first time.

We have ye to see the treasury Budget, or a FED governor speech. We will post on those as well as tomorrow’s events this afternoon.

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

The Federal Reserve’ Open Market Committee meeting did as all expected and left the very short term Fed Funds Rates – the overnight bank to bank loan rate - alone. As always, it was the Statement that impacted rates. The 10-year Treasury closed +.034% making the rate 4.668%. The price, which always moves in opposite direction of rates closed -14/32 to 98 22/32.

The FOMC Statement emphasized the FED’s continued concern about inflation. In the words of the FED, "Core inflation remains somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures."

The FOMC Statement reaffirmed previous statements that the economy is slowing. "Economic growth slowed in the first part of this year and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to expand at a moderate pace over coming quarters."

The statement closed with its usual wait and see attitude for future directions. "In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."

The bond market and its analysts believe it will be a long time before we see the FED lowering the Fed Funds rates. Mitchell Stapley, of the Michigan based Fifth Third Asset Management said, “Until we really see those indicators hit their targets, that is 2 percent or lower on core-PCE, and the unemployment rate ratcheting up, these guys are not going to lower rates,''

Interest-rate futures prices show the likelihood of a quarter-percentage point cut in the Fed's overnight lending rate between banks at its August meeting fell to 12 percent, from 17 percent before the announcement. Traders had priced in a 100 percent certainty of a cut to 5 percent as recently as March 8.

``They basically said the same things: the economy's going to slow, inflation pressures should come down, we're going to remain vigilant on inflation,'' said William Hornbarger, chief fixed-income strategist in St. Louis at A.G. Edwards & Sons Inc. ``We really think it's going to be like this for most of the year, with yields at 4.5 percent to 4.9 percent on the 10-year note.''

TOMORROW, 10 May 2007

At 10:15cdt {15:15gmt} Fed Governor Randall S. Kroszner will speak on The Future of Payments: Challenges and Opportunities At the 2007 Payments Conference, Chicago, Illinois. It is doubtful it will have any affect on the bond market, but a FED speech this close after an FOMC meeting may include commentary of the FED’s decision today.

The market opens with some important items. The Import and Export Price report is one of them. The Import prices are important, but seldom influence the direction of rates. It is anticipated to be +0.9% verses last month’s +0.6%. Export Prices seldom affect rates. There are no predictions.

The weekly Initial Jobless Claims is the only weekly event that can have an impact on the bond market. The economists are expecting 315k to 325k workers to file for first time unemployment insurance. That is higher than last week’s 305k.

Trade balance is important and can occasionally move the price of bonds. It is anticipated to be -$59.5B to -$60.1B

Finally, there is the Treasury Budget. The deficit is predicted to be -$120B to -$150B. It could be lower as receipts into the Treasury were almost 25% higher. That would be great for rates as the US Treasury Department would be competing less for dollars.

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