Rates closed somewhat higher Friday afternoon. There was a moment around 11:45 EDT when it looked as if the Iranian act of war may push rates lower. There was a rumor that situations were heating up and it may have even appeared that military or at least very strong action would have been taken. The rumors proved to be false, but it still caused a large momentary drop in rates. Rater recovered, unfortunately. The 10-year Treasury closed on Friday at 4.648% which was +.016% higher than Thursday’s close.

Friday’s trading gave us some lessons in how the bond market ‘thinks’. When

We say that the market ‘thinks’, we are really referring to the millions of investors and traders that influence rates every day. They ‘think’ about rates and bond prices the same way that voters ‘think’ as a group. Some vote for one candidate, some for the other. Investors and traders buy, sell, hold in or stay out based on their belief of the direction of rates and the economy. Rather than one man, one vote, one dollar, one vote.

In contrast to paranoid belief, here is no one person, agency, or evil corporation setting bond prices and interest rates. Interest rates are a function of an auction. Stock prices, bond prices and yes, even oil prices are set the same way.

That is not to say that the FED Reserve does not influence interest rates. The FED does influence interest rates, and time impacting rates, by setting the very short term FED Funds rates. The FED Funds rates are an overnight loan to banks.

To those who still believe that the FED controls interest rates, kindly explain why long term bond rates reflected in the 10-year Treasury have been below the FED Funds rates for nearly two years.

When interest rate voters are determining interest rates they are looking primarily at one thing, inflation. Inflation eats away at the underlying value of the money invested in the bond. One of the dominant theories of inflation is to watch how the economy is growing. As the theory goes, a hot economy MUST produce inflation. The theory is only partially true. If production of goods and services grows as fast as the economy things are ok.

Investors watch economic data to see how the economy is doing. That is why we report on them every day. Some of the data are forward looking, others are lagging’ they look back in time. Some mix the two. All thinks being equal, a forward looking indicator has more persuasion than a lagging indictor. But all things being equal are a rare event. The MBA Purchase Application Index is forward looking, but if GDP is out o the same day it will overwhelm the MBA Purchase.

They will also be watching critical sectors of the economy. Right now, everyone is most concerned with the housing sector.

Friday gives a living example of how traders and investors think. Personal Income and Spending are lagging indicators. That had a momentary effect on rates. The bond market was waiting for Chicago Purchasing Managers Index. It came out at 09:45 EDT. As a forward looking indicator it had more influence. The bond market did respond some after its release. Unfortunately it responded the wrong way.

Construction Spending rarely surprises the market. It did on Friday, at 09:00 EDT. As a portion of the real estate sector it currently has a big impact on rates.

So, the final question, why didn’t Consumer Sentiment pull rates back down? Economists and to a greater degree, bond investors know that consumers are often swayed by the media. They may be the first to know when the economy is dropping, but they are often the last to know when it recovers. This is especially true when a Republican is President given the main stream media’s 2.2% scenarios.

The 2.2% scenario is something that we commented on quite some time ago. It happened in 1992 and 1993. President Bush #41 and then Governor Bill Clinton were battling for Air Force One. In April of 1992 the 1^st quarter GDP was reported. The media reported it in dire terms as if the world was ending. The word anemic was used.

Flash forward 18 months and the word anemic was dropped. The GDP report was described as ‘a fast clip’. Funny thing was, the GDP grew at the same rate, 2.2%.

Rates were pretty good as we end the 1^st Quarter. But we need to caution that they may not drop much further. That is, unless the 10-year Treasury goes below the 4.500% level for more than 5 trading sessions. That is the next “psychological floor”. The market has toyed with going below that level, but never for more than a few trading sessions.

[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 [28 March 2007]

Friday is the big day for economic events with last month’s employment situation report. Monday does have the ISM report. Wednesday has the ISM Services report. Other than those, it should be a pretty quiet week.

There are still problems on the international situation.

As we posted earlier:

On Friday, the Iranians captured 15 British Sailors and Marines. The Iranian capture of these 15 British was clearly an act of war. Even if the British had briefly been in Iranian water the normal procedure would have been for Iran to question then release them with a stern protest.

It is our opinion that this event has the potential to turn into an international crisis. If it does, the impact on World Stability and peace is obvious. Let’s hope that the Iranian provocation does not escalate. At the same time, this blog is about economics and interest rates and we will examine this event with that in mind.

If the Iranians cause this to escalate the impact at the gas pump will be dramatic. It is possible that gas prices will spike about +$1.00 per gallon. The only silver lining will be the initial impact on rates as money makes a flight to safety. Rates could go as low as 4.000% on the 10-year Treasury. Again this assumes that the situation escalates.

That drop will last only a short time, 2 to 6 weeks. The increase in Energy costs will flow through and spark inflationary fears. Bond holders fear inflation more than they fear WW III.

A similar situation occurred in 2004 and was soon resolved. Still, the Britts (and the world) are growing tired of Iranian obstinacy. That could move this even to the forefront. That would not happen until late in the week.

As of this date, there has been more evidence offered that the Britts were in Iraqi water, and therefore innocent. Even the French – who never shy away from a chance to stab the Anglo-Americans in the back – are taking the side of the Brittish.

Iran is not backing down, neither is the UK. At this time it has not impacted rates. If it had rates would be lower. IT has dramatically affected Energy costs. Crude oil was +1.30 or +2.07% to $64.23/brl.

This could spark inflation fears. We are concerned with the influence that could have on rates.

MID-TERM OUTLOOK [28 March 2007]

There may be a problem for rates for the next quarter. 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.

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.

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

Chicago PMI was far higher than anticipated. Economists were expecting a 49.0 to 50.0 reading. The actual number was far higher at 61.7. It was released at 09:45 EDT {08:45 CDT, 13:45 GMT} and rates moved up at that time.

Construction Spending was also higher than the expected -0.3% to -1.0%. Construction Spending was +0.3%. This also moved the market up. It was released at 10:00 EDT {09:00cdt, 14:00gmt}.

Residential Construction Spending is not noticed often by the bond market, but it is important to our readers. This could be interpreted as a negative for real estate, but it really is good news as it will reduce inventory

Last, the University of Michigan’s Consumer Sentiment Survey was out at 09:00 and was reported at 88.4; which was just a bit lower than the 88.5 to 88.8.

Rates have since turned its direction. The price on U.S. Treasuries rose causing rates to go down as investors take a flight to safety. Bloomberg has reported: “(An) unconfirmed report that U.S. military officers advised American investors to leave Bahrain amid a standoff between the U.K. and Iran.”

Rate on the 10-year Treasury are -.002% to 4.630% We commented on this situation on 27 March and predicted the possibility of this even impacting rates.

There are several reasons why the bond traded the way it did this morning. We will post on that tomorrow, it will be a great learning moment. Be sure to look it up. We will also post on Monday tomorrow afternoon.

[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.]

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

Wednesday afternoon saw a reversal of the morning trading. Rates were trading lower than the previous day most for most of the session. In the last couple of hours they changed course and the 10-year Treasury closed +.0085 with the yield at 4.620%.

FED Chair Ben Bernanke responded to some congressional questions that caused some small concern among bond traders. He said that inflation remains the Fed's "predominant concern". “Overall, the economy appears likely to continue to expand at a moderate pace over coming quarters," Bernanke said. He said he does not see a recession this year.

"Bernanke stuck to his guns on the economy and inflation and in his written testimony does not appear to have deviated from last week's policy statement, leaving yields to float back up to 4.60% on the 10-year," said analysts at research firm Action Economics.

TODAY

Rates are only up a slight amount and have been trading flat most of this mornings trading session. The rate of increase on the 10-year Treasury has fluctuated between +.002% to +.008%. In the market’s opening, and at mid-morning there was a small spike as traders on the two coasts woke up. The spikes were up to 4.638% which was +.018%. This is fortunate as most of the data would have driven rates up higher.

The 10-year Treasury is +.008% at 4.628%

The biggest surprise of the day was the 1^st Quarter final-GDP. Economists were expecting a +2.2% reading. GDP surprised all with a +2.5% growth in the first quarter. By itself, this should have pushed rates up far.

The weekly Initial Jobless claims also should have pushed rates higher as it again came in lower than expected. This is the third weed that has happened. As an inverse indicator a lower than expected number is bad for rates since it is good for the economy. The ‘experts’ were predicting 315k to 320k filings for unemployment insurance. The Labor Department reported only 308,000 did.

It appears that the item that the bond market is paying the greatest attention to is the Chain Deflator. It is a portion of the GDP report, and measures inflation. As a measure of inflation it should not be a surprise that it is being watched closely by bond investors. Analysts were predicting a +1.7% across the board. The Chain Deflator came in as expected at +1.7%. As a measure of inflation, Chain Deflator is probably the day’s most important item for the bond market. That is why rates are flat despite GDP and Jobless number.

At 09:00 the Help Wanted Index was at 31; in line with the 31 to 32 range of forecasts.

Corporate Profits for 4th quarter were at +16.0% annualized. While that sounds high, it is, it is so old, that it never affects rates.

TOMORROW WILL BE A VERY HEAVY DAY…

…in terms of the data out. Since it is such an intense level of data, and because we have no guess on most of the items at this time, we will refrain from trying to guess what will happen. We reserve the right to make statements later today.

Personal Income and Spending are at the opening and do influencer rates on a common basis. Oddly, both are predicted to be +0.3% by all the sources. That makes personal Income much lower than last month’s +1.0%. Last month was a surprise as it came in higher than expected, and did move rates upward. Personal Spending is also predicted lower than last month’s +0.5%.

At 08:45cdt {13:45gmt}, the Chicago Purchasing Managers Index (PMI) is expected to be higher than last month’s 47.9. Expectations range from 49.0 to 50.0.

AT 09:00cdt {14:00zulu} Construction Spending is anticipated to straddle the previous month (-0.8%). Construction Spending anticipated at -0.3% to -1.0%. A very important, but unpredicted portion of Construction Spending is the residential construction portion. It is a detail that will need to be watched.

At the same time Construction Spending is released the University of Michigan produces its revised Consumer Sentiment report. The final number of Consumer Sentiment is less important to bonds than the previous. Analysts are expecting it to be at, or a bit lower at 88.5 to 88.8.

[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.]

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

Rates on bonds have been up slightly all morning, and moved higher after the release of the Consumer Confidence report. At one point the 10-year Treasury was +.031% to 4.618%.

The Conference Board reported that Consumer Confidence was lower than last month, and at the low end of the range of expectations. Economists were looking for Consumer Confidence to come in at 107.0 to 109.0. The actual number was 107.2, and February’s 112.5 was revised down to 111.2.

Normally, this would cause rates to be flat or lower. Not so today. The obvious question, why? We wish we could give you an answer, but we don’t see it in the wires or any other explanation. The details do not justify higher rates. The forward looking portion of the Consumer Confidence was lower than last month.

The only possible explanation we have is traders and investors were guessing that the Consumer Confidence would be even lower than thought. We had the same feeling. If true, the number was lower than the experts, but higher than the investors thought.

At 09:45cdt {14:45gmt} the 10-year Treasury is +.016% with the rate at 4.605%.

TOMORROW, 28 March 2997.

The bond market opens with the Durable Goods Orders. This only has an occasional likelihood of moving rates. The market expects Durable Goods to be +3.0% to +3.7% verses last month’s report of -7.8%. While we think Durable Goods Orders may be higher, we question if there has been that much improvement in the economy to cause people to by washing machines and cars, and for industry to buy 747s. It could be good for rates.

[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.]

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

Fortunately for rates, but not for the real estate industry, New Home Sales came in far lower than anticipated. The market was looking for small increase in February at 980k to 1.000m. This would have been an improvement over January’s 937k. The actual number was 848,000 units. The Department of Commerce also revised downward January’s sales number to 882k.

This is the only major economic event on Monday. There are some Treasury auctions, but they will need to have a big surprise in demand either way to impact rates.

The New Home Sales number reversed the course of rates this morning. The 10-year Treasury is currently -0.036% with the rate at 4.575% [@11:00cdt {16:00gmt}]. The 10-year Treasury was as low as 4.563% which is -.048% from Friday’s close.

TOMORROW, 27 March 2007

Consumer Confidence is a market mover and will be released at 09:00cdt {14:00gmt}. Last month Consumer Confidence was 112.0. It is predicted to be lower for this month at 107.0 to 109.0. These predictions are probably good guesses, if not a bit high. We could have a good day.

[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 [26 March 2007]

This week could become a volatile one. The same holds true for the next few weeks. They could also be a couple of calm weeks. Economists sometimes have a knack for stating the obvious.

The international seen MAY overshadow the economic events of this week. On Friday, the Iranians captured 15 British Sailors and Marines. The Iranian capture of these 15 British was clearly an act of war. Even if the British had briefly been in Iranian water the normal procedure would have been for Iran to question then release them with a stern protest.

It is our opinion that this event has the potential to turn into an international crisis. If it does, the impact on world stability and peace is obvious. Let’s hope that the Iranian provocation does not escalate. At the same time, this blog is about economics and interest rates and we will examine this event with that in mind.

If the Iranians cause this to escalate the impact at the gas pump will be dramatic. It is possible that gas prices will spike about +$1.00 per gallon. The only silver lining will be the initial impact on rates as money makes a flight to safety. Rates could go as low as 4.000% on the 10-year Treasury. Again this assumes that the situation escalates.

That drop will last only a short time, 2 to 6 weeks. The increase in Energy costs will flow through and spark inflationary fears. Bond holders fear inflation more than they fear WW III.

Fortunately, the odds of WW III – or any escalation are low. We will know as the week goes on.  That is why this event only had a moderate influence on rates on the morning of Friday, 23 March 2007 (the 10-year Treasury was down -.02% at the opening). The Iranian event was quickly overwhelmed by a higher than expected Existing Home Sales in mid-Morning.

A similar situation occurred in 2004 and was soon resolved. Still, the Britt’s (and the world) are growing tired of Iranian obstinacies. That could move this even to the forefront. That would not happen until late in the week.

The end of the week could also see some economic activity. With the exception of Monday’s New Home Sales, and Tuesday’s Consumer Confidence, this week’s economic data will not get busy until Thursday, and to a greater degree, Friday. Even these two days are only somewhat busy.

Thursday is the final revision of 4^th quarter GDP and the Chain Deflator. The final revisions of either do not have a habit of moving rates.

Friday does see some important and heavy items. The market does open on Friday with Personal Income and Spending. In mid-morning the Chicago PMI and Construction Spending will share the spotlight.

MID-TERM OUTLOOK [22 March 2007]

Rates have been pretty good as we enter the last month of the 1^st Quarter. But we need to caution that they may not drop much further. That is, unless the 10-year Treasury goes below the 4.500% level for more than 5 trading sessions. That is the next “psychological floor”. The market has toyed with going below that level, but never for more than a few trading sessions.

There may be a problem for rates for the next quarter. 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.

The good news is the bond market’s trading in the last five weeks. It is apparent that bond investors are still of the mind that inflation is whipped, and-or the economy is slowing.

Bond investors and traders seem to grab on and hold any negative economic news. The bond market will still respond to inflationary news. But, they trade at a low level for a longer time when the news is bad for the economy.

The problem is the FED. They are not convinced that inflation is whipped. The commentary from FED official will be of concern for rates. We need to consider that when the FOMC minutes are released on 11 April 2007.

The majority of economists seem to see the FED on hold for the next few months. That could be good given that the bond market has a desire to keep long term rates below the FED-Funds rates.

Stephen Stanley, RBS Greenwich Capital was quoted in the Wall Street Journal, “The tweaks at the margin argue for less risk of a move in either direction. So the Fed is on hold for a while with a slight lean toward hiking, whereas the market has the Fed on hold for most of the year with a slight lean toward an ease late in the year.”

But there is still some concern for inflation. Bear Stearns Economics said in February, “If GDP growth continues above 3%, as we expect, and if core inflation pressures show any sign of creeping higher, this statement leaves the Fed flexibly positioned to raise rates before the middle of the year. If January data on employment and retail sales suggest that the economy continued at an above-trend pace, then Bernanke could adopt a more hawkish tone on Feb. 14 (when he delivers his semiannual testimony on monetary policy and the economy to Congress). Our expectations for the Fed's central tendency forecasts for 2007 are 2¾% to 3% on real GDP growth and 2% to 2¼% on core PCE price inflation.”

Regardless of what the FED does within its FOMC, the bond market will react to changes in inflation and economic growth. Joshua Shapiro, of MFR Inc. has an interesting theory, “Our own view is that unusually warm weather (IN JAN) has played a role in boosting activity…data will cool off as weather patterns (presumably) normalize. However, until this is borne out in the data, the Fed and markets will remain concerned about the effect that an upside growth surprise could have on inflation pressures.” The weather should bear watching.

It is our own view that the economy can still grow without impacting inflation. Energy costs – while still high – do not seem to have caused concern on Wall Street; at least not yet. Wages have grown – except at the lower end of the income scale. That has a way of keeping the lid on the wage-price spiral.

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.

Commentary: Let’s eat food and burn oil.

LONG-TERM OUTLOOK [31 January 2007]

In the long-term, we may see some easing in the FED funds rates in late 2007.

Most economists tend to agree with Richard F. Moody of Mission Residential as do we. “We (Mission Residential) continue to hold to our view that no changes in the Fed funds rate are on tap for the first half of 2007 before what we expect to be below-trend GDP growth will open the door for two rate cuts over 2007's second half, but are increasingly open to the possibility that the FOMC could remain on hold for the remainder of 2007.”

The good news is still in the employment and production fronts. Both will conspire against each other to keep inflation low.

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

We woke up this morning to such an event. The Wall Street Journal reported the following headline from the Associated Press: “LONDON -- Iranian naval vessels seized 15 British sailors(,) Marines who had boarded a ship suspected of smuggling cars in the Persian Gulf off the Iraqi coast on Friday, officials said.

“The British Navy personnel from the frigate HMS Cornwall were "engaged in routine boarding operations of merchant shipping in Iraqi territorial waters," and had completed a ship inspection when they were accosted by Iranian vessels, Britain's Defense Ministry said. The British government has demanded "the immediate and safe return of our people and equipment."

"We are urgently pursuing this matter with the Iranian authorities at the highest level and ... the Iranian ambassador has been summoned to the Foreign Office," the ministry said.

This event briefly impacted rates, and fuel prices. Rates went down as there was a flight to safety. Fuel prices went up some. The 10-year Treasury opened -.020% with the rate to 4.589%.

Crude prices went up some, with the NYMEX +.24 / +.39% to 61.93. Crude oil in New York jumped above $62 a barrel briefly after Iran seized 15 British naval personnel, raising the prospect of conflict in the Middle East.

Bloomberg reported: “The incident occurred in the Persian Gulf at about 10:30 a.m. Iraq time today, the U.K. Ministry of Defense said. Signs that the United Nations Security Council will impose new sanctions on Iran to suspend its nuclear program also bolstered prices. A draft that would freeze the assets of a bank and bar some exports from the country was formally introduced yesterday.

``Any time tension rises in the Persian Gulf you have to be concerned,'' said Tom Bentz, an oil broker with BNP Paribas Inc. in New York. ``Worries that Iran would take oil off the market because of the nuclear dispute have been pushing prices higher for a while now. We are in a world that can't afford to have any supply taken off the market.''

What appears to be surprising is the minimal impact this has had on stocks bonds and commodity markets. This has the potential to increase tensions in the Mid-East. At the same time, there is already much tension there. This exact situation happened previously. Again, in the WSJ, “In June 2004, six British marines and two sailors were seized by Iran in the Shatt al-Arab between Iran and Iraq. They were presented blindfolded on Iranian television and admitted entering Iranian waters illegally, then released unharmed after three days.’

At 09:00 the bond market received its second surprise of the day. Everyone, ourselves included, were expecting the Existing Home Sales number for February to be less than January’s 6.46m. February surprised us by coming in not only above the lower expectations, but above January sales.

Economists were expecting Existing Home Sales to be 6.26m to 6.35m. The National Association of Realtors reported that 6.69m seasonally adjusted homes were sold in February.

Given all the problems that are in the residential real estate market an improvement like this should have shot rates up high. The bond market is balancing this number with events in the Mid-East and keeping rates fairly flat. The 10-year Treasury is +.006% with the rate at 4.593%

SHORT-TERM OUTLOOK [23 March 2007]

Monday morning will see the Census Bureau of the Department of Commerce will follow up Friday’s Existing Home Sales report. The Census Bureau issues the New Home Sales report at 09:00cdt {14:00gmt}. Expectations are not out at this time, but if this is higher than expected it could drive rates up. We must be careful not to assume that New Home Sales will be in the same direction of Existing Home Sales. They are independent numbers.

All events next week will be dependent on the Iran British situation. If it intensifies, all bets are off. That will help rates for a few weeks. But it will not assist the price at the pump.

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

The weekly Initial Jobless Claims was lower than expected and that had an impact on rates. The bond market was also doing a natural response to yesterday’s afternoon rally.

316,000 workers filed for initial unemployment insurance last week. Economists were expecting Initial Jobless Claims to be 320,000 to 325,000. Since this is an inverse indicator it gave weight to the idea that the job market was tightening. That can cause a wage-price inflationary spiral.

Leading Economic Indicators were as expected at -0.5% and did not affect rates. Economists were predicting a -0.3% to -0.6% reading.

The 10-year Treasury is at +.039% with the rate at 4.557%. Rates have traded at this level most of the morning.

TOMORROW, 23 March 2007.

Back on 06 March 2007 we commented on Friday’s Existing Home Sales report. Pending Home Sales were low on 06 March, which means we could have a volatile day if forecasts for tomorrow’s Existing Home Sales were not lower than the previous report. Economists are forecasting a small decline from February’s report of 6.46m units. Economists are anticipating Existing Home Sales to be 6.26m to 6.35m units. That may be an accurate guess.

Rates COULD be flat on Friday.

[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.]

MID-TERM OUTLOOK [22 March 2007]

Rates have been pretty good as we enter the last month of the 1^st Quarter. But we need to caution that they may not drop much further. That is, unless the 10-year Treasury goes below the 4.500% level for more than 5 trading sessions. That is the next “psychological floor”. The market has toyed with going below that level, but never for more than a few trading sessions.

There may be a problem for rates for the next quarter. 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.

The good news is the bond market’s trading in the last five weeks. It is apparent that bond investors are still of the mind that inflation is whipped, and-or the economy is slowing.

Bond investors and traders seem to grab on and hold any negative economic news. The bond market will still respond to inflationary news. But, they trade at a low level for a longer time when the news is bad for the economy.

The problem is the FED. They are not convinced that inflation is whipped. The commentary from FED official will be of concern for rates. We need to consider that when the FOMC minutes are released on 11 April 2007.

The majority of economists seem to see the FED on hold for the next few months. That could be good given that the bond market has a desire to keep long term rates below the FED-Funds rates.

Stephen Stanley, RBS Greenwich Capital was quoted in the Wall Street Journal, “The tweaks at the margin argue for less risk of a move in either direction. So the Fed is on hold for a while with a slight lean toward hiking, whereas the market has the Fed on hold for most of the year with a slight lean toward an ease late in the year.”

But there is still some concern for inflation. Bear Stearns Economics said in February, “If GDP growth continues above 3%, as we expect, and if core inflation pressures show any sign of creeping higher, this statement leaves the Fed flexibly positioned to raise rates before the middle of the year. If January data on employment and retail sales suggest that the economy continued at an above-trend pace, then Bernanke could adopt a more hawkish tone on Feb. 14 (when he delivers his semiannual testimony on monetary policy and the economy to Congress). Our expectations for the Fed's central tendency forecasts for 2007 are 2¾% to 3% on real GDP growth and 2% to 2¼% on core PCE price inflation.”

Regardless of what the FED does within its FOMC, the bond market will react to changes in inflation and economic growth. Joshua Shapiro, of MFR Inc. has an interesting theory, “Our own view is that unusually warm weather (IN JAN) has played a role in boosting activity…data will cool off as weather patterns (presumably) normalize. However, until this is borne out in the data, the Fed and markets will remain concerned about the effect that an upside growth surprise could have on inflation pressures.” The weather should bear watching.

It is our own view that the economy can still grow without impacting inflation. Energy costs – while still high – do not seem to have caused concern on Wall Street; at least not yet. Wages have grown – except at the lower end of the income scale. That has a way of keeping the lid on the wage-price spiral.

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.

Commentary: Let’s eat food and burn oil.

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

Rates reversed their direction after the FOMC released its decision on rates. The FED left the short term Fed Funds rate unchanged as unanimously expected. The summary of the FOMC meeting is what impacted rates.

The bond market ultimately did not respond to what was said, but what was unsaid. The FOMC omitted a crucial clause that was viewed as signaling a tightening bias. In short, they are no longer saying that they are more likely to increase rates, then decrease rates.

The 10-year Treasury initially spiked up as analysts read the FED said its key policy concern "remains the risk that inflation will fail to moderate as expected." At that point the 10-year Treasury went to the days high at 4.591%.

Then as analysts read on they noticed what was conspicuously absent; the bias toward tightening. The 10-year Treasury did a ‘180’ and rates moved lower. The 10-year Treasury closed -.029% moving the rate to 4.518%. That is a .073% intra-day move.

The FOMC statement was short, even for the summary. Here it is in its entirety:

“The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

"Recent indicators have been mixed and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.

"Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.

"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’s reaction is seldom a response to the FED’s rate change.  Today will most likely be that way.  But, when it does react to the rate decision the move is very dramatic. Most often the rate move is in response to the summary of the minutes. FED watchers try to gauge the future of the FOMC’s actions. One can almost time the reading speed of the average analyst. As they read through bearish and bullish comments the bond market moves in a corresponding direction.

There was good news for the Real Estate industry in the morning. The MBA Purchase Application Index has shown some improvement in the last two weeks. The four week moving average has increased in the last four weeks. This morning’s weekly number was 410.6. The 4-week moving average was 407.58, last week was 399.65.

The 10-year Treasury is +.036% with the rate at 4.581% and has traded at that level all morning. 

TOMORROW, 22 March 2007

The data out is of moderately high importance, and we have a small chance of volatility.

The market opens with the release of the weekly Initial Jobless Claims. This is the heaviest of the weekly items and can move rates. It is predicted to be higher than last week with economists thinking that it will be 320k to 325k. This is an inverse indicator; a higher than expected number is good for rates. We are not certain that that will be the case. This has come in lower in the last few weeks and could happen tomorrow. This could cause rates to increase tomorrow.

At 09:00cdt {14:00gmt} the Conference Board publishes the Leading Economic Indicators. Predictions are lower than last month’s +0.1%, at -0.3% to -0.6%. The LEI can move rates on occasion.

[Publisher’s note: With the exception of Saturday & Wednesday, we will publish only one of the outlook sections each day on a rotating basis, none on Friday. SHORT-TERM OUTLOOK (on Monday) attempts to forecast and discuss up to the next 30 days. MID-TERM OUTLOOK (on Tuesday) looks forward from 15 to 90 days, most often 30 to 90 days. The Mid-term has the most accurate predictions, just like the weather. The LONG-TERM OUTLOOK (on Thursday) will extend out the next six months, maybe one year. When we change an outlook section we will embolden the date and heading.]

MID-TERM OUTLOOK [12 March 2007]

Rates have been pretty good as we enter the last month of the 1^st Quarter. But we need to caution that they may not drop much further. That is, unless the 10-year Treasury goes below the 4.500% level for more than 5 trading sessions. That is the next “psychological floor”. The market has toyed with going below that level, but never for more than a few trading sessions.

We are not as optimistic on rates for the next quarter. As homeowners start to see a rebound in housing their confidence will increase. As confidence increases, so will spending. That will bring back inflationary fears.

The good news is the bond market’s trading in the last three weeks. It is apparent that bond investors are still of the mind that inflation is whipped, and-or the economy is slowing.

The majority of economists seem to see the FED on hold for the next few months. That could be good given that the bond market has a desire to keep long term rates below the FED-Funds rates.

Stephen Stanley, RBS Greenwich Capital was quoted in the Wall Street Journal, “The tweaks at the margin argue for less risk of a move in either direction. So the Fed is on hold for a while with a slight lean toward hiking, whereas the market has the Fed on hold for most of the year with a slight lean toward an ease late in the year.”

But there is still some concern for inflation. Bear Stearns Economics said in February, “If GDP growth continues above 3%, as we expect, and if core inflation pressures show any sign of creeping higher, this statement leaves the Fed flexibly positioned to raise rates before the middle of the year. If January data on employment and retail sales suggest that the economy continued at an above-trend pace, then Bernanke could adopt a more hawkish tone on Feb. 14 (when he delivers his semiannual testimony on monetary policy and the economy to Congress). Our expectations for the Fed's central tendency forecasts for 2007 are 2¾% to 3% on real GDP growth and 2% to 2¼% on core PCE price inflation.”

Regardless of what the FED does within its FOMC, the bond market will react to changes in inflation and economic growth. Joshua Shapiro, of MFR Inc. has an interesting theory, “Our own view is that unusually warm weather (IN JAN) has played a role in boosting activity…data will cool off as weather patterns (presumably) normalize. However, until this is borne out in the data, the Fed and markets will remain concerned about the effect that an upside growth surprise could have on inflation pressures.” The weather should bear watching.

It is our own view that the economy can still grow without impacting inflation. Energy costs – while still high – do not seem to have caused concern on Wall Street; at least not yet. Wages have grown – except at the lower end of the income scale. That has a way of keeping the lid on the wage-price spiral.

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.

Commentary: Let’s eat food and burn oil.

LONG-TERM OUTLOOK [31 January 2007]

In the long-term, we may see some easing in the FED funds rates in late 2007.

Most economists tend to agree with Richard F. Moody of Mission Residential as do we. “We (Mission Residential) continue to hold to our view that no changes in the Fed funds rate are on tap for the first half of 2007 before what we expect to be below-trend GDP growth will open the door for two rate cuts over 2007's second half, but are increasingly open to the possibility that the FOMC could remain on hold for the remainder of 2007.”

The good news is still in the employment and production fronts. Both will conspire against each other to keep inflation low.

Steve Boxmeyer [612] 799 – 6858

steve@LendWithIntegrity.com

Rates on Treasuries were lower this morning despite the higher than expected Housing Starts. Traders are taking position while the FOMC begins its meeting, and makes its announcement tomorrow.

Housing Starts were higher than expected and Building Permits were at the low end of predictions.

Housing Starts were anticipated to be 1445k to 1575k. They were 1528k new homes had ground broken in February. That is higher than the previous month’s 1408k.

Building Permits were forecast to be 1530 to 1570, but the actual number was 1532

The high Housing Starts could be seen as good news for the real estate industry, but we need to consider the impact of adding inventory to an already bloated market. That will not be good for prices. It will not get fence sitters to move.

The 10-year Treasury is -.028% with the rate at 4.543%.

TOMORROW 21 March 2007

The FOMC releases its policy statement at 13:15cdt {18:15gmt}. There is not a lot on the economic calendar that has much chance of being heard over that item. The only other items scheduled are the MBA Purchase and the Crude Inventories numbers.

[Publisher’s note: With the exception of Saturday & Wednesday, we will publish only one of the outlook sections each day on a rotating basis, none on Friday. SHORT-TERM OUTLOOK (on Monday) attempts to forecast and discuss up to the next 30 days. MID-TERM OUTLOOK (on Tuesday) looks forward from 15 to 90 days, most often 30 to 90 days. The Mid-term has the most accurate predictions, just like the weather. The LONG-TERM OUTLOOK (on Thursday) will extend out the next six months, maybe one year. When we change an outlook section we will embolden the date and heading.]

MID-TERM OUTLOOK [12 March 2007]

Rates have been pretty good as we enter the last month of the 1^st Quarter. But we need to caution that they may not drop much further. That is, unless the 10-year Treasury goes below the 4.500% level for more than 5 trading sessions. That is the next “psychological floor”. The market has toyed with going below that level, but never for more than a few trading sessions.

We are not as optimistic on rates for the next quarter. As homeowners start to see a rebound in housing their confidence will increase. As confidence increases, so will spending. That will bring back inflationary fears.

The good news is the bond market’s trading in the last three weeks. It is apparent that bond investors are still of the mind that inflation is whipped, and-or the economy is slowing.

The majority of economists seem to see the FED on hold for the next few months. That could be good given that the bond market has a desire to keep long term rates below the FED-Funds rates.

Stephen Stanley, RBS Greenwich Capital was quoted in the Wall Street Journal, “The tweaks at the margin argue for less risk of a move in either direction. So the Fed is on hold for a while with a slight lean toward hiking, whereas the market has the Fed on hold for most of the year with a slight lean toward an ease late in the year.”

But there is still some concern for inflation. Bear Stearns Economics said in February, “If GDP growth continues above 3%, as we expect, and if core inflation pressures show any sign of creeping higher, this statement leaves the Fed flexibly positioned to raise rates before the middle of the year. If January data on employment and retail sales suggest that the economy continued at an above-trend pace, then Bernanke could adopt a more hawkish tone on Feb. 14 (when he delivers his semiannual testimony on monetary policy and the economy to Congress). Our expectations for the Fed's central tendency forecasts for 2007 are 2¾% to 3% on real GDP growth and 2% to 2¼% on core PCE price inflation.”

Regardless of what the FED does within its FOMC, the bond market will react to changes in inflation and economic growth. Joshua Shapiro, of MFR Inc. has an interesting theory, “Our own view is that unusually warm weather (IN JAN) has played a role in boosting activity…data will cool off as weather patterns (presumably) normalize. However, until this is borne out in the data, the Fed and markets will remain concerned about the effect that an upside growth surprise could have on inflation pressures.” The weather should bear watching.

It is our own view that the economy can still grow without impacting inflation. Energy costs – while still high – do not seem to have caused concern on Wall Street; at least not yet. Wages have grown – except at the lower end of the income scale. That has a way of keeping the lid on the wage-price spiral.

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.

Commentary: Let’s eat food and burn oil.

Steve Boxmeyer [612] 799 – 6858

steve@LendWithIntegrity.com

The bond market had some very good gains in mid-day trading. At one point the rate was as low as 4.541%. Some of the gains were given up in late trading as the 10-year Treasury closed at 4.553%.

Although the T-Budget had a greater deficit than expected (-$120b), it did not seem to impact rates. If it had affected rates a deficit that was greater than expected would have caused rates to go up. But, rates remained stable at the T-Budget’s release.

TODAY, 13 March 2007

Rates on Treasuries are down again this morning. There are two reasons for this. There is still concern about the subprime mortgage industry, and Retail Sales were below expectation.

There is speculation among bond traders that home-loan delinquencies among the riskiest borrowers will hamper economic growth.

Accredited Home Lenders Holding Co., a subprime, is looking for debt waivers and may go into bankruptcy. It is also going to try to raise new funds.

According to Bloomberg’s: “The prospect of bankruptcies in the U.S. mortgage industry prompted investors to buy the safest assets. Treasuries extended gains after data showed less-than-forecast retail sales.

``There's a lot of anxiety across the globe among investors about a significant housing slowdown and the related effect on the economy,'' said Mustafa Chowdhury, head of interest-rate research in New York at Deutsche Bank AG. ``That anxiety is feeding the flight-to-quality trade.

Retail Sales for February were lower than what analysts were projecting. Most of the groups we follow were expecting total Retail Sales to be +0.2% to +0.4%. One group was closer with a guess of +0.0%. The actual number reported by the Commerce Department was +0.1%. This is higher than last month’s +0.0%

The more important core-Retail Sales number excludes the volatile auto sales. Economists were predicting a number of +0.1% to +0.4%, but the actual core-Retail Sales number was -0.1%. This is in contrast to last months +0.3%

Retail Sales, and concern about the subprime mortgage industry have impacted rates in a good way. The 10-year Treasury is -.041% with the rate at 4.512%.

TOMORROW, 14 March 2007

Wednesday sees the release of the important Import Prices and the attached Export Prices. Import Prices are predicted at +0.8% to +1.0%.

Export Prices have no predictions and are not viewed as important by the bond market.

The other important item at the market’s opening is the 4^th Quarter Current Account. Bloomberg.com defines it best; “The current account measures the United States' international trade balance in goods, services, and unilateral transfers on a quarterly basis. The levels of exports, imports and the current account indicate trends in foreign trade.” Forecasts for the Current Account range from -$203.0b to -$204.0b.

The market also opens with the release of MBA Purchase (& refinance) Index. There is no prediction for this, but it does give clues as to the future of the housing market.

The quarterly Services Survey will also be released at the opening. It is a very new item and has little track record. As a result, it has no predictions, and is mostly ignored by the bond market.

We are neutral on locking V floating.

[Publisher’s note: With the exception of Saturday & Wednesday, we will publish only one of the outlook sections each day on a rotating basis, none on Friday. SHORT-TERM OUTLOOK (on Monday) attempts to forecast and discuss up to the next 30 days. MID-TERM OUTLOOK (on Tuesday) looks forward from 15 to 90 days, most often 30 to 90 days. The Mid-term has the most accurate predictions, just like the weather. The LONG-TERM OUTLOOK (on Thursday) will extend out the next six months, maybe one year. When we change an outlook section we will embolden the date and heading.]

MID-TERM OUTLOOK [12 March 2007]

Rates have been pretty good as we enter the last month of the 1^st Quarter. But we need to caution that they may not drop much further. That is, unless the 10-year Treasury goes below the 4.500% level for more than 5 trading sessions. That is the next “psychological floor”. The market has toyed with going below that level, but never for more than a few trading sessions.

We are not as optimistic on rates for the next quarter. As homeowners start to see a rebound in housing their confidence will increase. As confidence increases, so will spending. That will bring back inflationary fears.

The good news is the bond market’s trading in the last three weeks. It is apparent that bond investors are still of the mind that inflation is whipped, and-or the economy is slowing.

The majority of economists seem to see the FED on hold for the next few months. That could be good given that the bond market has a desire to keep long term rates below the FED-Funds rates.

Stephen Stanley, RBS Greenwich Capital was quoted in the Wall Street Journal, “The tweaks at the margin argue for less risk of a move in either direction. So the Fed is on hold for a while with a slight lean toward hiking, whereas the market has the Fed on hold for most of the year with a slight lean toward an ease late in the year.”

But there is still some concern for inflation. Bear Stearns Economics said in February, “If GDP growth continues above 3%, as we expect, and if core inflation pressures show any sign of creeping higher, this statement leaves the Fed flexibly positioned to raise rates before the middle of the year. If January data on employment and retail sales suggest that the economy continued at an above-trend pace, then Bernanke could adopt a more hawkish tone on Feb. 14 (when he delivers his semiannual testimony on monetary policy and the economy to Congress). Our expectations for the Fed's central tendency forecasts for 2007 are 2¾% to 3% on real GDP growth and 2% to 2¼% on core PCE price inflation.”

Regardless of what the FED does within its FOMC, the bond market will react to changes in inflation and economic growth. Joshua Shapiro, of MFR Inc. has an interesting theory, “Our own view is that unusually warm weather (IN JAN) has played a role in boosting activity…data will cool off as weather patterns (presumably) normalize. However, until this is borne out in the data, the Fed and markets will remain concerned about the effect that an upside growth surprise could have on inflation pressures.” The weather should bear watching.

It is our own view that the economy can still grow without impacting inflation. Energy costs – while still high – do not seem to have caused concern on Wall Street; at least not yet. Wages have grown – except at the lower end of the income scale. That has a way of keeping the lid on the wage-price spiral.

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.

    Commentary: Let’s eat food and burn oil.

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

YESTERDAY’S CLOSE 08 MARCH

Rates closed better than the where at our mid-morning, but were still higher than Wednesday’s close. The tic on Treasury rates moved lower Thursday afternoon with the 10-year Treasury closing +.012% to 4.509%.

FRIDAY 09 MARCH 2007

Rates are much higher in response to a lower than expected Unemployment Rate. Unemployment is an inverse indicator like the weekly Initial Jobless Claims. A low number is good for the economy. Good for the economy = bad for rates.

Unemployment was predicted to be 4.6% to 4.7%; the Labor Department reported 4.5% of workers are looking for jobs.

The remaining items came in as expected. Payrolls are the other highly important number and grew by 97,000, within the 90k to 110k expected.

Average Hourly Earnings were +0.4%, far above last month, but within the expectations of +0.3% to +0.4%. Average Workweek was a bit lower than last month’s 33.8 with this month reporting 33.7 which was in the forecast of 33.7to 33.8 hours.

The Trade Balance Report is outside of the Employment Situation Report, but was within expectations. Economists expected that the Trade Deficit would be $59.0b to $60.5b, with the actual number at $59.1b.

Wholesale Inventories most likely have been ignored by bond traders. If it had been noticed, it would have helped with rates. Wholesale Inventories were +0.7%, higher than the predicted -0.5% to +0.1%. Like Unemployment, this is also an inverse indicator. Coming in far higher than predicted should have brought rates lower than expected. It is hard to know what is in the mind of all investors and traders, so it is possible that it was discounted.

The dominate number was the lower than expected Unemployment Rate. Bond traders and investors are beginning to question it the FED will cut rates anytime soon. Interest-rate futures suggested a 30 percent likelihood the Fed will cut rates by July, down from 66 percent yesterday. Bond yields this week had dropped to the lowest since December as investors sought refuge from declining equities.

This concern has pushed rates upward. The 10-year Treasury is +.082% with the rate at 4.591%.

NEXT WEEK

We could have some volatility on Monday afternoon with the Treasury Department’s Treasury Budget Report. Until that release at 13:00cdt {18:00gmt} we may see some lowering of rates as bargain shoppers come in, and traders sober up from today’s selling.

We will blog more tomorrow afternoon.

We VERY VERY cautiously recommend floating.

[Publisher’s note: With the exception of Saturday & Wednesday, we will publish only one of the outlook sections each day on a rotating basis, none on Friday. SHORT-TERM OUTLOOK (on Monday) attempts to forecast and discuss up to the next 30 days. MID-TERM OUTLOOK (on Tuesday) looks forward from 15 to 90 days, most often 30 to 90 days. The Mid-term has the most accurate predictions, just like the weather. The LONG-TERM OUTLOOK (on Thursday) will extend out the next six months, maybe one year. When we change an outlook section we will embolden the date and heading.]

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

TODAY 08 MARCH

The bond market is giving up some of yesterday’s price gains due to two items. This morning’s primary driver is the stock market. The price on treasuries has declined as the flight to safety demand is reduced. Stocks and Stock futures are starting to gain strength. The S&P 500 is +11.55 to 1403.52 points.

The employment market is also moving rates to a small degree. The weekly Initial Jobless Claims were predicted to be lower than the previous week’s report of 338k. Economists were predicting 322,000 to 335,000 workers to file for first time unemployment insurance. 328,000 workers actually did file for unemployment insurance. While this is in the range of expectations, it was below the majority of predictions.

Jobless Claims are an inverse indicator; a lower number is good for the economy. Good for the economy = bad for rates.

Although most traders probably ignored the Monster Job report, it was higher than last month. The non-seasonally adjusted index was reported at 177. February’s Monster number was 168, January was at 167.

Bloomberg explains this indicator very well, “Monster collects job postings from 1,500 web sites (including Monster.com) and creates an index of job availability, akin to The Conference Board's help wanted index. The difference between the two is that one collects help wanted advertising from newspapers and the other collects from online posting. The Monster index is not seasonally adjusted.”

It does show some strengthening in the job market.

While the improving stock market is this morning’s primary driver, it is probable that some of the traders and investors are reacting to the job market and taking position before tomorrow’s all important Employment Situation Report. The 10-year Treasury is currently +.027% with the yield at 4.524%.

TOMORROW, 09 MARCH 2007.

The market opens with a very important monthly number; the Employment Situation Report. The Employment Situation Report includes Hourly Earnings, Average Workweek, Payroll change, and Unemployment Rate.

Our biggest are of interest is the Payroll change. Economists are expecting a growth of 90k to 110k, which is lower than last month’s 111k. Earlier this week the ADP Employment Reported this month’s private sector job growth at 57k. That MAY mean this Friday’s lower expectations for Payroll growth may not be low enough. The record of predictability for the ADP is mediocre.

The Unemployment Report, is a very important number, but has a very tight range of expectations from 4.6 to 4.7.

Average Hourly Workweek is anticipated to be 33.7 to 33.8. Hourly Earnings are forecast at .3% to .4% growth. Hourly earnings will rarely affect rates, Hourly Workweek seldom does.

Trade Balance numbers are also out at the opening and can, influence rates, but seldom does. Analysts are looking for a $59b to $60b trade deficit.

At 09:00 Wholesale Inventories are out and are believed to be anywhere from +0.1% to +0.5%.

Given the possible low payroll number we VERY CAUTIOUSLY recommend floating.

[Publisher’s note: With the exception of Saturday & Wednesday, we will publish only one of the outlook sections each day on a rotating basis, none on Friday. SHORT-TERM OUTLOOK (on Monday) attempts to forecast and discuss up to the next 30 days. MID-TERM OUTLOOK (on Tuesday) looks forward from 15 to 90 days, most often 30 to 90 days. The Mid-term has the most accurate predictions, just like the weather. The LONG-TERM OUTLOOK (on Thursday) will extend out the next six months, maybe one year. When we change an outlook section we will embolden the date and heading.]

LONG-TERM OUTLOOK

In the long-term, we may see some easing in the FED funds rates in late 2007.

Most economists tend to agree with Richard F. Moody of Mission Residential as do we. “We (Mission Residential) continue to hold to our view that no changes in the Fed funds rate are on tap for the first half of 2007 before what we expect to be below-trend GDP growth will open the door for two rate cuts over 2007's second half, but are increasingly open to the possibility that the FOMC could remain on hold for the remainder of 2007.”

The good news is still in the employment and production fronts. Both will conspire against each other to keep inflation low.

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

The ADP Employment – often but not always ignored by all financial markets – was far lower than the previous month’s 152k. ADP reported this month’s private sector job growth at 57k. That MAY mean this Friday’s lower expectations for Payroll growth may not be low enough. The record of predictability for the ADP is mediocre. (See yesterday’s post for an explanation of the ADP Employment report.)

This morning’s MBA Purchase Application Index was reported at 405.3. This kept the 4-week moving average steady at 396.93. Last week the Mortgage Bankers Association reported the Application Index at 401.3 with the 4-week moving average at 396.78.

Crude Oil Inventories are out and seem to have little impact on crude prices at this time. We will update this later if it seems to be impacting rates.

Beige Book and Consumer Credit will be published later today. See yesterday’s post for commentary on these two.

TOMORROW, 08 MARCH 2007.

There is only one major item on Thursday; the weekly Initial Jobless Claims. It is expected that the Labor Depart will disclose 322,000 to 335,000 workers will file for unemployment insurance. These predictions are lower than last week’s 338,000.

The Bank of England and the European Central Bank will make their policy announcements overnight. They are not expected to surprise the market, but that does not always mean anything.

The Monster Job Layoff and the Chain Store reports are two minor items that are often, but not always ignored by the bond market.

[Publisher’s note: With the exception of Saturday & Wednesday, we will publish only one of the outlook sections each day on a rotating basis, none on Friday. SHORT-TERM OUTLOOK (on Monday) attempts to forecast and discuss up to the next 30 days. MID-TERM OUTLOOK (on Tuesday) looks forward from 15 to 90 days, most often 30 to 90 days. The Mid-term has the most accurate predictions, just like the weather. The LONG-TERM OUTLOOK (on Thursday) will extend out the next six months, maybe one year. When we change an outlook section we will embolden the date and heading.]

SHORT-TERM OUTLOOK [5 March 2007]

Rates have been good the last few weeks, at least in part due to a flight to safety. One very important thing to consider, flights to safety are almost always temporary. Once things settle down, and the equity markets stabilize, the cash will flow back out of bonds and rates will go back up. We recommend locking today.

Most of this week's economic items are of moderate importance until Friday. Friday’s data includes the all important Employment Situation Report (Payroll Growth, Unemployment, Average Hourly Workweek, and Hourly Earnings). Tuesday will also be a bit volatile with the Productivity report.

LONG-TERM OUTLOOK [31 January 2007]

In the long-term, we may see some easing in the FED funds rates in late 2007.

Most economists tend to agree with Richard F. Moody of Mission Residential as do we. “We (Mission Residential) continue to hold to our view that no changes in the Fed funds rate are on tap for the first half of 2007 before what we expect to be below-trend GDP growth will open the door for two rate cuts over 2007's second half, but are increasingly open to the possibility that the FOMC could remain on hold for the remainder of 2007.”

The good news is still in the employment and production fronts. Both will conspire against each other to keep inflation low.

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