Bonds Fall on PPI, Housing Data

Bonds Fall on PPI, Housing Data
By John Lee
Wednesday, Jan 17, 2007


U.S. 10-year Treasury bond prices fell today, after two reports pointed to inflationary pressures. A government report showed that wholesale prices (PPI) rose more than analysts expected in December, and another report showed that homebuilder confidence grew this month. Bond prices have been pushing lower since the first of December, on growing signs that the U.S. economy is turning around after a period of slow growth and ugly numbers.

The housing sector remains a key focus for investors and speculators, who will want to see consistent strength in all areas of the housing market for bond prices to continue to fall. Interest rate futures show a nearly 100% chance that the Fed will continue to hold the overnight rate at 5.25% in March, whereas last year many investors were speculating that the Fed would need to cut rates by that time. Watch for key housing, manufacturing and confidence reports in the future to affect this solid move lower by bond prices.

Despite two positive reports from the U.S., the dollar fell against the euro today after a government report showed that investors bought the most foreign stock in November since at least 1977. An increase in foreign security investments exacerbated concerns that the dollar is being discarded in favor of the euro. More and more countries are increasing their currency reserves to favor the euro over the dollar, which has helped to propel the dollar lower. The international currency market favors currencies backed by hot, inflationary economies, which places the euro in a favorable light. The countries that comprise the EU have been able to consistently produce hot, growth-oriented numbers, while the U.S. has only recently been able to rebound from a sluggish second half of 2006. The yen is performing poorly, as Japan has no real need to lift rates to deal with growth and inflation; the BoJ is expected to hold rates later this week. The dollar gained fractionally against the yen today.

Crude oil futures rose nearly 2% today to close at $52.18, as cold weather settled across the U.S. Crude oil has been falling dramatically into 2007, losing well over 10%. OPEC has threatened for output cuts in addition to the nearly 2 million barrels a day that are currently being withheld. However, OPEC's threats seem to have little to no effect on the price of oil, due in part to an inability of its members to make a united stand. Cold weather should prop up energy prices, though, as cold weather equates to more energy demand to heat homes, and higher prices. Natural gas fell over 6% today, as investors speculated that inventories could easily meet any increase in demand stemming from cold weather.

Gold rose over 1% to a two-week high today, as investors sought refuge from a falling dollar. Gold futures usually move inversely to the dollar and with oil, which is exactly what happened today. Gold is used as a safe-haven against dollar weakness and high energy prices, but dollar action seemed to guide gold trading today. Copper prices fell fractionally today, as high inventories continue to ease demand pressures.

Grains gained across the board, after sliding yesterday. Corn rose just over 1%, soybeans rose nearly 2% and wheat rose around 2.3%. Orange juice futures rose nearly 3% on supply fears stemming from a cold snap in California.

Economic News
The PPI grew 0.9% in December, compared with most analysts expectations of 0.5%.
Homebuilder confidence rose to a 6-month high in January.
John Lee