Bonds and Oil Head Lower

By John Lee

U.S. 10-year Treasury bond prices fell today after a private report showed an unexpected rise in existing-home sales in December, and the ISM report numbers contracted. Yesterday the Fed kept interest rates unchanged, and focused the announcement wording on U.S. economic stability and moderating inflation. Bonds continued to trend lower today, on the inflationary housing report, after spiking yesterday on Fed news. Bonds shot higher last June, when the Fed initiated a rate-pause on the grounds of slowing growth and moderating inflation. However, a string of turn-around, positive-growth reports, including today's housing numbers, have forced investors to cancel bets that the Fed will cut rates by March. Investors were speculating that a slowing U.S. economy would necessitate the cuts, but recent reports have pointed to rising growth and strength. Bond prices usually fall on strength and rise on weakness.

The dollar closed almost unchanged against both the euro and the yen, bouncing back from early losses against the yen. After a weak manufacturing report from the U.S., the yen gained on the dollar, but positive housing numbers helped push the dollar back to flat on the day. Traders speculated that the monthly employment report due out tomorrow will show that the jobless rate remained close to a 5-year low. The international housing market has favored currencies backed by hot, inflationary economy. Weakness in Japan has led to rumors of political intervention, in the form of the G-7 conference next week. Europe has been able to produce consistently positive reports, which has propelled the euro to recent record highs against the yen and yearly highs against the dollar. The dollar has been fighting off the remnants of a sluggish second half of 2006, and is being boosted on a string of turn-around reports since early December.

Crude oil fell 1.4% today, after an Energy Department report showed that supplies fell less than expected last week. Crude oil has been rising since mid-January, after falling 34% from record highs in July. Crude fell dramatically through the second half of 2006, on high supplies in the U.S., and a late-arriving winter. Energy prices across the board usually rise during cold weather, but the cold did not settle in until late in the season this year. OPEC has implemented a global production cut of nearly 2 million barrels a day, and has called for more if prices do not stabilize. U.S. plans to double its strategic reserve are helping to boost prices, as more consumption by the U.S. equals less global supply. Natural gas fell about 2% on high supply levels.

Gold rose just under 1% today, on speculation that the commodity market as a whole is on the rebound. Gold usually moves inversely to the dollar and with oil, but neither happened today. Despite crude's fall, investors across the board are looking for oil to climb higher through the year, which will push gold's price higher as well. Today's gold action was more focused on the long-term future of commodity prices, rather than just daily price action volatility. Copper prices fell over 2.5% today.

Grains traded mixed today. Corn fell about 1.6%, wheat fell around 1.4% while soybeans rose fractionally.

Economic News
The ISM index fell to 49.3, the lowest since April 2003.