Bonds and Oil Head Lower

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%

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


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

John Lee

Associate Editor