Bonds Fall on Fed Comments

U.S. 10-year bond prices fell slightly today,
after comments from Fed Vice Chairman Kohn hinted that the Fed will not be
lowering interest rates any time soon. Kohn’s positive remarks are backed
by a string of recent positive reports, including a better-than-expected jobs
report on Friday. Bonds initially shot higher in June, when the Fed
initiated a rate-pause on slowing growth and moderating inflation. Growth
and inflation usually equate to lower bond prices and higher interest rates,
while a weak economy will bring higher prices and lower rates. The housing
sector remains a key focus for bond traders, who are watching the broad housing
market as an overall economic health indicator for the U.S.

The dollar fell slightly against the euro, and
moved fractionally higher against the yen today. Some traders speculated
that central banks across the globe are diversifying their currency reserves
from dollars into euros. The dollar fell off of a 6-week high against the
euro, boosted significantly by last week’s jobs report, but it remains clear
that the euro is standing its ground firmly. Europe has been consistently
producing positive, growth-oriented economic reports, all pointing to rate hikes
by the ECB early in 2007. The U.S. has recently seemed to pull it
together, stringing along a number of positive housing, manufacturing, sentiment
and jobs reports over the past few weeks. Japan, on the other hand, looks
very weak with negative reports, with the yen resting near all-time lows against
the euro.

Crude oil fell nearly 1% as traders bet that OPEC
will not be able to create a sustainable impact on the price of oil. Crude
is down 25% from record July highs, and OPEC has called for a worldwide output
reduction of nearly 2 million barrels. As oil continues to fall, OPEC
ministers keep warning the market that more cuts will be coming soon, but
traders today did not listen to the threats. Warm weather in the U.S. and
large inventory reserves continue to push the price of crude lower.
Natural gas rose 3% in trading today on forecasts that cold weather will
eventually hit the Northern U.S. sometime later this week.

Gold futures rose just under 0.5%, as traders
took advantage of low prices stemming from last week’s slide. Dollar
strength helped to propel gold lower last week, and today traders bet that gold
is still a valuable investment in the face of underlying dollar weakness.
Crude oil’s fall today helped to keep a lid on any major gold gains; gold
usually trades inversely to the dollar and with gold. Copper traded
fractionally lower today.

Wheat prices fell to 3-month lows today, down
nearly 2%, on signs that extremely high prices are hurting demand. Grain
closed 2006 +43% higher than the year before, and those high prices are
beginning to effect demand. Corn prices fell 1.4% on fears that investors
are turning to the energy sector for more profitable returns.

Economic News

No major U.S. news to report today.

John Lee

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