Bonds Fall On Inflation Data, Fed Comments

U.S. 10-year Treasury notes continued to fall today, after
the Philly Fed report showed that manufacturing expanded in the last month,
and comments from Fed officials reiterated a hawkish inflationary stance.
Manufacturing in the Philadelphia area expanded for the first time in 3 months
this month, rising off of 3 year lows recorded in October. Two Fed
officials also commented that inflation remains a greater risk than a slowing
economy, which led to a fall in demand for the security of the long-term
notes. With a weakening economy, investors will look for safety in the
long-term bond notes, but in a growing economy, the long-term notes are not
needed as a hedge against a short-term recession. Bonds shot up in June
when the Fed initiated a rate pause, and have wavered near 7-month highs as
conflicting reports and comments continue to roll in. Interest rate
futures show an approximate 10% chance that the Fed will reduce rates before
March to combat easing inflation.

The dollar rose against the yen and euro today on the
positive Philly Fed report and hawkish central bank comments. The
currency markets have been dominated by inflationary and interest-rate news,
and these recent U.S. reports strengthen the dollar’s position on the global
market, backed by a growing economy. The ECB and BoJ have both expressed
the need to raise rates before the year is out, while the U.S. has virtually
no chance of a rate hike any time soon. Growing, hot economies and
booming inflation continue to equate to currency strength, and that trend
looks to continue into the near-future.

Crude oil fell to $56.25 a barrel today, after inventories
yesterday showed that natural gas inventories climbed, lessening demand for
both energies. Crude is down 25% from highs recorded in July, during a
tense war between Israel and Palestine that threatened the global supplies
coming out of Iran. OPEC has recently called for a reduction of 1
million barrels a day across the globe, but has yet to see a serious, hard
reduction come to light. Investors do not seem to be taking the
reduction threats seriously, evidenced by the continuously falling prices.
Natural gas fell 2.8% today after inventories showed an increase in
inventories, and investors brace for the energy demands of winter.

Gold fell fractionally today, as the dollar surged and
energy prices fell. Gold has been trading lock-step with oil for months,
and inversely with the dollar, as investors hedge against inflation and rising
energy prices. Gold is down 20% from its recorded May highs, and
continues to trade heavily in hand with bonds and energy. Copper fell
1.6% on slowing demand for the metal in industrial production in China and the

Softs and grains traded mixed today. Orange juice rose
to 16-year highs as the crop damage from last year’s hurricane season
continues to affect the groves. This year’s crop looks to be the
smallest in over a decade, which is driving demand to new levels. Wheat
fell 0.7% as export sales reach a 4-month low. Corn and soybeans both
fell today as investors locked in gains from the recent rally in grains.

Economic News

Consumer prices fell 0.5% in October, more than the expected

The Fed Bank of Philadelphia’s general economic index rose
to 5.1 from -0.7 in October.

John Patrick Lee