Bonds Fall on PPI, Housing Data

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

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