Bonds Jump, Dollar Falls on Weak Reports

U.S. 10-year Treasury notes jumped today, after
the ISM came in weaker than expected today. Service sector growth slowed
to the worst in nearly 4 years in March, and factor orders rose less than
forecast. Today’s reports pointed to spreading weakness in the U.S.
economy, with many investors afraid that housing weakness will eventually spill
into all corners of the economy. Bonds have been trading within a fairly
tight range for over a month, just recently falling significantly; today’s spike
in bond prices puts bonds near the low-end of that range. Bonds typically
fall on economic strength and rise on weakness, so traders clearly took the weak
reports as a negative factor for the U.S. economy.

The dollar sagged against the euro and the yen
today, after weak economic reports bolstered sentiments that the U.S. economy is
in a slowdown. Weak service sector growth and factory orders led to dollar
selling, as traders anticipated more weakness to come for the dollar. The
yen has been a focus lately, as traders position themselves around the carry
trade and global equities. In a carry trade, the yen is borrowed to invest
in more profitable assets; equity weakness has led to yen strength, as traders
buy back the yen to cover risky positions. The global currency market
usually favors currencies backed by positive-growth, inflationary economies,
which Europe has proven itself to be. Both Japan and the U.S. have
struggled lately to produce consistent economic numbers, and neither have any
real chance of a rate hike any time soon.

Crude oil fell about 0.7% today, on news that
Iran will release 15 captured British sailors. Since Iran seized the
Britons last month, crude oil has shot higher, on concerns that Iran would
remove its oil supply from the world market if attacked. Iran tensions
were a primary factor in crude’s record prices in July, and this most recent
episode highlights crude’s geopolitical sensitivity. Natural gas rose over
1% today as cold weather begins to settle in across the Northern U.S.

Gold rallied over 1% today on dollar weakness.
Gold usually trades inversely to the dollar and with oil, and today’s dollar
action dominated gold trading. Gold rose as traders dumped the dollar for
the safety of the precious-metal commodity. Copper futures rose over 2% on
continued signs of high levels of demand from China.

Grains traded mixed today. Wheat rose about
3.4% and corn jumped nearly 4%, while soybeans fell fractionally.


ISM index fell to 52.4, versus expectations of 55.

Factory orders grew 1% compared to expectations
of 1.8%.

John Lee

Associate Editor