Bonds Jump on Weak Inflation Data

U.S. 10-year Treasury bonds bounced the most in a
month today, after a government report showed that core inflation rose less than
expected in March. Last week, bonds dropped to 2-month lows after the Fed
released its minutes from the last meeting; the minutes showed that the members
agreed that a rate hike could be necessary to keep a handle on inflation.
Bond prices usually rise on economic weakness and fall on strength, so traders
took last week’s minutes as a positive for the economy. The weak core
inflation numbers increased bets that the Fed will cut rates sometime this year
to deal with slowing growth and inflationary pressures. Housing should
remain a key focus for bond traders, as the housing market is commonly used as a
broad indicator of economic health.

The dollar fell against the yen and the euro, and
the euro also fell against the yen today, amid speculation that the U.S. economy
is slowing faster than previously thought. A core inflation report in the
U.S. came out surprisingly weak today, prompting bets that the Fed would be
forced to cut rates before the year is out. Last week’s Fed minutes came
out unexpectedly hawkish, which helped to boost the dollar on inflation and
growth sentiment. However, today’s report sent the dollar pushing against
record lows against the euro, and helped the yen gain against the U.S. currency.
The British pound also moved to its highest levels in 15 years against the dollar.

Crude oil futures fell about 0.3% today, on
speculation that tomorrow’s EIA report will show that U.S. refineries have
increased production capacity to prepare for summer. Normally, oil
refineries gear up production numbers before summer, which is usually a period
of high energy demand. Crude has settled into a comfortable range around
$63 a barrel, after shooting higher on the Iran/UK hostage situation.
Natural gas fell about 1% on continued speculation that winter is basically over
for the year.

Gold also fell about 0.3% today, taking a break
from an extended rally to 11-month highs. Gold has surged lately on dollar
weakness against the euro, and on volatile energy prices. Gold normally
moves inversely to the dollar and with oil; despite dollar weakness today, gold
fell in-line with oil. Copper shot higher today by nearly 4% on signs of
increased demand in the U.S., and a possible strike in Indonesia.

Grains traded mixed today. Soybeans fell
about 1.6%, corn dropped over 3% and wheat jumped about 0.6%.


Core consumer
prices rose about 0.1% in March.

home construction was up 0.8% in March.

John Lee

Associate Editor