Bonds, Oil Move Higher

U.S. 10-year Treasury bonds continued to rise
today, after housing starts fell to their lowest levels in nearly 10 years.
The housing market has been one of the major economic indicators used by
investors and analysts to gauge broad market sentiment and economic health.
A weak housing market was one of the main reasons that bonds rose through the
second half of 2006; strength in the housing market in December helped to push
bond prices lower. Bonds have been on the rise this week, after Bernanke
commented that inflation was moderating, and industrial production slowed
significantly. Bond prices have spiked recently on weak economic reports.

The dollar closed near flat against the yen and
the euro, but closed down on the week against both currencies. The dollar
was heavily affected by Bernanke’s dovish comments from earlier in the week, and
from a cluster of negative economic reports from the U.S. The
international currency market favors currencies backed by inflationary,
positive-growth economies, which puts the euro in the best light. Japan
has struggled to produce consistent positive reports, which has led to record
lows against the euro and yearly lows against the dollar. With a number of
weak reports this week from the U.S., the dollar could be seeing more trouble if
the Fed decides to cut rates this year.

Crude oil rose about 2.4% today, on reports that
a militant group that is attacking Nigerian oil operations is planning to spread
their attacks to more areas. Crude has been trading in a fairly tight
range for about two weeks, and has struggled to break major resistance at $60 a
barrel. Crude fell over 30% from July record highs before bouncing back on
winter’s arrival, and U.S. announcements to double its strategic oil reserve
over the next decade. Natural gas rose just under 3% as traders took advantage
of relatively low prices.

Gold fell fractionally today. Oil usually
rises on dollar weakness and rising oil. Although the dollar was almost
flat on the day, dollar sentiment is negative right now on a string of
uninspiring economic reports and comments this week. Oil moved higher
today, which led some investors to buy gold as a hedge against rising energy
costs. Copper fell just under 1% on high levels of supplies.

Grain prices rose across the board today.
Soybeans rose just over 1%, wheat rose over 3% and corn moved higher just over


Housing starts
fell to the lowest levels since 1997 last month.

Producer prices fell 0.6% in the U.S. last

John Lee

Associate Editor