Bonds Rally on U.S. Weakness

U.S. 10-year Treasury notes rose today the most
in 3 weeks, after a Philadelphia manufacturing growth report disappointed
investor expectations. Bonds had been coming down off recent 11-month
highs on a number of positive economic reports, but today’s announcement helped
to limit optimism about the future of the U.S. economy. The Philly Fed
shrunk the most in 3 years, which exacerbated an already precarious U.S.
inflation data environment. Bonds initially shot up in June when the Fed
initiated a rate-pause, but lately conflicting economic reports and Fed
announcements have been vying for control of the bond market. Retail sales
and producer prices have risen, which is positive, but housing and manufacturing
continue to plague any positive investor sentiment.

The yen rebounded slightly off of record lows
against the euro, and gained slightly against the dollar. A Japanese
economic minister today commented that huge currency rate swings were
“undesirable,” causing a slight bounce in the otherwise weak yen. The yen
has been hampered by negative economic reports and dovish comments, while the
euro has been reaching for new highs on hot growth and steady inflation.
Europe’s growth rate and inflation have led the euro on a rally against the yen
and dollar, but both the dollar and yen have been fighting to hold their ground.
The global currency market favors hot, inflationary economies, while low growth
and rate-cuts are avoided on the market. Both Japan and the U.S. see any
viable chance of a rate-hike soon, while Europe’s growth lends itself to
inflationary conditions.

Crude oil fell 1.6% to close at $62.68 a barrel,
as continued mild weather in most of the U.S. and high government inventories
kept a lid on most gains. Oil jumped to 3-month highs after OPEC announced
its 2nd planned phase for an international reduction in output that will now
near 2 million barrels a day off the global market. Oil is down 25% from
May highs, so OPEC has been calling for unity and action among its members in
instituting a cut. Despite OPEC’s efforts, weather and supplies continue
to keep the price of oil relatively stable. Natural gas rose 0.4% as
traders took advantage of 9-week low prices, in the hopes of cold weather in the
future. Cold weather equates to more energy use and higher demand for
natural gas.

Gold fell 0.4% on speculation that the dollar has
found strength against the euro. The euro moved to 20-month highs over the
dollar recently, but the dollar has fought back losses to gain ground and
neutral sentiment. Gold moves inversely to the dollar; the metal is
commonly used as a hedge against inflation and dollar weakness. Oil is
also used as a hedge against rising oil prices, so oil’s move lower today
certainly helped ease gold prices. Gold is down about 20% from May highs,
but is still up from last year. Copper fell 2.5% as slowing economic
growth in the U.S. continues to affect demand for the metal, which is commonly
used in home and industrial building.

Coffee rose 0.6% to a 5-week high on slowing
supplies from Vietnam, the world’s largest coffee producer. Wheat gained
2%, bouncing off of a recent pullback and corn futures rose over 1%.

Economic News

U.S. economy grew during Q3 at the slowest pace
of the year so far.

Philly Fed slumps to lowest levels since 2003.

John Lee

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