Bonds Shoot Up On Inflationary Data

U.S. 10-year Treasury bonds rose the most in two weeks today,
pushing towards 7-month highs. Government reports released today showed
wholesale prices and retail sales fell in October, likening the prospects of a
rate-cut in the future, to combat a slowing economy with cooling inflation.
Prices paid to producers fell 1.6% last month, in contrast to the balmy 0.5%
predicted by analysts. Bonds shot up in June when the Fed initiated a new
rate-pause policy, but has wavered on conflicting economic reports and
statements from the Fed board. This new push to higher prices represents
the latest investor speculation that the economy is slowing, and that the Fed
will be forced to reduce rates sometime early in the next year.

The dollar fell the most in a week against the yen, and lost
moderately to the euro, after two government reports illustrated a slowing U.S.
economy with little incentive to raise rates any time soon. The currency
market has been dominated by interest rate and inflationary data, and today’s
reports from the U.S. significantly affected the dollar’s position on the global
market. The weak reports highlight a slowing U.S. economy, which could
lead the Fed to go so far as to lower rates early next year. Both the ECB
and BoJ have hinted that rate hikes are imminent before the year is out, but the
U.S. has basically no chance to lift rates any time soon; today’s reports have
lent weight that cuts are on the way.

Crude oil futures fell 0.5% to close at $58.30 on speculation
that warm weather across the U.S. is curbing fuel consumption. OPEC has
announced output cuts, and a few countries have pledged to start reducing the
amount of barrels produced each day. OPEC called for the cuts to ease
losses from the rapidly falling price of oil, setting a reduction goal of 1.2
million barrels a day. Oil is down nearly 25% from its record July highs.
Natural gas rose 1.1%, as investors speculate that winter weather will send
demand soaring; many see this price as a low and jumped to take advantage.

Gold fell fractionally today, after an unexpected drop in
producer prices reduced demand for the metal as a hedge against inflation.
Gold is down nearly 20% from its May highs; gold usually trades in-line with oil
and inversely against the dollar. Copper rose 0.3% on speculation that the
Fed will reduce rates to rejuvenate growth in the U.S. economy, which would
increase demand for all metals.

Softs and grains rose today. Wheat rose 1.5% as drought
conditions in the Midwest continue to damage crops. Corn and soybeans both
rose today, reversing a four-day decline, on speculation that U.S. farmers will
cut back sales to improve demand conditions.

Economic News

Producer prices dropped 1.6% in October, compared with that
0.5% analyst expectations.

Retail sales fell 0.2% in October, the second straight
declining month.

John Patrick Lee