Bonds Slide On Inflationary Data

U.S 10-year Treasury bond prices dropped for the second
straight day, after reports were released that showed that labor costs rose and
the service sector grew more than expected. Investors have been bracing
themselves for more reports that show an economic slowdown, which these numbers
do not fully support. Investors have been looking for a complete halt to
the rate hikes, with some even pricing in rate cuts during the first half of
2007. Bond price losses were cut when the Beige Book report showed that
consumer spending rose slowly on a weak housing market. The Fed’s meeting
on September 20th will clarify much, as investors will see how seriously the Fed
wants to hold rates, or possibly cut them.

The dollar rallied hard against the yen today, and made modest
gains over the euro after a government report showed that labor costs increased
and the service industry expanded more than expected during the last quarter.
These numbers led some investors to believe that the rate tightening cycle is
not over, and that the Fed could possibly raise rates later this month.
The yen dropped against the dollar and the euro on speculation that the BOJ will
not raise rates at a meeting later this week, while the ECB looks to raise rates
before the year is out, possibly twice. The dollar, yen and euro seem to
be in a rate-hike battle, as the struggle to contain inflation by raising
interest rates continues to dominate investor sentiment regarding relative
currency strength.

Crude oil futures fell 1.5% to close at $67.55 a barrel as
tensions in the Middle East continue to ease. Israel will end its blockade
of Lebanon tomorrow at 6:00 PM local time, which has been in force since July
13. Iran, though still defiant in its nuclear stance, appears to be
treading water in the diplomatic arena, which is effectively easing immediate
supply concerns. Natural gas also fell, down 1.5% on moderate weather
forecasts reduce the demand for nat gas in power plants.

Gold futures dropped 0.4% to close at $644.40 an ounce, after
a strong run-up yesterday in the precious metal. Gold has been trading
hand-in-hand with oil over the summer, as energy demand fears fuel the need for
safe-haven metals. Central banks in Europe also have the opportunity to
sell up to 500 tons of the metal before the year is out and have not reached
their sales target. Investors viewing gold slightly bearishly at this
point. Silver rose nearly 1% during trading today.

Softs traded mixed today. Cocoa was up nearly 2%, coffee
dropped fractionally, orange juice had little change and sugar rose 1.3%.

Grains mostly fell today. Corn fell 1% on rainy weather,
which would increase supply. Wheat also dropped, down 1.2%, soy fell 1.3%
and oats had little change.

Meats traded mixed today, with cattle up 1% and porkbellies
down 2.5%.


Service Sector Sees Faster Than Expected Growth In August (full

Q2 Productivity And Labor Cost Growth Revised Higher (full

John Patrick Lee