Bonds Slip Further Ahead of Key Fed Announcement

U.S. 10-year Treasury bond prices fell today, in anticipation of a Federal
Reserve rate cut during tomorrow’s Fed announcement. Fed futures have priced in
a 100% chance of a cut, and bond prices have been falling in accordance with
those expectations. After hitting yearly highs, bonds began to fall last week,
on widespread assumption that the U.S. Fed will be forced to cut rates to deal
with slowing growth, a credit crunch and a seemingly bottomless housing market.

The yen jumped versus the euro and the dollar, as traders exited carry trades
funded by major UK mortgage lender Northern Rock. Last week, it was reported
that the Bank of England was supplying emergency bail out funds for the bank,
leading to customer withdrawals of around $4 billion, which is about 8% of the
bank’s deposit base. The yen has been trading inversely to the major markets
lately, as traders buy back borrowed yen on market weakness. Traders borrow yen
to purchase riskier assets in the so-called carry trade. The dollar fell against the Canadian dollar, but was up on the British pound today.

Crude oil futures jumped nearly 2% to new record highs in the $80.60 range
today, on speculation of a Fed cut tomorrow. Oil fell on demand worries in
August, on concerns that U.S. slow growth would hurt demand. However, oil has
since rebounded and made new highs after falling more than 10%, on signs that
demand will not falter, and supplies will not be able to keep up. A rate cut
would theoretically fuel growth, which would keep oil demand high. Natural gas
futures rose nearly 6% on rising demand outlook.

Gold rose about 0.8% to 16-month highs today, on speculation that dollar
weakness is to come. Gold usually trades inversely to the dollar and with oil.
Traders are expecting tomorrow’s Fed announcement to bring a rate cut, which
would then lead to a weakening dollar. Gold also rose in-line with crude
futures. Copper futures rose to 1-month highs on similar rate cut speculations.

Grains rose across the board today. Soybeans gained about 1.4%, and corn rose
just under 1%.

U.S. stocks closed lower on Monday, ahead of the Fed’s meeting on interest
rates. Stocks also declined in Europe but were mixed in Asia. Banking stocks
tumbled in Europe after investors withdrew $4 billion from troubled U.K. lender
Northern Rock. Click

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Stock Market Recap

Economic News

NY manufacturing slowed more than expected
in September.