6/16/09

Good morning. Another goofy day. Bonds started lower (down 9 basis points from yesterdays close) and are now up again (14 points). The prices are changing as Russia, India and China consider buying each other's bonds, swapping currencies to lessen dependence on the dollar and shifting reserves out of Treasuries. Speculation that the Fed will raise interest rates this year, if the economy is recovering, is fading as quickly as it surged the past two weeks as investors become less concerned inflation will increase. U.S. Producer Prices rose in May, sharply falling short of expectations, as food expenses dropped. An increase in fuel led to the jump in wholesale prices and these costs may rise further in June. Core prices, excluding food and fuel, unexpectedly in May, the first decrease since October 2006. Overall PPI fell 4.7% on a year over year basis, the biggest decrease since 1949, reflecting the drop in fuel prices late last year that has since partially reversed. The bottom line is that inflation currently is moderate. U.S. Housing Starts soared up 17.2% in May, showing surprising strength. Building permits, an indicator of future construction, rose 4% from the previous month. However, building permits are down 47% from a year earlier. Factory production, 80% of total production, was down 15% in the last year, the biggest 12-month drop since 1946. Manufacturing is still contracting, maintaining a moderate decline. As orders have tumbled, companies have slashed production to lower inventories. The excess capacity will help control inflation as raw material costs keep rising. We’ve had a little improvement in pricing and we are hoping it will continue. Please let me know if you have any questions. Have a great day today