The global trend in interest rates is biased toward tightening the monetary supply.  Will a tighter US monetary policy benefit the United States at this time?  There seems to be a large disagreement in the marketplace as to whether or not higher interest rates are in the best interest for our economy.  The two primary factors that the Federal Open Market Committee (FOMC) members are factoring into their decision are containing inflation and promoting growth. 

Over the past several years, the robust housing market has encouraged consumers to borrow money and increase spending habits, which has spurred economic growth.  The low interest rates, as well as the ease of lending practices have started to change.  Due to the recent mortgage problems, the criteria for borrowing money have tightened.  According to Dennis Gartman (of The Gartman Letter), Dave Seiders (chief economist for the National Association of Home Builders) has attributed the slowdown in building primarily to this.  The housing starts number came out at 1.474 million homes versus 1.485 million expected.  In 2005 and 2006, the housing starts were as high as 2.2 million homes before peaking.  The trend is clearly for lower housing starts at the moment.  The lower housing start trend translates into the fear of lower economic growth. 

At the moment, the equity markets have continued to be strong.  This is evident in watching the stock market rally to levels last seen in 2000 for the S&P 500.  Consumers appear to be confident. Retail sales were up 1.4% versus up .6% expected.  Consumer spending will likely fall as time goes by, due to higher energy prices.  Both the Producer Price Index (PPI) and the Consumer Price Index (CPI) came out slightly higher than expected, increasing the concern for inflation in the economy.  The PPI came out at +.9% versus +.6% expected.  The core rate, excluding food and energy, was +.2% as expected.  The CPI was +.7% versus +.6% as expected.  The core CPI, excluding food and energy, was actually slightly weaker than expected at +.1% versus +.2%.  For this reason, I believe that the Fed will err on the side of caution and leave rates unchanged. 

At this point, the 10-Year Note and 30-Year Bond market appear to be consolidating technically. What will encourage the market to continue its downside momentum?  Some economists believe that the US growth rate will continue to expand going into next year, primarily due to a tight labor market.  The tight labor market is increasing wages and spending power, which in turn stimulates economic growth.  The tight labor market and higher wages are taking pressure off the housing market to promote growth.  Longer-term, the higher wages, as well as higher energy costs will pressure stock prices. 

Fed Watch: The two day FOMC meeting is scheduled for next week. The market is expecting the Fed to not change rates at this time.  However, there is a bias towards a possible increase in rates if they do make a change. 

Near Term Trend:  Sideways

Long Term Trend:  Down

Support:  104-13.0

Resistance:  104-27.5

Upcoming Key Reports:

6/20/07 --          API/EIA Energy Stocks - 9:30 am CST

6/21/07 --          Weekly Jobless Claims - 7:30 am CST

                        EIA Gas Storage - 9:30 am CST

6/26/07 --          Consumer Confidence - 9:00 am CST

                        New Home Sales - 9:00 am CST

6/27/07 --          Advanced Durable Goods - 7:30 am CST

                        FOMC Meeting

                        API/EIA Energy Stocks - 9:30 am CST

6/28/07 --          GDP Q1 Final - 7:30 am CST

                        Weekly Jobless Claims - 7:30 am CST

API/EIA Energy Stocks - 9:30 am CST

FOMC Meeting - Announcement - 1:15 pm CST

                        EIA Gas Storage - 9:30 am CST

6/29/07 --          Personal Income - 7:30 am CST

                        Construction Spending - 9:00 am CST

                        Industrial Production - 8:15 am CST

7/2/07 --            ISM Manufacturing Index - 9:00 am CST

7/3/07 --            Factory Orders - 9:00 am CST