The weak housing market has been in the headlines the past couple of weeks causing the interest rate markets to continue to rally and the stocks correct. 

Over the past couple of weeks, signs of a troubled economy seem to be all over the market.  First and foremostly, report after report has come out weaker than expected in the housing market.  The new home sales were .834 Million Units versus .900 Million, as expected.  This decline has further extended the downtrending market.  The existing home sales were 5.75 million units sold versus 5.9 million units expected.  Construction spending was down .3% vs. +.2% expected. 

Inflation could limit the rally in the interest rate markets, since the Fed has repeatedly stated their concern.  GDP was up 3.4% versus up 3.2% as expected.  If you ask anyone on the street, we all agree that the cost of day-to-day goods and services are significantly increasing in price with the exception of housing prices.  In theory, a weak dollar should help contain inflation, but is this really the case in the global marketplace that we live in today?  Since crude oil predominantly trades in U.S. dollars on the cash market, it makes sense that the crude oil price is rallying as the dollar is dropping.  Sellers of crude oil are only willing to sell crude on their terms and price.  Since crude oil production takes place all over the world, the U.S. is at a disadvantage in this case.  This type of inflation causes the U.S. to be at risk of a slow down in the economy. due to a lower purchasing power.  For this reason, I have a hard time believing that the Fed will opt to lower rates any time in the near future. 

Although the recent drop in the stock market (attributed to the woes in the sub-prime lending market) has alarmed many investors, it is widely believed that this is a healthy break in the stock market.  Liquidity is extremely high globally.  Therefore, many investors are still looking for buying opportunities. 

Fed Watch: The upcoming FOMC meeting is scheduled for August 7th. The market isn't expecting the Fed to change rates at this time.  However, there is a bias toward a possible rate cut due to the continued housing weakness. 

Technical Update:  A close below 107-02.0 is considered a key pivot area in the September 10-Year notes.  Look to initiate a short position on a rally to 107-20.0 basis September 10-Year notes.

Near Term Trend:  Higher

Long Term Trend:  Down

Support:  107-02.0, 106-01.0, 105-15.5

Resistance:  107-27, 108-16.0    

Upcoming Key Reports:

8/1/07 --            ISM Manufacturing Index - 9:00 am CST

                        API/EIA Energy Stocks - 9:30 am CST

8/2/07 --            Weekly Jobless Claims - 7:30 am CST

                        Factory Orders - 9:00 am CST

                        EIA Gas Storage - 9:30 am CST

8/3/07 --            Monthly Unemployment - 7:30 am CST

                        ISM Non-Manufacturing Index - 9:00 am CST

8/7/07 --            Productivity & Costs - 7:30 am CST

                        FOMC Meeting

8/8/07   --          Wholesale Trade - 9:00 am CST

                        API/EIA Energy Stocks - 9:30 am CST

8/9/07   --          EIA Gas Storage - 9:30 am CST

8/13/07 --          Business Inventories - 7:30 am CST

                        Retail Sales - 7:30 am CST

8/14/07 --          PPI - 7:30 am CST

                        US Trade Balance - 7:30 am CST

8/15/07 --          CPI - 7:30 am CST

                        Real Earnings - 7:30 am CST

                        Capacity Utilization - 8:15 am CST

                        Industrial Production - 8:15 am CST

                        API/EIA Energy Stocks - 9:30 am CST