You don't have to be actively trading the markets to know that volatility has skyrocketed as a result of continued sub-prime mortgage woes hitting the market.  The European Central Bank, the Bank of Japan, the Fed, and the Bank of Canada have all increased their money supply over the past week to relieve some of the liquidity pressures caused by the tightening lending environment.  The relaxed sub-prime lending standards were a thing of the past as we all have to pay the price with increased volatility and downward pressure in the stock market. 

According to recent comments, the Fed remains focused on inflation and therefore continues to hold rates unchanged.  According to the producer price index (PPI) report released Tuesday morning, the Fed is correct.  The PPI was +.6% versus +.1% as expected.  The core rate, excluding food and energy, was +.1% versus +.2% expected.

Those in favor of a rate cut continue to cite weakness in the economy, such as lower non-farm payrolls.  The non-farm payrolls came out at +92,000 jobs for the month of July versus +135,000 new jobs expected.  Secondly, productivity is declining slightly.  Manufacturing appears to be contracting as well.  The ISM index came out at 55.8 versus 59.0.  An index reading below 50 is considered to be a contracting environment versus an expanding environment. 

Fed Watch: The upcoming Federal Open Market Committee meeting is scheduled for September 18th. The market is expecting the Fed to not change rates at this time.  However, there is a bias toward a possible rate cut, due to the continued sub-prime mortgage concerns.  In the interim, the Fed has increased the money supply to attempt to alleviate near-term pressure.

Technical Update:  A close below 106-28.0 is considered a key pivot area in the September 10-year notes.  Look to initiate a short position on a rally to 108-00.5 basis September 10-year notes, with a tight stop at 108-11.0. A rally through this key area will likely increase volatility.  A Fed rate cut would likely need to happen to break this key area.

Near-term trend:  Higher

Long-term trend:  Down (Based on the Weekly Chart below)

Support:  106-28.0, 106-01.0, 105-15.5

Resistance:  108-00.5, 108-16.0