We fully expect to see increased volatility in the market for months to come.  Since the Fed cut the discount rate last Friday after increasing the money supply the week before, the market volatility has eased slightly and restored some optimism for investors. 

The majority of the reports that came out over the past few weeks have been better than expected by the market. Since the volatility is attributed to the credit crunch related to the sub-prime lending situation, it is fitting to discuss the housing market first.  New home sales and existing home sales both came out stronger than expected.  Existing home sales were 5.75 million units versus 5.70 million expected.  This sounds promising but it is important to remember that this is the lowest sales number in the past five years. New home sales were impressively .870 million units versus .825 million as expected.  Keep in mind that a year ago, the new home sales were closer to .969 million units sold.  Therefore, the trend is still declining for new home sales.

The current supply of housing on the market is approximately 7.5 months.  With the increasing supply for sale, it is no surprise to see new home starts weaker than expected at 1.381 million units versus 1.405 million units expected.  According to a chart in The Gartman Letter recently, the number of ARMs coming due for refinancing are expected to peak between January and June of 2008. This leaves us to believe that the number of foreclosures is likely to increase as the housing supply on the market increases. 

The street continues to be concerned with the future weakness in the stock market.  Many analysts continue to keep a close eye on consumer spending habits to determine how deeply the economy is affected by the credit crunch.  At this point, the retail sales numbers have been solid up approximately 2% - 2.4% for the past few weeks.  This was stronger than expected, but could be partially attributed to the back-to-school buying habits of many Americans. The big shocker in the market last Friday came from much higher than expected durable goods orders.  The durable goods were up 5.9% versus an increase of 1% expected.  (Durable goods are products meant to last more than 3 years.)

With the threat of a slowing economy, is the Fed still concerned with inflation? Absolutely. The most recent producer price index (PPI) report indicated that producer prices have increased .6% versus .1% expected.  Another PPI report is scheduled to come out the morning of the next FOMC meeting.  The CPI will not come out until after the FOMC meeting.  As we approach the next FOMC meeting, many people are expecting the Fed to cut rates due to increased market pressures.  Cutting rates would likely pressure the dollar and increase inflation and possibly create hyper-inflation.   

Fed Watch: The upcoming FOMC meeting is scheduled for September 18th. The market is expecting the Fed to cut rates .25% at this time, 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:  The December 10-Year Note is solidly in an uptrending channel. Look to initiate a long position in the December 10-year notes on a break to 108-10.0, with a stop below 107-25.5. My upside target objective prior to the September 18^th FOMC meeting is 110-23.0.

December 10-year note becomes front month on Friday.

Near Term Trend:  Higher

Long Term Trend:  Higher

Support:  107-27.5, 106-29.5

Resistance:  108-29.0, 110-23.0

Upcoming Key Reports:

8/29/07 --          API/EIA Energy Stocks - 9:30 am CST

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

                        GDP Q2 - 7:30 am CST

                        EIA Gas Storage - 9:30 am CST

8/31/07 --          Personal Income - 7:30 am CST

                        Factory Orders - 9:00 am CST   

9/3/07 --            US Market Closed for Labor Day Holiday

9/4/07--             Construction Spending - 9:00 am CST

                        ISM Manufacturing Index - 9:00 am CST

9/6/07 --            Weekly Jobless Claims - 7:30 am CST

                        Productivity & Costs - 7:30 am CST

                        ISM Non-Manufacturing Index - 9:00 am CST

API/EIA Energy Stocks - 9:30 am CST

EIA Gas Storage - 9:30 am CST

9/7/07 --            Monthly Unemployment - 7:30 am CST

                        Wholesale Trade - 9:00 am CST

9/11/07--           US Trade Balance - 7:30 am CST

9/12/07--           API/EIA Energy Stocks - 9:30 am CST