US Economy Slowing, Bonds Fall

By Glenn Dyer | More Articles by Glenn Dyer

US bond rates fell to 4.69 per cent for the 10 year security last week, the lowest for several months and perhaps a sign the hard heads in the market see the risks of an economic slow down are greater than investors in stocks and commodities.

The fall followed a series of official figures which suggest the US economy might be slowing a little more broadly and faster than previously thought.

Comments by Federal Reserve chairman Ben Bernanke also helped push bond prices up and yields down when he sort of endorsed the continuing worth of a slowing economy to the fight against inflation.

Friday saw more suggestions of this slow down.

Winter caught up with the struggling US housing industry, sending activity sharply lower from December’s warm helper driven rise in activity.

The return of winter across the Midwest and North Eastern States meant the true extent of the continuing slump in activity was again exposed to financial markets.

The downturn though still has analysts wondering whether it was merely a weather-related catch-up, or a sign that the industry is going to see a further decline in activity.

The upshot was that the level of new homes started in January was the lowest for a decade.

But the impact on economic thinking was modified by the news that US Producer Prices fell in January by a little more than expected, providing comfort that inflationary pressures won’t be worrying anyone too soon, especially the Fed.

Official figures showed housing starts slumping 14.3 per cent to an annual rate of 1.408 million, less than forecast and down from December’s 1.643 million rate.

The Commerce Department figures showed that even as sales have stabilized, residential construction will not recovery quickly because the stock on sold houses (completed or unfinished) reached a record last year.

This build up in stocks of unsold houses is pointing to a continuing fall in construction activity, leading analysts to believe the industry’s slide has a way to go.

Fed Chairman Ben Bernanke told the US Congress in his first semi-annual testimony of the year, that this weakness in homebuilding may extend through much of the year at the same time inflationary pressures begin “to diminish.”

Figures out in the middle of the week from the US real estate industry association said that US house prices fell in half the country in 2006: prices finished the year lower than at the start. In the rest of the country prices were weakly higher to static.

The latest figures and those January Producer Prices were seen by US bond markets as helping the cause for no rate change, and perhaps a glimmer of hope of a rate cut.

Meanwhile the US Labor Department said the PPI dropped 0.6 per cent last month, reflecting a fall in energy costs. Excluding volatile fuel and food costs, wholesale prices 0.2 per cent for a second month.

No inflationary shocks there.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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