Monday: 12/10/07

Strong economic data and the approach of tomorrow's Fed policy meeting weighed on Treasuries today while stocks made solid gains to push the major indices to their highest closing levels in over a month. In late trading, the 10-Year Treasury Note was down by 13/32, raising its yield to 4.16%; the Dow was up by 101.45 points to 13,727.03; and the Nasdaq was up by 12.79 points to 2,718.95.

The Pending Home Sales report showed an increase in October and a sharply enlarged gain in September. The data point to a brighter sales picture for the last two months of the year.

The seasonally adjusted level of existing home sales have fallen for in each month between March and October while the level of new home sales fell in the first nine months of this year and only rose slightly in October.

The news rekindled the upward momentum for stocks with the Dow gaining 478.30 points in the last four sessions. News of an investor bail-out for USB Bank following last week's news of a bail-out for Citigroup helped energize the beleaguered financial sector and rechanneled some of the safe-haven interest in Treasuries. A further ease in oil prices also helped stocks. The price of a barrel of light, sweet crude oil for next month delivery slipped by $0.31 to $87.97. This followed a $1.95 drop on Friday.

By the end of stock trading, the Dow had risen on the day by 0.74%, the S&P 500 by 0.75%, and the Nasdaq by 0.47%.

Besides reacting to the stock market, bond traders were also continuing to prepare for tomorrow's Fed meeting. Prior to last week, speculation was divided as to how much the Fed would cut interest rates. Some felt that 0.50% cuts might be forthcoming to guard against the housing / credit situation from dragging further on the economy.

But the latest take on last quarter's gross domestic product turned out to be much stronger than expected and Friday's employment report revealed no notable weakness in the labor market as a whole. In addition, a plan to help out some subprime mortgage holders has further eased credit market concerns.

Though there are some Fed watchers who are still predicting half-percent cuts to the overnight borrowing rate between banks (federal funds rate) and the rate charged by for loans directly from the Fed (discount rate), the predominating expectation is that the cuts will be 0.25%.

And while rate cuts are generally a plus for bonds, their stimulative effect on the economy raises worries that they will also stir up inflation pressures. Since the fed funds rate is the benchmark for short-term rates, the short end of the Treasury securities maturity spectrum found some support from the rate cut expectation. On the other hand, the increased inflation risk helped weigh against the longer-termed securities.

The Fed policy statement comes out at about 2:15 PM Eastern Time. In the morning, the report on wholesale inventories will by released, though it is not expected to get much attention. The seasonally adjusted level is expected to have increased by about 0.5%. Levels are expected to have remained lean.