Only two more days ... thank goodness!

We're two days away from the Fed news, expected at 2:15 p.m. on Thursday. And thank goodness. Waiting for this meeting has been a killer on the nerves since this could be a real game changer for stocks, bonds, the dollar and more. Nothing to do now but wait.

One quick bit of news in the meantime: Both new and existing home sales figures were released for the month of May. The rate of new home sales was stronger than expected, up 4.6% from April. What happened? Builders slashed prices and threw "cash on the hood" a la GM, that's what. My evidence: The advertisements all around me AND the fact the median price of a new home plunged more than $10,000 between April and May. May's $235,300 median price was the lowest since last July. Inventory for sale (in absolute numbers) dropped a bit, however.

On the existing side of the business, sales fell 1.2% between April and May and inventory ballooned to a fresh high of 3.6 million units. Prices were up 6% YOY. The latest figures don't change my overall outlook: Housing is headed into the toilet over the longer-term due to slumping sales, panicky speculators, surging supply, rising interest rates, a looming tightening in lending standards, higher ARM payments (do I need to keep going on?)

Treasuries keep getting pounded

How does Bloomberg describe this hammering? The headline says it all:

"Treasuries Head for Worse Slump Since 1984 on Fed Rate Concern"

They're measuring "worst" in terms of number of days in which bonds have fallen. That's up to eight. But while the cumulative decline has been awful (about two points in 10-year Note futures), I haven't seen much in the way of "panic days" -- big declines on heavy volume. It's almost like traders are saying: "Oh well, guess we better get yields up to the fed funds rate we'll have next week" (which is expected to be 5.25%).

Could that mean we have even MORE downside? Without a crescendo wash-out type scenario where all the bond sellers get cleaned out, maybe.

When "good" bonds go bad...

There are a lot of "Flight to safety" bond buyers who are feeling pretty stupid now. Bonds were perceived as a "good" safe haven when the stock market got pounded. Buyers jumped in, bidding bonds up in price and sending interest rates lower.

But now, they're getting killed. 10-year Treasury yields are flirting with a breakout above prior highs just shy of 5.2%. Moreover, Eurodollar futures are down in 12 out of the past 14 trading sessions. You could even argue the market is pricing in a slight ... extremely slight ... chance of a 50-basis point Fed hike at next week's meeting.

Critical Fed meeting right around the corner...

The Fed's next policy setting meeting is a two-day affair that concludes next Thursday, June 29. A 25 basis point is locked in, as far as I'm concerned. But what about the outlook for the future? Is there a chance they go 50? I'll be back to share my thoughts in a few days. Suffice it to say that I think the Fed could end up being tougher than the markets (stock AND bond) expect. The mini-panic in financial markets is over ... oil is climbing right back toward new highs again ... the latest economic data (ex-housing) is relatively strong both here and overseas ... and foreign central banks are hiking from one corner of the world to another. Pause? Not bloody likely.

As for Treasuries, yields are breaking out all over. The weekly chart of 10-year T-Note yields (above) shows we took out the highs of early 2004, re-tested those highs, then started taking off to the upside again. There's some longer-term resistance around 5.5%. But if the federal funds rate is headed to that level in the next few months (and right now, both the futures market and me think we are), that could give way. More food for thought for the "one and done" crowd.

Another wild and wooly week...

Talk about a roller coaster! Stocks swoon, then soar. Interest rates drop on bad news at first ... then surge on bad news later. It's enough to make a man pine for the weekend -- good thing it's only a few hours away!

So what about the markets I follow? It looks to me like we've shifted into "bear" mode for many financial stocks (though we could rally a bit more near term). And unless we get devastating economic news between now and the end of the month, the Fed is going another 25 basis points higher with the fed funds rate. Longer-term Treasury yields should get dragged higher as well. After all, it's extremely rare to have a 5.25% FF rate and a 5.14% 30-year bond yield.

One last thing: Next week is light on economic data. So we may actually enjoy some tranquility for a change! We'll see ...

3 out of 3 reports show nasty inflation

Well, we now have the Producer Price Index and Consumer Price Index for May under our belts. Both stunk up the joint.

* The Producer Price Index jumped 4.3% year-over-year in May, the biggest rise since January. Core PPI gained 0.3% vs. the 0.2% Wall Street forecast, while core intermediate and crude goods surged a whopping 6.3% and 26.8% YOY.

* The overall CPI jumped 0.4% in May after rising 0.6% in April. Prices have now surged at an annualized rate of 5.2% in the first five months of 2006. That’s much worse than the CPI’s 3.4% increase in 2005 and almost DOUBLE the 2.7% inflation rate in 2004.

* So-called “core” inflation climbed 0.3% for the third month in a row. This measure excludes food and energy, and it’s closely watched by both the Fed and the markets. Prices rose for a broad range of goods and services – housing, medical care, airfares, recreation, you name it.

Worth noting: This time, bonds sold off on the "bad" news. They had shrugged off the PPI and import price data. Is this the start of a new down leg in bond prices? Is it just a blip? We'll see.

Incidentally, many financial stocks have been taken out back and shot these past few days. Guess the "one and done" crowd -- which keeps buying bank stocks on the assumption the Fed is thisclose to being done -- got it wrong ... again.

1 down, 2 to go on inflation front

Every month, we get 3 major inflation reports -- import/export prices, the Producer Price Index, and the Consumer Price Index, usually in that order. Today's import price data was troubling to say the least.

In May ...

* Overall prices climbed 1.6%, twice as much as Wall Street forecast.

* The news was even worse for “non-fuel” import prices, a core inflation measure the market follows closely. They surged 0.7% -- the most in any month since 2002 when the government started tracking the category.

* Several categories of import prices rose. They included petroleum(+5.2%), consumer goods (+0.3%), and industrial supplies (+3.9%).

Not much for the "well-contained inflation" Fed to hang its hat on.

Major, MAJOR trend break in housing stocks

I'm going to let this chart of the HGX, the housing index, speak for itself. I've been shouting from the rooftops the housing sector was toast. Looks like even Wall Street is finally waking up.

Bernanke drops a bomb on Wall Street

Fed Chairman Ben Bernanke (whom I prefer to call "Gentle Ben") wasn't so gentle today. He delivered a devastating blow to the market at an international monetary conference in Washington this afternoon. Specifically, he warned that inflation was accelerating, that the acceleration was "unwelcome" and that the Fed "will be vigilant" to make sure that trend toward higher inflation doesn't continue. On top of that, he essentially acknowledged that the economy was slowing, but also implied that it didn't matter -- preventing inflation was the Fed's primary goal. In other words, the weak jobs report from last Friday won't stop them from hiking again.

You can read the full comments here. Their market impact? The dollar bounced. Eurodollars and short-term Treasuries got hit pretty hard, with long-term bonds taking a smaller whacking. Meanwhile, stocks tanked -- especially those financial shares that have been rallying on the "one and done" rate hike story for several months (and rate hikes!) now.

Housing takes another header

The Pending Home Sales Index is a "leading indicator" for actual sales on the existing home side. Traditionally, the National Association of Realtors only reported actual existing home sales, which are based on closings (and as anyone who has bought a house knows, they occur 30-60 days after contract signings). The pending index is based on signings, so it's more up to date.

Anyway, April pending sales were down 3.7% MOM from March … triple market expectations of a 1% decline. Worse, the pending home sales index is now down almost 12% from a year earlier. In the Midwest (17%) and West (19%), sales were down huge. This is more evidence the soft landing story is crap, in my opinion.