Finance Highlights 2006 0905 - Laserfiche WebLink

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August 2006 MARKET REVIEW MARKET SUMMARY During the month of July, fed Chairman Ben Bernanke testified before Congress on the state of the economy, and his comments there prompted a change in perception among market participants. While inflation fears had previously dominated market expectations, Chairman Bernanke's comments caused these to be replaced by expectations for a slowing economy, combined with the possibility of an end to FOMC rate increases. While inflation gauges remained above the Fed's comfort level in July (core CPI +O.Z% to 2.6% yoy), subsequent economic data seemed to validate the Fed's change in point of view. For example, the government's initial reading of 2"d quarter GDP came out at a Z.5%, significantly lower than 5.6% for the first quarter. Statistics and anecdotal evidence also continued to indicate a slowing housing market. Faced with an economy that appears to be slowing and elevated inflation readings, the Federal Reserve has indicated that its monetary policy will remain dependent upon evolving economic data. Nevertheless, it appears likely that the FOMC will soon pause, at least temporarily, in its campaign of interest rate increases. The next FOMC meeting takes place on August 8th. As a result of this change in perception, bond prices rallied furiously during the month of July, with yields in most sectors declining by 15 or more basis points. 3 Month 5.07 4.98 0.09 Z Year 4.95 5.15 (0.20) 3 Year 4.9Z 5.12 (0.20) 5 Year 4.90 5.09 (0.19) 10 Year 4.98 5.14 (0.16) 30 Year 5.07 5.19 (0.1 Z) ~ ~ ! Syr -Zyr T-Note f (0.05) 1 i (0.06) . - 0.01 10yr -Zyr T-Note 0.03 (0.01) 0.04 Source: Bloomberg The treasury yield curve shifted downward in July, with yields on the twoyearand three year treasuries declining by20 bpsand yields on the ten yeartreasuryfalling by 166ps.