CPI, inflation at the consumer level, rose a meager .4% headline while the core index (ex-food and energy) remained unchanged. Higher energy prices bumped the headline number, just like they did with yesterday’s PPI. Food prices, especially dairy products and nonalcoholic beverages, took a dip, helping the core index to hold steady. The results were in line to a touch better than expected, taking the sting out of yesterday’s jump in PPI. Overall, renewed demand for energy products and the falling dollar will continue to nudge headline inflation numbers higher but will have little effect on Fed policy.
November Housing Starts were also on the calendar, rising 8.9% to 574K units. Although the print was up from last month, it came in below economists’ estimates of 580K units. Supply of existing homes fell to 7 months, a nice improvement from the peak of 11.3 months in 2008. Overall, we feel that the housing market is stabilizing but will need to content with another wave of foreclosures as homeowners remain underwater and the loan modification programs to date have been a bust.
All eyes have now turned to the FOMC and any change in interest rates/policy statement. Given Global uncertainty (think Dubai, Spain, Greece, etc.) and year end constraints, we see today’s FOMC as a carbon copy of last month’s release. Technically, the combination of oversold conditions and good support at the 3.60% yield level has given life to our bond market. Currently, the 10 year note is up 13/32’s (yield 3.55%), mortgage backs up 6/32’s, and stocks up 25 points on the big board. Technically, the market is trading in a counter trend move (rally) within the larger bearish trend. Good resistance remains overhead at the 40 day moving average (3.49% yield). The limited range is forming a neutral, inside day with the bears still in control. As much as we want to like this market, it is nothing more than putting “lipstick on a pig.” Keep your defense on the field.