PPI, inflation at the wholesale level, rose .3% headline yet dropped .6% on the core index (ex-food and energy). Both numbers were below economist’s expectations and show little to nothing by way of inflation in the pipeline. Industrial Production/Capacity Utilization were also on the tape, up .1 IP while Cap U came in at 70.7%. The rise in IP was below expectations but continued a string of gains that has lasted 4 months. Cap U made it 4 months in a row as well, showing us that there is still considerable slack in the economy yet stability is staring to creep back in to industrial output. Big Ben put on a good show yesterday, talking the talk about the Fed’s main concerns on unemployment and inflation. Try as he may, the market seems to doubt that he can pull it off, that is putting people back to work and controlling inflation.
His mandate for low interest rates well into the future, coupled with a staggering deficit, falling dollar, 3 trillion in health care costs on the docket, and taxes for both individuals and small business destine to rise in 2010 will create difficult challenges and unintended consequences. With the Fed policy a given, we expect to see a floor under the bond market, supporting both treasury and mortgage back security pricing. Buying sponsorship (upcoming auctions) and year end book closings will be the challenge (liquidity issues).
The 10 year note and mortgage backs were very overbought as well, giving us a text book sell as consolidation set in. Mortgage backs were off as much as 12/32’s early today but have boot strapped themselves back to cut the losses in half. We traded right back down to good support and that up sloping trend line I showed you last week. So far, it has held. We also like the fact that the chart has held closer to yesterday’s highs versus today’s lows, giving the chart a neutral, inside day appearance.
With stocks near unchanged and a basket of economic uncertainty, best to not throw caution to the wind.