Mel's Blog

Mortgage Bonds appear to be yawning at some good news on consumer inflation by way of the Consumer Price Index.  

The Labor Department reported the Consumer Price Index (CPI) for July at 0.1%, which matched expectations.  And the more closely watched Core CPI, which factors out volatile energy and food prices, also met expectations at 0.2%.  The lower overall CPI was attributed to lower gasoline prices during the month and was the lowest headline consumer inflation rate during the past eight months.  With this latest read, the year over year headline CPI now stands at 2.4%, while the Core CPI is 2.2% year over year.  The report shows that core inflation is stable to moderating and this is good news for Bonds and the economy longer-term.

On the manufacturing front, the New York Empire State Index showed manufacturing activity in the New York Region is alive and well with a reading of 25.1 in August, which was higher than expectations of 19.0.  

Net Foreign Purchases of US Securities for June were reported at $121 Billion.  This healthy level of inflows into US Securities, such as Stocks and Bonds, shows that foreigners still have an appetite for US Dollar denominated investments.  As we have discussed many times in the past, this foreign buying of our Bonds has kept our long-term interest rates relatively low.  But remember that this report is based on purchases made in June, so it will be interesting to see how this report reads in the coming months given current events in the credit markets.

Industrial Production and Capacity Utilization  were both reported essentially in line with expectations.  This was a good report because the 81.9 reading on Capacity Utilization remains below the 82 level historically consistent with inflationary pressures.

Yesterday, Bonds were able to make a successful bounce higher off of the 25-day Moving Average.  With the next level of resistance about 40 to 50bp higher than present levels, we want to be patient and see if prices can add to those gains.  But Bonds may again be at the mercy of Stocks...and at the moment, the Dow is attempting to stabilize above psychological support at the 13,000 level.  Should Stocks improve further, it may be at the expense of Bonds as money flows from Bonds and into Stocks.  For the moment, I advise cautiously floating, but be ready to take action if Bond prices turn lower.