Mel's Blog

The market volatility continues as Mortgage Bonds are trading lower and are attempting to hold above support on the 25-day Moving Average.  

This morning’s economic news was negative for Bonds.  The always volatile Retail Sales Report for November recorded the largest gain in six months, by rising 1.2% and double expectations.  When excluding the effect of auto sales, Retail Sales rose an even higher 1.8%.  Tempering the strength of the report were higher gasoline prices, which when excluded, leaves Retail Sales at a leaner 0.6%.

Also weighing on bonds this morning was a very hot Producer Price Index (PPI) Report, showing producer or wholesale prices rising by 3.2% in November, double expectations and the largest increase since August 1973.  Once again the culprit was higher energy costs with gasoline prices surging 34.8% and overall wholesale energy prices rising by 14.1% in November – a new record.  After excluding volatile food and energy prices, the Core PPI increased by 0.4%, which was also twice expectations.   The hot wholesale inflation numbers immediately applied selling pressure on Bonds.  On a year over year basis, PPI had its highest increase since 1981, at an alarming 7.2%, with the Core Rate at a more modest 2%.  While this has the markets concerned, PPI is very volatile and often does not translate into consumer inflation as it may get absorbed by productivity gains and profits.  This puts even more emphasis on tomorrow's Consumer Price Index Report, which will give us a look at the pace of consumer inflation.

Weekly Initial Jobless Claims declined by 7,000 to 333,000 last week with the four-week moving average of claims falling by 2,000 to 338,750.  Claims were forecast to be reported at 335,000.  This is a slight negative for bonds, as the labor market continues to show stability.  

During the past several days, Mortgage Bonds have been bouncing up and down between support and resistance.  Longer-term, the Up Escalator is still intact, although it may be vulnerable amidst the heightened volatility.  I recommend very carefully floating for now.