Mel's Blog

Even tame consumer inflation hasn't helped Mortgage Bonds too much this morning, as they continue to battle the ceiling at the 25-day Moving Average.  But current testimony by Ben Bernanke is causing market movement in both stocks and bonds.

The Consumer Price Index (CPI) for June increased by just 0.2%, which represented the smallest monthly increase in the CPI since January, with the year-over-year CPI coming in at 2.7%.  The more closely watched Core CPI, which factors out volatile food and energy costs, also increased by only 0.2%, meeting expectations.  This read means that the year-over-year Core CPI held at a tame 2.2% - still just outside the Fed's desired range of 1 - 2%, yet not too far away from their goal.  But remember the recent Core Personal Consumption Expenditure Index (PCE)  was reported at 1.9% on a year over year basis and it is the Core PCE that is the Fed's favored measure of consumer inflation.

As Fed Chairman Bernanke's speech to the House of Representatives is being delivered this morning, he stated that although the recent inflation numbers have been moderating, the Fed remains very concerned about inflation.  He confirmed that the Core readings are the ones to watch (which remove food and energy prices), and specifically mentions the Core Personal Consumption Expenditure (PCE), which unlike the media, we have known was the Fed's preferred measure.  He underscores that they are staying very alert to economic changes and indicators, but based on their continuing concerns over inflation, it certainly appears that there will not be a cut to the Fed Funds Rate in the near future.

Very interesting note, speaking of the media:  one line of the prepared speech that they focused on and headlined was "the ongoing housing correction might prove larger than anticipated".  While this was indeed pulled directly from the text, the full text reads very differently, as Bernanke is saying that while one risk to the outlook is that the housing correction might prove larger than anticipated and impact consumer spending, but goes on to say that consumers have been spending at a very healthy pace of late.  Be very cautious about believing the scare tactics that the media uses, as they often take words out of context...Highly advised:  read the full text of Bernanke's speech here, as he also discusses the subprime situation and proposed solutions at length as well.  http://www.federalreserve.gov/boarddocs/hh/2007/july/testimony.htm

In housing news, Housing Starts and Building Permits for June were reported “mixed” with Starts increasing in June but Permits falling.  Housing Starts increased by 2.3% to an annual rate of 1.467 million, which was slightly higher than expectations of 1.45 million, while Permits fell by 7.5% to an annual rate of 1.406 million, matching a 10 year low and below expectations of 1.49 million.