Mel's Blog

In the Zone!  The Core Personal Consumption Expenditure (PCE) Index for April, which measures core consumer inflation, was reported below expectations at 0.1%.  But more importantly, the small 0.1% rise in April helped lower the year-over-year core rate of consumer inflation to 2.0%, which is within the Fed's target zone of 1 to 2%.  Unfortunately, this tame inflation data was unable to help Bond prices, which are trading lower and remain stuck in a miserable downtrend.  And a look at the bond page shows exactly that...it is amazing to see how bonds have tracked this range on the down escalator.

In other big news today, 157,000 new jobs were created in May, which was moderately higher than expectations of 135,000 jobs, but there was a small revision to the prior two months reports removing 10,000 jobs from what was previously reported.  The unemployment rate held steady at 4.5%.  This report shows the labor market remains tight, which makes the Fed's concerns of wage based inflation a real issue going forward.

Bottom line -  These huge reports came in as we expected and the market is also responding as we expected.  If you acted on yesterday's strategy and locked your loans ahead of this morning's reports, congratulations. But how do you advise on new transactions?  The Bond looks poised to test a floor of support at the $97.09 level, about 29bp lower than present levels - take notice of how far prices could drop if the Bond is unable to stay above this $97.09 level.  If this level is breached, the next clear floor lies a whopping 200bp lower than present levels.  I am in a locking mode until I see signs of a potential reversal.