Mel's Blog

A slightly hotter than expected reading on inflation has pressured Mortgage Bonds a bit lower so far today. 

The Consumer Price Index (CPI) rose 0.4% in February which was a touch more than expectations of 0.3%, while the more closely watched Core CPI which strips out volatile food and energy prices rose by 0.2% and was in line with expectations. 

The year over year rate for Core CPI held steady at 2.7%.  Even though the Core CPI was reported in line with expectations, the fact that the year over year Core went unchanged has to be a little concerning for the Fed as inflation does remain stubbornly above the Fed's desired target range.  On the news, Fed Fund Futures forecasted a 30% chance of a cut in July, which was a sharp drop from the 46% forecast before the CPI was released.  Share this news with your clients and partners, because if the Fed doesn't cut rates, this means that Home Equity Lines of Credit and ARM loans tied to short-term Bonds like the 6-month LIBOR will not be moving lower in the near future.

Speaking of the Fed, there is talk about a rate cut to help the housing market or to smooth out the Sub-Prime problem.  Don't believe it.  The fed will only cut rates if the Core rate of inflation, as measured by the Personal Consumption Expenditure (PCE) Index, falls below 2% for a couple of consecutive months.  The latest Core PCE was 2.3%, with the next report due out on March 30th.

Industrial Production was reported at 1.0%, which was greater than expectations of 0.3% and was due primarily to the cold weather and increased utility usage.  Capacity Utilization was reported at 82.0%, which was hotter than expectations of 81.3%.  More importantly, inflationary pressures begin once Capacity Utilization nears maximum levels.  This allows for a rise in prices, and this increase in the cost of goods can thereby be passed on to the consumer.

Bond prices have been pushed below support provided by the Trend Line.  This comes of no surprise as Bonds have been unable to pierce resistance at the $99.41 level.  With prices now below the nearest floor of support, bonds could continue to drift lower to test the next closest floor of support at the 25-day Moving Average, presently located at $99.04 or 18bp worse than the current price.  Stay tuned because this may happen later today and create the need for a re-price alert to lock.