Mel's Blog

Mortgage Bonds are slightly lower after this mornings economic news and a talk from Fed Chair Bernanke.

Fed Chairman Ben Bernanke spoke this morning at the Cato Institute and unveiled some big changes on the way the Fed reports information in an effort to provide us with more transparency. Big Ben said the new strategy "will provide a more-timely insight into the Fed's outlook, will help households and businesses better understand and anticipate how our policy decisions respond to incoming information, and will enhance our accountability,". Going forward the Fed will double the frequency of their forecasts for economic growth, unemployment, inflation and will extend those forecasts to three years from the current two year forecast.

Starting next week with the release of the Fed Minutes from the Oct 31st Fed Meeting, the Fed will release projections for inflation-adjusted GDP, unemployment and inflation - as measured by both the headline and the Core Personal Consumption Expenditure Price Index (PCE). On the change to now forecast headline PCE, Ben Bernanke said "Ultimately, households and businesses care about the overall...rate of inflation,".

A few things to note - The Fed again highlights PCE as their measure of inflation. Additionally, the Fed is going to watch headline inflation more closely - we don't know what effect this will have on monetary policy, but it is interesting to see the Fed have a broader view on inflation, certainly due to the spike in energy prices. We think Ben Bernanke has been a masterful Fed Chair and this move to provide more transparency will be good for the financial markets and investors. It will also create a greater need to be dialed-in to the market as these future forecasts from the Fed will provide more information and more often - meaning, more chance for market moves. One other point about Bernanke - although he has been extremely accurate on his stance for Fed policy, his policy decisions have been met with criticism from the media and dissention from Fed Members. Instead of saying "I told you so", Ben took the high road and welcomed this type of open disagreement to reach the best conclusions.

This morning, Retail Sales were reported in line with expectations and September's prior reading was revised slightly higher. Also some good inflation news hit the wires as the Producer Price Index (PPI) for October rose 0.1%, which was in line with expectations. But when excluding volatile food and energy prices, the Core PPI was reported unchanged, which was below expectations of 0.2%. This tame read on inflation is good news, but Traders are going to be more focused on tomorrow's important Consumer Price Index (CPI).

Technically, Bond prices are trading near support at the 25-day Moving Average and above additional support at the 50-day MA and Rising Trend Line. For now, we will continue to Cautiously Float as strong support lies just beneath present levels.