Mel's Blog

"I can't get enough of your Love"...Bad Company.  And Bonds can't get enough of the 200-day Moving Average having touched it 12 of the past 16 trading days.  So while prices are modestly lower, they are still hovering near this important Moving Average.

The Producer Price Index (PPI), which measures inflation at the wholesale or producer level, popped 1.1% higher during September – much higher than the 0.5% consensus estimate.  Increases in food and energy prices were primarily responsible for the surprising surge in producer inflation.  Food prices jumped by 1.5% while energy prices surged by 4.1% during the month.  However, when factoring out these volatile categories, the Core PPI increased by a lower than estimated and rather tame 0.1%.  On a year over year basis, the headline PPI was reported at 4.4%, which was very hot and double last month's reading - hence, this news pressured Bonds slightly lower.  Even though the year over year Core PPI rate came in at a lean 2.0%, the hot headline number has sparked chatter in the pits about the threat of inflation.  And as we all know Bonds hate inflation.

Fed Fund Futures traders may be thinking that inflation is indeed a threat as well as they are now pricing the chance of a .25% cut on Oct 31st at less than 50%.  Next week's CPI will be an important reading as we approach the next Fed Meeting.  Should this number be reported above expectations, it is likely that a Fed cut in October will be off the table.

Retail Sales for September was reported at 0.6%, which was higher than expectations of 0.2%.  New vehicle sales led the way with a 1.2% gain.  However, when excluding the effect of auto sales, retail sales increased by 0.4%, which was just above expectation of 0.3%.  The positive economic news also applied modest selling pressure to Bonds this morning.

The University of Michigan’s Consumer Sentiment for October was reported at 82.0 which was lower than expectations of 84.0.   Bond prices had little reaction to the news.

Bonds continue to move in a sideways pattern bouncing back and forth above the 200-day Moving Average, while remaining above a good floor of support at the 50-day Moving Average, presently at $99.95 and the $99.88 level.  Stocks have been on a nice run of late and they could be tiring.  If this is the case and Stocks move lower, Mortgage Bonds may benefit.  For now, I will continue to float, but cautiously, as prices remain above a layer of support.