June 17. Inflation and helicoptors
–Sharply lower interest rates Friday as the market continued to digest Thursday’s Hilsenrath blog, which said that the Fed was going to ‘push back’ market expectations of rate tightening. The green euro$ pack, (third year out) saw the strongest rally, closing +10.375 bps. The five year note fell over 7 bps in yield. Red/gold pack spread actually steepened by 2 bps.
–The big event this week is the FOMC announcement and press conference on Wednesday. But given the strong bounce in bonds, it’s worth spending a bit of extra time considering inflation in general, with CPI for May released Tuesday. Inflation is falling. Core Personal Consumption Expenditure Price Index was only 1.29% month/month in April, near the lowest m/m reading ever. In March 2012 (by the way, spring of 2012 tens hit their high yield of 2.4%), it was 2.00% which was the highest since the end of 2008. The year over year change in April Core PCE Prices at 1.05% is the lowest on record, back to 1960. Let that set in for a second. THE LOWEST ON RECORD. Sure, the Fed may begin to taper at some point, but the fear of a deflationary asset spiral is still palpable, especially as other Asian export nations respond to Japanese market share gains due to a weaker yen. The Fed’s thresholds are inflation and employment, and recent data suggests that housing will be negatively impacted by the modest rate rise just experienced (for example, refi applications plunged). Last employment data was ok, but month over month wage gains were zero. While tapering may well occur by autumn, it’s likely to be modest.
http://www.advisorperspectives.com/dshort/updates/PCE-Price-Index.php
http://fabiusmaximus.com/2013/06/14/inflation-interest-rates-51376/#more-51376
