If you are one of those people who read the tea leaves trying to predict which direction interest rates are moving, today was an interesting day.
The PPI (Producer Price Index) jumped 1.2% in July, the largest increase in 27 years.
Oil prices, which have been going down sharply lately, touched down at just over $111 per barrel, but closed up for the day at $115.
The Dollar, which has also been on a roll, was off today, too.
Inflation hawk and Dallas Fed Chairman Richard Fisher in a speech today warned that though the economy was slowing, the uptick in inflation could lead to a “lingering inflationary fever”.
Over the last month any of these items would have been enough to spark a huge selloff in mortgage bonds. Today mortgage bonds managed to end the day flat (actually up 3 tics), parked right at a stubborn level of resistance. There was plenty of news showing the economy is still slowing, and some of the inflation is obviously seen through the rear view mirror. But in the past month it hasn’t mattered. Bond traders have been wearing their inflation blinders and they would take any excuse to sell.
If mortgage bonds can break through this resistance, there is a good amount of room for them to run. If mortgage bonds go up, mortgage interest rates come down. The market is fickle, and tomorrow and bonds could easily get worse. But the fact that the market took this news in without flinching makes me think this won’t happen. My tea leaves say rates are about to get better.
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{ 3 comments… read them below or add one }
I’m one of those guys… and today drove me absolutely nuts. I just can’t believe the market some days.
I think most traders have priced in a certain level of inflation to begin with (based on the reactions to PPI & CPI).
Unfortunately, I don’t think it’s going to get any easier any sooner!
Peter good post and good call so far, lets just hope that your tea leaves keep giving you the right signs. this market is so up and down right now that we really do not have any ideas but at least the tea leaves were right today.
Looks like the volatality is subsiding a bit, and the markets are reacting more to basic fundamentals, than the daily news. That sounds good, regardless of which way it trends.
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