This morning we read;
Sept PPI jumped more than expected , +1.1% with forecasts of +0.8%. The core rate (ex food and energy) was better at unchanged against estimates of +0.2%. Theincrease in the PPI largely due to fuel costs increasing in Sept. Inflation gets a lot of ink these days with the Fed printing money at light speed but there isn’t any evidence on increases in the core rate which is where the focus is. Facing a global economic slowdown, businesses may have difficulty passing higher energy costs onto customers, keeping a lid on prices. In addition, weak demand from abroad and in the U.S. will probably prevent the cost of raw materials from flaring, limiting inflation pressures and allowing the Federal Reserve to focus on jump-starting employment growth. The core index increased 2.3% in the year ended in September, the smallest 12-month advance since June of last year. Core prices were held in check by a 0.7% drop in the cost of communications gear, the biggest decrease in more than eight years. Prices for computers and related equipment dropped 1.5%, helping to offset a 0.3% gain in light motor trucks according to the Labor Dept.
Prior to 8:30 PPI data the 10 yr note rate was up 3 bp from yesterday’s close.After PPI the 10 got a bounce back to unchanged as more confirmation that inflation is still not on the radar. Inflation fears will stay even though there isn’t any evidence yet that it is increasing. With long term interest rates at these low rates, traders and investors will not ignore the possibility. Investors still willing to buy these low yields based on a model created by the Fed; the 10-year term premium, that includes expectations for interest rates, growth and inflation, was negative 0.89%. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average for the past 10 years is +0.44%. The all-time low was negative 1.02% on July 24.
After four days in a row of declining stock indexes, this morning the market is looking a little better prior to the 9:30 open. Recent activity in the equity market has been discouraging; the indexes have tried to improve everyday recently only to fall apart in the late afternoon. Yesterday the DJIA held a 95 point gain in the morning but closed -18; the broader S&P index ended unchanged.
In Europe this morning reports that August industrial production increased 0.6% frm July (July also was +0.6% frm June). The better report however didn’t pass through to Europe’s key stock markets; all weaker today.
At 9:30 the DJIA opened +15, NASDAQ and S&P -1. The 10 yr note at 9:30 1.66% -1 bp; 30 yr MBS +2 bp.
9:55 brought the U. of Michigan consumer sentiment index was generally expected unchanged at 78.3; as reported the index jumped to 83.1, a huge increase. The reaction sent the 10 yr note up 1 bp and fueled stock indexes higher. The highest level since before the recession began five years ago, raising the odds that retailers will see sales improve. The increase attributed to rising stock and property values along with falling joblessness.
