Why bonds can't get out of their own way

This morning, we got key retail sales and import/export price data for September. At first, bonds loved the fact headline import prices plunged 2.1% MOM between Aug. and Sept. Advance retail sales also dropped 0.4% vs. expectations for a 0.2% gain. BUT if you strip out ALL fuel data (we all know energy prices tanked in September), things get interesting.

Ex-fuels monthly import inflation was 0.3% in Sept. That matches August's 0.3% rise ... giving us a 2.9% YOY ex-fuel inflation rate. Ex-auto, ex-gas retail sales were also up big 0.8%, the strongest reading since at least March, and maybe more. The reason headline sales were poor was that sales at gas stations tanked.

Bonds shot up 11/32 in price right after the news came out. They're now DOWN 12/32. Keep a very close eye on the bonds and how stocks react. Falling rates and assumptions of falling inflation have fueled this big market rally. While I believe the drop in energy prices WILL keep inflation from getting way out of control, these figures show the economy may not be as weak as everyone believed. They also raise the possibility core inflation will remain hot enough to concern the Fed.