Interest Rate Roundup

Friday, July 13, 2007

Speaking of inflation ...

This morning, we got the first of three monthly reports on inflation -- import/export prices. The report showed ...

* Overall import prices rose 1% in June, more than the 0.7% forecast. The prior month's 0.9% rise was revised up to 1.1%. On a year-over-year basis, import prices were up 2.3%, the most since March (2.8%), though clearly down from the high single-digit growth rates in 2004 and 2005.

* "Core" import prices, or those excluding petroleum, were up 0.2% on the month (and 2.6% YOY). That was the fourth monthly gain in a row, but a smaller magnitude rise than the 0.5% increase seen in May. Strip out all fuels, and you see prices were up 0.2% (and 2% YOY).

* Also worth noting: The cost of Chinese imports has risen three out of the last four months -- 0.3% in June, 0.3% in May and 0.2% in March. The cost of imports from other Asian countries has been climbing too. Is this a case of "Be careful what you wish for" with regards to the Chinese yuan? In other words, will our demands for the Chinese to let their currency rise come back to bite us in the form of higher inflation? Time will tell.

After initially rallying right at 8:30 (because retail sales data for June came in weak), bonds have reversed course. Long Bond futures prices were recently down 3/32, while 10-year yields were recently up 1.5 basis points. I continue to believe Treasuries are vulnerable and that a rise in 10-year yields to 5.5% is likely in the next couple of months. We'll see.


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