Interest Rate Roundup

Monday, October 30, 2006

belated blustering on bonds ...

I was out on Friday, and I've been catching up on some other stuff today. Ergo, no posts until now. But here are some quick thoughts on the recent market action:

* GDP was a surpise to me and the markets. I expected more on the growth front. But we got a lackluster 1.6% annualized gain vs. a forecast for 2% growth. Throw in the recent disappointment in durable goods orders, and you end up with the ingredients for a bond market rally.

* Technically speaking, we've climbed back to the 112 level in the long bond. That's where we broke down on September's "jobs day." I didn't expect this, especially given that the recent inflation readings remain strong, that liqudity remains ample, that stocks are setting records daily, that consumer confidence is rebounding, etc., etc. But these latest figures raise the possibility that the broader economy (ex-housing) is in more trouble than I thought.

* Speaking of housing, residential construction plunged at an annual rate of 17.4% in the third quarter, the worst showing since the first quarter of 1991. That whacked 1.12 percentage points off GDP, the biggest drawdown from housing in almost 25 years.

* The next catalysts for a big move in bonds are the October ISM index figures due out Wednesday and the October jobs report out Friday.

* Regarding the latest inflation news, the core Personal Consumption Expenditures reading was +2.3% YOY in the third quarter. That's above the 2% unofficial Fed cap, though down from 2.7% in Q2. September's core PCE reading from the personal income/spending data came in at 2.4% YOY. That too is well above the Fed's comfort zone and just shy of a multi-year high. Yes, inflation indicators have trended down a bit. But no, I don't believe we have an all clear on the inflation front by any stretch of the imagination.


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