Interest Rate Roundup

Thursday, December 21, 2006

Growth V. Inflation, round 2,653

The never-ending debate between growth and inflation continues today. This time, it's the Philadelphia Fed index provoking some discussion (and by the way, I just picked that number out of the blue -- this isn't really the 2,653rd time I've blogged about this topic!). Here are the details in the Philly index ...

* The overall index sank to -4.3 in December from 5.1 in November. The "experts" were looking for a reading of 4, so this was clearly a disappointment.

* The new orders sub-index was negative for the third time in the past four months (-2.4). But the index measuring employment rose to 7.9 from 0.2.

* But those two negative readings on the GROWTH front have to be measured against problematic readings on the INFLATION front. While the prices paid index dropped (to 20.6 from 26.7), the prices received index rose (to 9.9 from 5.7).

* Moreover, survey respondents had higher expectations about future inflation. The index measuring expectations for input prices six months in the future jumped to a five-month high of 40.8. The index for future received prices also rose to 29.9, nearly twice the November reading and the highest since July.

We've got one heck of a thin market here ahead of the holidays. So we're seeing some weird trading action off the numbers. Treasuries originally went nowhere on the news. Then half an hour later, they rallied several ticks. The 10-year T-Note was recently yielding 4.55%.

It remains an open question whether we can break to new yield lows or whether we've seen about all we're going to see in that department for this rally. But the Fed clearly doesn't want to encourage any rate cut speculation. Richmond Fed President Jeffrey Lacker is out on the tape saying: "The risk that core inflation surges again, or does not subside as desired, clearly remains the predominant macroeconomic policy risk."


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