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How the Bond Markets React 04.17.05
Warning Signs
With the Consumer Price Index excluding food and energy on the move up, wages looking weak and the "measured" approach the Fed is using to slow an economy that is slowing all by its lonesome, all eyes are on the Producer's Price index due out on Tuesday.
Not that the report didn't already have a certain gravity before but it now may be the best indication of whether commodities have leveled off at the wholesale level allowing some balance in pricing at the supplier level. Pricing at the producer level has been quite good of the last several years. Passing those prices on to the consumer has not been as easy. The PPI has been a negative force on bonds in the short term in the past but has been a reassuring force in terms of the long bond and its anticipation of inflation.
The long bond yields may be the key for believing that inflation will be nicely contained. Unless, of course, the PPI is off the charts. Many expect an increase over February's number of 0.4% to a March reading of 0.7% excluding food and energy.
Paul Volker has become the oracle of the "I told you so" crowd of late as he openly suggested that the ice we are standing on is not strong enough to support our bullish optimism let alone be able to hold our desire to buy any and everything foreign, even if those goods might have been made by American companies. I only mention that because in reality 48% of the $61 billion trade deficit is actually going to US companies using foreign labor to make products for sale to Americans. The same consumer who points an accusing finger while they whine at the Chinese and Asian producers. They are only filling a niche.
Volker's concern aside from our appetite for spending and our anorexic savings rates is that he wants us to understand just how much we are borrowing. We are now in debt to the point where we have put the world in jeopardy as we siphon the savings of saver nations in ever greater amounts. With only so much available capital to be had on the open market, the gluttonous US of A has tied up over 80% of the available cash the world has to lend.
With these warnings of trouble ahead and evidence that it may have taken hold in the marketplace, investors should be cautious. Bewares are in order as the new sayers who cite trends that are similar to presidential cycles past and seasonal adjustments to natural patterns begin to surface in print and on air.
This is not your father's economy. Nor is it the economy of your grandfather. In fact, Mr. Volcker who is old enough to be grandfatherly, suggests that he has never seen anything quite like it.
Fixed income investors shivered at the contents of the F.O.M.C. minutes released last week. But with a benign PPI number, the volatility of short term rates might find a further rally in bonds in the coming weeks.
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