Bond Investors Aren't Buying It

By: Michael Ashton | Thu, Jul 15, 2010
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10-year yields slipped below 3% again, to 2.98%, as economic data released today were almost uniformly weak.

The "almost" comes courtesy of Initial Claims, which declined sharply to 429k; as I pointed out last week (link), though, this was somewhat expected since GM eschewed its usual summer shutdown.

Beyond that, though, there was nothing good to say.

Both the Empire Manufacturing index (5.08 versus 18.00 expected and 19.57 last month) and the Philly Fed index (5.1 versus 10.0 expected and 8.0 last month) were below the lowest Street estimates. On Empire, the Employment, Shipments, and New Orders subindices all slipped, and on Philly Fed New Orders were actually slightly negative at -4.3 from 9.0 last month. Both headline indices remain technically in positive territory, but the current reading is indistinguishable from zero - again, signs of an economy that is doing none of the positive things it is supposed to do at this stage of the expansion. That's the lowest Philly reading since August; Empire barely beat out the December print but is also near the levels of July/August last year.

Industrial Production recorded a +0.1%, in line with consensus expectations, but that was thanks to Mr. Heat Miser: the high temperatures last month pushed utilities output higher, but factory output itself fell 0.4%. Capacity Utilization at 74.1% was steady with the downwardly-revised level of last month. That will help calm inflation fears (or stoke deflation fears) at the Fed, but as I am fond of pointing out: if low levels of capacity use mean we don't have to worry about inflation, then someone needs to explain Zimbabwe to me. If (money growth * money velocity change) is low, inflation will stay low. If it is high, inflation will rise.

On the question of inflation, PPI was as-expected, but I don't pay much attention to PPI as it just doesn't have much explanatory power. We get CPI tomorrow (Consensus: -0.1%, +0.1% ex-food-and-energy), and that's the name of the game. My models a year ago were projecting year/year core inflation of about 1.1% for the June print, but it looks like it will come in around 0.9%. My models also suggest core should bottom in September-November, around 0.7%. There's a lot of uncertainty around these models, because we're seeing an environment we have never seen before, but so far they're doing well.

Although stocks managed to fight back after getting hit on bad economic news today, the advance is looking tired and, with prices back at the top of the range, I suspect we are ready to head back down again. Certainly bond investors seem to think so.


I am continuing to offer a special deal on my book, Maestro, My Ass!, if you order through my website (link). Only ten bucks, or twenty if you want it signed. That includes "slow way" shipping domestically. My wife wants the piles of unsold books out of the living room. Help her out!



Michael Ashton

Author: Michael Ashton

Michael Ashton, CFA

Michael Ashton

Michael Ashton is Managing Principal at Enduring Investments LLC, a specialty consulting and investment management boutique that offers focused inflation-market expertise. He may be contacted through that site. He is on Twitter at @inflation_guy

Prior to founding Enduring Investments, Mr. Ashton worked as a trader, strategist, and salesman during a 20-year Wall Street career that included tours of duty at Deutsche Bank, Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003 he has played an integral role in developing the U.S. inflation derivatives markets and is widely viewed as a premier subject matter expert on inflation products and inflation trading. While at Barclays, he traded the first interbank U.S. CPI swaps. He was primarily responsible for the creation of the CPI Futures contract that the Chicago Mercantile Exchange listed in February 2004 and was the lead market maker for that contract. Mr. Ashton has written extensively about the use of inflation-indexed products for hedging real exposures, including papers and book chapters on "Inflation and Commodities," "The Real-Feel Inflation Rate," "Hedging Post-Retirement Medical Liabilities," and "Liability-Driven Investment For Individuals." He frequently speaks in front of professional and retail audiences, both large and small. He runs the Inflation-Indexed Investing Association.

For many years, Mr. Ashton has written frequent market commentary, sometimes for client distribution and more recently for wider public dissemination. Mr. Ashton received a Bachelor of Arts degree in Economics from Trinity University in 1990 and was awarded his CFA charter in 2001.

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