The Dow Jones is currently at new all-time highs as investors celebrate news of tame consumer inflation. The Federal Reserve’s favorite gauge of inflation, Personal Consumption Expenditures (PCE) was reported this morning, showing the Headline figure dropping from an annualized rate of 1.5% down to 1.4%. This surprising low number helps give investors hope that the Fed will not have room to raise interest rates any higher than they currently are in fear of inflation falling further. We are now in completely uncharted waters, where the economy is showing signs of slowing at the same time the Fed is under pressure to both raise interest rates and reduce its balance sheet. Since there is no history from which to draw experience from, the Fed is delicately balancing efforts to keep the economy growing while simultaneously tightening economic policy. Not an easy challenge to solve.
Personal spending and income reports for the month of June were released today showing that income levels were unchanged and spending increased at an anemic pace of just 0.1%. Once again, this created a “bad news is good news” for the stock market scenario. At this point, stocks like any news that may hold the Fed back from making additional pull backs or economic tightening of any sort. The longer the Fed party can last, the better off the stock market will be.
Mortgage bonds have moved higher and are now looking for a breakout. Since breakouts are rare, this could be very short lived. However, if bonds can remain above all standard moving averages, we could see improved interest rate pricing in the near term. Just be on guard in case sentiment changes.
If you can closely watch the markets, you can float to see if bonds are able to hold on to gains.