The Consumer Price Index (CPI), which measures inflation on the consumer level, for October was reported to be an increase of 0.2%. Although higher than what the market has become used to, it did match expectations. More importantly, the Core Rate, which strips out food and energy prices, was also up 0.2%. Since the 0.2% this month replaces last October’s +0.1%, the year over year number did move higher. However, because of rounding, the reported year over year number remained steady at +1.9% and did not move up to +2.0%. Given that consumer inflation is moving higher, the bond market reacted negatively to the news.
Industrial Production was reported down 0.2%, which was lower than expectations. It is interesting to note that nine out of ten reports on manufacturing have been negative as of late. This is further evidence of weakness in the manufacturing sector, which does not bode well for pending holiday sales as we enter the high consumer retail season.
Mortgage bonds are now testing a critical level of support. We must be very careful at this level. If bonds make a decisive break beneath here, we could see the damage to mortgage rates happen quickly. With the stock market making another rebound, bonds have a difficult battle ahead of them. In the meantime, we will maintain our locking bias.