After a short-lived visit above 20,000, the Dow Jones Industrial Average is back beneath this critical level. Whether stocks can muster the strength to get back to all-time highs will largely depend upon the news of the week. So far this morning, the steep drop in the stock market has not led to significant improvements in bond pricing. For bonds to see a nice improvement, they will need to break out of a duel ceiling of overhead resistance provided by the 25 and 50 day moving averages. Since bonds have not convincingly been above the 50 DMA since early October of 2016, the likelihood of bonds making a run higher are low. Recent history has shown that bonds tend to fall once hitting this level. Therefore, we must be careful right now.
The Personal Consumption Expenditure (PCE), which happens to be the Fed’s favorite gauge of consumer inflation, report was released this morning. The month of December showed a 0.2% increase, which was in-line with estimates. The Headline figure showed an increase on a year over year basis from 1.4% up to 1.6%. With the recent uptick in oil prices, this move is likely a result.
Personal Income and Spending were also reported this morning, showing a 0.3% and 0.5% increase respectively. Incomes were slightly below expectations, while Spending was in line with the markets’ expectations. On a year over year basis, private sector incomes were up 3.7%, which is more than enough to handle a 6% rate of increase in the price of homes.
Unless bonds can break above their 50 DMA, we will maintain our locking bias.