We received some important economic reports this morning, all which came out as expected or below expectations. Personal Income and Spending was reported to be up 0.4% and 0.3% respectively; both in line with what the market was anticipating. The Personal Consumption Expenditure (PCE) component within the report showed another very tame reading on inflation. Since this is the Federal Reserve’s favorite gauge of inflation, it can create volatility within the markets. On a month over month basis, Core PCE (strips out food and energy prices) was only up 0.1%. On a year over year basis, Core PCE actually moved lower from 1.3% down to 1.2%. The low reading on inflation may be just what the Federal Reserve needed to justify waiting to make a move higher in short term interest rates.
Mortgage bonds remain trapped in a wide sideways channel between overhead resistance provided by the 200 day moving average and a floor at the 25 and 100 DMA. The 10 Year Treasury Note yield made an attempt to break beneath its 200 DMA this morning but was quickly forced higher. In spite of all the economic weakness around the world, the market is clearly not yet ready for lower yields. When you look at competing yields around the globe, the US 10 Year Note should be much lower. It may take a significant economic event or report to make it happen. However, there certainly is a chance that we could see lower yields again at some point in the near term.
Bonds continue to show lackluster performance. Therefore, we will maintain our locking bias.