Locking bias heading into the Fed meeting next week

It’s more of the same again today, with stocks and bonds trading within a narrow range. The big news of the morning was the release of the Producer Price Index (PPI) which measures inflation on the wholesale level. Because it is not measuring price changes to consumers, it isn’t as widely considered. However, it can serve as a precursor to consumer price changes in the future. For the month of August, it was reported that PPI showed a 0.0% change from the month prior, and is -0.8% on a year over year basis. Stripping out food and energy prices; Core PPI increased +0.3% with a year over year increase of +0.3%.

Recent economic data may cause the Fed to pass on raising rates when they meet next week. Between the stock market selloff, higher mortgage interest rates and higher borrowing costs for businesses, the equivalent of a rate hike has likely been accomplished. Further, the strength of the US dollar has significantly slowed US exports and reduced oil prices down near multi year lows. An increase to short term interest rates would exacerbate most of what has already been done. The free trading markets are often the most effective way to accomplish stability and balance within our economy. However, if the Fed fails to raise rates we can expect mortgage rates to jump a bit higher in response. This is again an example of the market self-correcting.

Bonds remain trapped in a narrow range. With little hope of a break out anytime soon, there is minimal benefit to assume the risk of floating.