This morning the government reported that for January, the Producer Price Index (PPI) rose by more than was expected. The overall PPI grew by 0.3% (compared to December), while the less volatile core rate, which excludes both food and energy, rose by 0.4%. This signals that for January, at least, "wholesale inflation" was worse than thought (read an article about this and compare it to another article).
What do you suppose the reaction was in the bond market? Normally, a "hot" inflation number will cause a bond sell off, pushing bond prices down and interest rates higher. Today, however, the opposite was the case -- rates actually fell. How could this happen?
Remember, when we analyze this market, we must, of necessity, consider "other things being equal." Today, that was not the case. First, the number itself might have been bad, but this is only the first bad number in a while for the PPI. And, never pay too much attention to the value of an indicator for a single time period. Second, the shocking rise was on a sequential rate of change, comparing December to January. When an alternative comparison is used, comparing this January to last January, called the year-over-year growth rate, that number was actually fairly good (1.5%), and below the year-over-year growth rate for December (of 1.7%).
As this was happening, oil prices continued their recent rise, moving from around $58 per barrel just a few days ago to $61.29 today. Again, this would normally be bad for bonds, which makes the PPI story even more interesting. For extra credit, due at the beginning of Tuesday's class, go to StockCharts.com and plot the price of oil ($WTIC) with the 9-day RSI and the Relative Strength compared to the S&P and annotate it with comments and lines that summarize the main aspects of its performance over the last week or two.
Finally, the University of Michigan's Consumer Sentiment Index fell more than expected today, further reinforcing the upward price movement in bonds.
Friday, February 17, 2006
Saturday, February 4, 2006
January Employment Report
The jobs report yesterday had some surprises. The "headline" employment number rose by around 190,000, below expectations. But prior month totals were revised upwards. You should always view revisions to prior data when judging newly released data -- on anything.
To read a story about this click here. Look briefly at the overall report as well.
There is more to the employment report than just employment. It also contains data on the unemployment rate, hours worked, and the average hourly wage. It was these that triggered the ultimate reaction by the stock and bond markets. Average hourly earnings rose a greater-than-expected 0.4% for the month and 3.3 percent for the year. Along with the disappointing productivity number on Thursday, this further reinforced inflation fears. As a result, there was an initial rise in bond interest rates (remember this from class -- the inflation premium in interest rates increased, pushing up nominal rates). The stock market also reacted badly. Why? Two things. First, higher interest rates are bad for stocks. We will see in class this coming week that this entails a substitution of interest-earning assets for stocks, and it lowers the present discounted value of expected profits. Second, the acceleration of inflationary expectations means that the Fed will not be finished raising interest rates very soon as had been thought. In fact, the belief that the Fed was almost done raising rates is what led the Dow-Jones Industrial Average over the 11,000 mark earlier this year.
From a technical analysis point of view (read Stikki Stock Charts if it ever gets here), this means that the resistance encountered by the Dow-Jones average at 11,000 held, and that it will likely hold for a while. A similar argument pertains to both the NASDAQ and the S&P 500 (those doing this as your forecast paper topic should start to follow this). The pressing question from a technical point of view is therefore, where is support for each of these markets. For the S&P 500, prior resistance at 1,275 had been exceeded (i.e., a breakout
occurred). And, as typically occurs, priror resistance became support during the breakout. Now, unfortunately, things have reversed once again -- 1,275 is once again resistance. Support (for now) is at 1,250.
In the blog entry above this one, I have provided a graph of the S&P 500 and the recent breakdown from a triangle formation. Not a very flattering picture. Why? Besides the obvious declines, I have added information about the RSI (I will distribute the handout for this soon). The bad news is that the RSI is not yet in oversold territory (RSI <30), so this decline might have a ways to go yet.
To read a story about this click here. Look briefly at the overall report as well.
There is more to the employment report than just employment. It also contains data on the unemployment rate, hours worked, and the average hourly wage. It was these that triggered the ultimate reaction by the stock and bond markets. Average hourly earnings rose a greater-than-expected 0.4% for the month and 3.3 percent for the year. Along with the disappointing productivity number on Thursday, this further reinforced inflation fears. As a result, there was an initial rise in bond interest rates (remember this from class -- the inflation premium in interest rates increased, pushing up nominal rates). The stock market also reacted badly. Why? Two things. First, higher interest rates are bad for stocks. We will see in class this coming week that this entails a substitution of interest-earning assets for stocks, and it lowers the present discounted value of expected profits. Second, the acceleration of inflationary expectations means that the Fed will not be finished raising interest rates very soon as had been thought. In fact, the belief that the Fed was almost done raising rates is what led the Dow-Jones Industrial Average over the 11,000 mark earlier this year.
From a technical analysis point of view (read Stikki Stock Charts if it ever gets here), this means that the resistance encountered by the Dow-Jones average at 11,000 held, and that it will likely hold for a while. A similar argument pertains to both the NASDAQ and the S&P 500 (those doing this as your forecast paper topic should start to follow this). The pressing question from a technical point of view is therefore, where is support for each of these markets. For the S&P 500, prior resistance at 1,275 had been exceeded (i.e., a breakout
occurred). And, as typically occurs, priror resistance became support during the breakout. Now, unfortunately, things have reversed once again -- 1,275 is once again resistance. Support (for now) is at 1,250.In the blog entry above this one, I have provided a graph of the S&P 500 and the recent breakdown from a triangle formation. Not a very flattering picture. Why? Besides the obvious declines, I have added information about the RSI (I will distribute the handout for this soon). The bad news is that the RSI is not yet in oversold territory (RSI <30), so this decline might have a ways to go yet.
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