Inflation Jumps, Bonds Vault

  • February 16, 2001
  • Marc Dupee

Debt futures reeled this morning after prices at the
wholesale level leapt by their biggest margin in 10 years. The Producer Price
Index  (PPI) rose 1.1% and .7% at the core level, blowing away estimates.

T-bonds
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on the threat of inflation. T-bond futures prices move inversely to bond yields
and fell because the threat of inflation reduces the odds that the Fed will cut
interest rates. 

But the bond market took a closer look at the PPI and
determined that the report may be a fluke. Other factors are probably working to
keep inflation at bay and are showing up in a correlated gauge of wholesale
inflation. As Tony Crescenzi pointed out on TradersWire BondWire,
“the Journal of Commerce index stayed close to an 18-month low yesterday,
underscoring the notion that today’s reported gain in the PPI was a fluke. At
85.33, the JOC index, which is comprised of key industrial materials such as
steel, copper, cotton, rubber, crude oil, and chemicals, is now well below its
2000 high of 92.1 set on September 20th and has fallen a sharp 2.6 points just
over the past two weeks. The index had moved sideways for about three months
after hitting a low of 85.72 on November 3rd 2000, before falling sharply the
past two weeks. Given the strong historical correlation between the JOC index
and the Producer Price Index, the JOC index is signaling disinflation in
the months ahead, owing to the current inventory correction and its impact on
manufacturing output.

The key analysis here is “signaling
disinflation.”

T-bonds
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“V” bottom and pullback entries on the long side and are trading in
narrowing patterns on highs, up 17/32 and 19/32, respectively. 

Stock index futures are getting whacked after Hewlett’s,
Dell’s, and Nortel’s negative news, Nasdaq 100 futures
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greeted with a limit down opening, and dropped even lower after the 12 minute
halt to trading on the CME. Intraday levels provided by Carolyn Boroden in her
TradingMarkets new TradingSubscription service have held (and pegged) the bottom
at 2235.
S&P futures
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Dow futures
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Currencies are readjusting and–like bonds– are responding to other economic
news out today that suggests the economy is weak and the Fed will have to remain
aggressive in cutting rates. The prospect of inflation eating away at the value
of the buck is doing the most to account for the 99 decline to 112.27 in March dollar index futures
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Euro FX futures
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are up .01310 to .91700.

From the Momentum-5
List, cocoa
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buying.