Cary Leahey
Cary Leahey
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You got a favorable surprise on the CPI. We had the first decline in the core rate in 21 years, ... It just reminds the Fed, which said last week that the risks of inflation and deflation were almost equally balanced, that you still have some very residual deflation risk. And it ... supports the notion that the Fed might not have to raise interest rates at all next year.
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The bond market took this report as a sign that core inflation may be bottoming and the Fed may still be in the tightening business later this year.
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The bond market doesn't really care about the payrolls data now because you're even getting the crazy question asked about whether the Fed can ease.
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A Fed move in late summer is a high probability bet right now.
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That, combined with no job growth, makes it harder and harder for the Fed to pull the trigger in an election year.
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The Fed might skip (raising rates in) September -- but you have to remember that how the world looks today and how it looks on September 20 could be a lot different -- a lot worse or a lot better.
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I lean toward a half point instead of a quarter. The Fed wants to shore up confidence, to show that, unlike the European Central Bank, it feels your pain.
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The important thing is not whether the Fed can ease but the fact that people can even ask that question and some intelligent people say if the Fed raises rates in September, it would be a public relations disaster.
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These are the kinds of things that raise eyebrows at the Fed. The implication that this January report has for wage inflation is bothersome to the market and the Fed.
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Even though the PPI has accelerated, it hasn't passed over to consumer goods prices, and it hasn't passed through into wage gains,
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On the prices paid index, you're down 50 points from the highs in October, which the bond market clearly likes.
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The PPI number had some pipeline pressure underneath the surface, but the market liked the fact that the core rate was up only 0.1 percent,
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Yet another survey of the economy is suggesting sustainable strength. Rates backed up a little because of this report, but you're treading water a bit because of payrolls data lurking on Friday.
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It's an impressive number. It just gives you more confidence that you'll get 4.0 percent plus (increases) in the fourth quarter and you'll hang in there through the first.