Market Update June 29, 2007

Risks favor: Cautiously Floating

Current Price of FNMA 6.0% Bond: $98.81, +12bp

Bonds are trading higher on the release of a tame Core Personal Consumption Expenditure (PCE) Index. The Core PCE for May was reported at 0.1%, which matched expectations...but most importantly, lowered the year-over-year Core consumer inflation rate to 1.9% - inside the goalposts of the Fed's desired target zone of 1 to 2%. Very good news for Bonds. However, this morning's advance is being capped by the very strong Falling Resistance Line - take a look at the Bond Page.

This is just on the heels of yesterday's Fed statement - where as expected, they left the Fed Funds Rate unchanged at 5.25%, but stated that although inflation is moderating, they are not yet persuaded that it is fully under control. And the Fed does expect an increase in economic activity - which means they are not likely to make a cut to the Fed Funds Rate in the very near future. This was a bit of a mixed message that took awhile for the market to fully absorb, and Bond prices ultimately finished just slightly lower yesterday. So this morning's news of tame inflation data via the Core PCE was an especially welcome sign. But there is talk that the Fed may also be concerned that the Headline Inflation numbers, which include food and energy, have been a bit higher than desired. This will be a story to keep an eye on.

In other economic headlines, the Chicago Purchasing Manager's Index (PMI) was reported at 60.2, better than expectations of 58.0 and right in line with the Fed's comments on economic activity picking up ahead. Additionally, the Revised University of Michigan Consumer Sentiment Index for June was reported at 85.3, better than expectations of 84.0. Consumers also continue to spend money like they hate it - the Personal Savings Rate dropped even more negative, to stand currently at -1.4%. The stronger than expected economic reports have not put much of a damper on the Bond rally so far today, as Traders are focused on enjoying the friendly read on core consumer inflation.

The “big squeeze” is still on, as Bonds continue to battle the Falling Resistance Line, presently at $98.79. With support below at $98.28, a breakout is pending. Next week's lower than normal holiday Trading volume, coupled with next Friday's Jobs Report might just provide the spark that causes Bond prices to either push above this ceiling or head back down towards support at $98.28.