Inflation Fears Rocks Market
Bonds are sharply lower this morning on a stronger than expected report on labor costs. Thirty-year bonds are down 29/32, yield 6.08%. Two-year notes are down 6/32, yield 5.63%.
The employment cost index (ECI) for the second quarter rose 1.1%, its fastest pace since the second quarter of ‘91. Expectations were for a rise of .8%. Wages and salaries, which comprise 70% of the index, rose 1.2%. This is the fastest growth rate since the second quarter of'90. Benefits, which account for 30% of the index, rose .9%. ECI is the only index that measures both wages and benefits and is regarded by Fed Chairman Greenspan as particularly important. Year/year ECI is growing at 3.2% vs. 3.0% the previous quarter. But it is lower than the year/year growth rate of 3.5% for the same period last year. Traders fear this could be the catalyst to spark another round of Fed tightening.
Second quarter GDP rose a smaller than expected 2.3%. Expectations were for a rise of 3.4%. The price deflator (a measure of inflation) was unchanged at 1.6%. The consumer is still showing considerable momentum. Personal consumption expenditures rose 4.0%. This is softer than 6.7% rate of the first quarter; nonetheless, it is still a strong number. Consumer spending accounts for two thirds of GDP. The trade deficit widened by $19.4 billion. This subtracts from GDP. Traders are putting more weight on the ECI number this morning.
Initial jobless claims fell 40,000 to 275,000. The decline is most likely related to the start up of auto plants that had been closed for retooling. The seasonal factors are most likely not accounting for this.
Elsewhere around the world, Japan reported its industrial production for June rose 3.0%. The rise was double expectations and raises the possibility of a monetary policy tightening by the Bank of Japan.
Friday will bring data on personal income, new home sales, the Chicago Purchasing Managers survey and the University of Michigan's consumer confidence index.
Have a nice day. bonds-online.com |
