Inflation is still something to keep an eye on, ... The market has priced in a slowdown but if we do get a surprise on payroll day, we could see a sell-off in bonds.
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More Bill Davison on Wikipedia.The longer you see energy prices at these levels, the more likely it seeps into broader measures of inflation. Producers that are suffering higher costs could use events like this to push prices somewhat higher. This almost gives them an excuse to raise prices.
The bond market has been focused on looking for nuggets of weakness. But the payroll number could tip things the other way. Another strong number could start to change people's minds.
When you look back to what we had before Greenspan, we had a Fed that was much more controlled with information. He brought so much transparency to the job.
The economy is showing more strength and the bond market is starting to wake up to that fact.
The jobs numbers will be less reliable. If they are stronger, people will say it's because people had to hire more workers because of Katrina and it's only temporary. And if it's weaker people will also say that it's Katrina-related, ... The Fed's job has just gotten harder.
Measured could go away, ... Greenspan wants the yield on the 10-year Treasury to go up because usually, long rates are not this low until late in a tightening cycle. The bond market may be underestimating how much more tightening needs to be done.
There's a joke in the fixed income world that the PPI and CPI excluding everything is zero. But you can't really discount everything, ... I'm not trying to be alarmist but the market is underestimating the inflation risk in the economy.
The correction somewhat mutes inflation concerns. The market is looking in one direction today and that's for slower growth.
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