Last week in review
(April 11 – 15, 2011)

Last week, two inflation reports came in. The core Producer Price Index (PPI) reported that inflation was slightly higher than expected. However, the core Consumer Price Index (CPI), which measures inflation at the consumer level, came in slightly lower than expected.

So why the contradiction between the two indices? What does this mean?

Although the reports seem contradictory, they’re not really. They actually focus on different aspects of inflation. The PPI shows us what’s going on at the wholesale or production level, while the CPI focuses on what’s happening with consumers.

So, looking back at the reports, we see that the PPI indicates inflation is on the rise at the wholesale level. But the CPI report indicates that inflation isn’t being passed on to consumers, at least not yet.

Last week we also saw that manufacturing in the New York State region rose for the fifth consecutive time and came in at the best level in a year. Similarly, industrial production came in better than expected. Higher productivity keeps operating costs lower, lessens the need for hiring, and helps keep prices down. Also last week, capacity utilization – which means how much of a factory’s production capacity is being used – was reported at the highest reading since mid-2008, which means it is on the rise. However, until this reading climbs a little higher, the available slack within the production cycle will inhibit some hiring and also inflation growth.

Overall, the reports indicated that business conditions and production continue to improve. However, we’re not quite where we want to be, and more growth is needed to really help boost the labor market.

In terms of how the news impacted bonds and home loan rates, last week’s reports were friendly to bonds and home loan rates in a couple of ways. First, they promoted low inflation for the time being – and inflation is the archenemy of bonds and home loan rates. Second, the slack in production and slowed pace of hiring is bond friendly. Remember, the bond market typically reacts positively to negative economic news because it normally causes money to flow out of stocks and into bonds, helping bonds and home loan rates improve.

As you can see in the chart below, bonds climbed at the end of last week, due in large part to the report that inflation remained contained for now.

Chart: Fannie Mae 4.0% Mortgage Bond (Friday, April 15, 2011)

 In the news this week
(April 18 – 22, 2011)

The news at the beginning of the week will focus on the health of the housing industry, and then end with more labor and manufacturing news. We’ll talk about these reports next week and their impact on the bond market.

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Economic calendar for the week of April 18 – 22, 2011