U.S. bonds are trading better Friday morning after several bond-friendly economic reports and an ongoing decline in the world stock markets this past week. Heavy on traders’ minds is the decline in oil and other commodities which is a deflationary signal. Each and every week we attempt to make sense of the markets, but the data is so mixed, it remains quite challenging.
From a short-term rate increase standpoint, many feel that the Federal Reserve will raise short-term interest rates in December, even though there is still no sign of inflation (as evidenced by this morning’s Producer Price Index (PPI) report) simply because the Fed indicated it would do so in its last meeting. This is creating even further confusion as inflation and wage growth are non-existent, the Fed’s dual mandates behind raising interest rates continues to be argued by both dissenters and supporters. Some are saying that the low interest rates are causing deflation and that by raising rates, inflation would follow. We will leave that argument to the experts.
Therefore, based on today’s deflationary reports, we are biased toward floating interest rates very carefully into next week’s widely followed Consumer Price Index (CPI) report.