Economic Slowdown: Transitory Effects vs. False Starts

Japan is out for 黄金週間 (Golden Week) and London is shut down for the Royal Wedding. Add in event exhaustion and another high-risk event in the week ahead (Jobs Data)....and there isn't much reason to make a trade unless you're squaring a position to flatten out some risk. Volume in the bond market reflects that sentiment....

We did have a couple data points to absorb before shifting into cruise control though.

(Reuters) - U.S. consumer spending rose as households stretched to cover the higher cost for food and gasoline as inflation posted its biggest year-on-year rise in 10 months. The Commerce Department said on Friday consumer spending, adjusted for inflation, edged up 0.2 percent last month after rising 0.5 percent in February. "The story in the first quarter was higher gas prices are forcing people to spend more at the expense of other items," said Christopher Low, chief economist at FTN Financial in New York. "The inflation burden increased in the quarter, things were progressively worse as you moved from January to March." Spending was supported by incomes, which increased 0.5 percent last month after a 0.4 percent gain in February. The rise in incomes was a touch above economists' expectations for a 0.4 percent gain. Savings edged up to $651.2 billion from $647.5 billion in February. The saving rate was unchanged at 5.5 percent.

(Reuters) - Consumer sentiment rose in April as the sharp increase in gasoline prices was viewed as being temporary, a survey released on Friday showed. Even so, consumers still anticipated some additional price increases in the coming months, the Thomson Reuters/University of Michigan's consumer sentiment survey showed. Complaints about high prices were the most frequent since 2008 and half of all households said their finances had worsened. Small expected wage gains tempered higher fuel and food prices, leaving real income expectations unchanged in April. The final reading on the overall index came in at 69.8, up from 67.5 in March and up a hair from the preliminary reading of 69.6. It was roughly inline with the median forecast of 69.9 among economists polled by Reuters. The survey's barometer of current economic conditions held steady with March's reading of 82.5, while the survey's gauge of consumer expectations rose to 61.6 from 57.9. The survey's one-year inflation expectation was unchanged at 4.6 percent, though it was still the highest level since 2008. The five-to-10-year inflation outlook dipped to 2.9 percent from 3.2 percent the month before.

If you haven't noticed yet, which I find hard to believe, Main Street is getting its margins squeezed as more expensive food and energy prices are passed along by producers. 

That perspective leaves the market wanting more details...we're in limbo on the big picture outlook. The positive vibes experienced in the holiday spending season are wearing off and the reality of a long, slow economic recovery is once again settling in...just like it did last year when the seasonal uptick in activity filtered through the system and bond yields slowly corrected to better reflect an extended period of dovish FOMC policy rhetoric. We call it "false starts"...

Whether or not this cost-push inflation (without the wage growth) is "transitory" or not will dictate how "transitory" the economic slowdown will be....which will dictate whether or not bonds rally through key resistance and Best Execution mortgage rates break their barriers....READ MORE ABOUT THOSE BARRIERS.

UNDERSTANDING INFLATION: Inflation Expectations Distorted by Bullish Perspectives of Reality