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June CPI was released today, with the index registering at an increase of 0.7% for the month versus 0.1% in May with a 17% increase in gasoline costs as the primary driver of the broad sequential increase.  Make no mistake; this is having an impact on the consumer: gas prices and interest rates are up, confidence is down and that is the reality of our current situation.

Regardless of reality, year-over-year numbers are where we need to remain focused because that is where it becomes a "political" football and will ultimately impact the market.  The CPI was reported down 1.4% Y/Y today -a modest sequential rise from last month when we saw the worst number since 1955. Reality vs. politics:  what would be an increasing inflationary measure on an absolute or monthly basis becomes a deflationary figure when measured year-over-year basis and that means that rates will stay at zero for the foreseeable future as Bernanke & Co. keep the free money train rolling. 

We have been making the call that the CPI numbers will go positive in Q4, and that that will represent a return of true inflation which it looks increasingly likely that the Fed will not be prepared for. Right now we are experiencing REFLATION which is just taking us from one point to the next.  As I look at my screen right now the REFLATION trade is alive and well; the Dollar is down and the best performing sectors are Financials (XLF), Energy (XLE) and Materials (XLB). 

We are still looking at a "politicized" short end of the yield curve.  The FED right now has no choice but to be the "deflation fighter."  Next week, when Chairman Bernanke is in front of the politicians, he can't very well tell them that he sees inflation coming in Q4.  

What does all of this mean?

  • (1) We will have an inspirational yield curve - the FED will keep rates at ZERO longer!
  • (2) Rates are not going to stay there forever!

Howard Penney

Managing Director