Treasuries Sell Off, Reflecting Waning Hopes Of Fed Action On The Heels Of Stronger Economic Reports

Thursday, August 16, 2012 06:59
Treasuries Sell Off, Reflecting Waning Hopes Of Fed Action On The Heels Of Stronger Economic Reports

Tags: economic indicators | economy | Federal Reserve | Treasury bonds

Does the Fed control the markets? Market moves based on speculation about Fed action would seem to indicate that it does. Each time the Fed has taken action, markets have soared. Anticipation of soaring Treasuries has boosted investor interest but that was based on increasingly dismal economic reports.

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Now, things are different and the tantalizing QE3 (third quantitative easing) seems to be regressing once again into holy grail status. Recent reports on the economy have been brighter. Investors think this lessens the chance that the Fed will indeed act.
Some analysts view the recent strength in the treasury market is not the result of QE3 speculation—it’s simply a summer liquidity selloff (i.e. profit taking). But the anticipation of Fed action may be setting investors up for disappointment, and a sell-off.
Meanwhile, the housing market is getting better. That should be good news but there are some who will find a downside to everything. The downside in this case, apparently, is that the housing market has bottomed.
That means inflation could be on the way since housing prices are a significant component of that nasty beast. Based on that, the estimate for the Consumer Pricing Index report on Wednesday, August 14 was up 1.7% year-over-year. It came in flat instead.
A statistical tweak in the housing component of the CPI way back in 1983 has kept housing prices from directly influencing the number. A substitute calculation based on what is called owners’ equivalent rent—a calculation that not only measures what owners would pay to rent their own properties but also actual rents being paid in the marketplace.
In June, shelter costs reportedly rose by 2.2% although a real estate website puts that number much higher at 5.4%. As housing prices and rents feed more meaningfully into the CPI survey in the coming months, we may see the CPI rise accordingly.

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