Where’s the inflation?

November 16, 2017 2:02PM CST

Tame inflation numbers this week are keeping a bid under treasuries, along with some geopolitical tension emanating from Saudi Arabia/Iran. It is notable that bonds rallied sharply off an early week sell off in the S&P, and have maintained strength with a 23 point rally in the S&P Thursday. That behavior, where flight to quality moves are sustained when fear has abated, bodes bullish for bonds. 

Yesterday morning the Consumer Price Index showed a .1 percent rise after jumping .5 percent in September. That lowered the year on year increase in the CPI to 2 percent from 2.2 percent in September. The primary argument for higher rates is rapidly rising inflation. Without proof of that, the fed can be much more gradual in hiking rates. It is still expected that the Fed will raise rates once in December, and three more times next year. 

Technically, 30-year treasury bonds are closer to the high of the recent range then the low. There should be very stiff resistance between 155 and 156 on the December 30-year bond. Aggressive traders may want to consider getting short exposure when bonds are in the 154 area. A sustained rally in the S&P will cause rotational pressure out of bonds and into equities. Flight to quality strength will also diminish. Initial support comes in between 150 and 151, with much more downside should it be broken.

 

Dec '17 30-Year Treasury Daily Chart

Dec '17 30-Year Treasury Daily Chart

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