Market update for September 28th, 2007

Core Consumer inflation appears to be under control and within the Fed's target range, as the Core PCE for August was reported at 0.1%. The number matched expectations and left the more closely watched year over year Core rate at 1.8%, down from the previous 1.9%. The Fed's target zone is 1 to 2%, so this is welcome news for the bond market. It also could give the Fed a green light to cut rates further.

In re-capping yesterday’s action, Mortgage Bond prices registered a nice 25bp gain and jumped back above the 200-day Moving Average, following a strong showing in US Treasury’s $13 Billion auction of Five-year Notes. Foreign appetite for our Bonds remains strong.

This morning, the Personal Income and Spending report showed consumers are still whipping out their credit cards. Consumers showed they are resilient with a 0.6% increase in spending, the highest monthly growth rate in three years. Incentives by auto manufacturers sent consumers flocking into car dealer show rooms as spending on autos and other durable goods led the way with a 2.8% increase - the largest increase in two years. Meanwhile, Personal Income grew by 0.3% during the month, which was lower than expectations and the slowest monthly growth rate since last April.

The Chicago Purchase Managers Index (PMI) for September was reported at 55.0, which was stronger than expectations of 53. The University of Michigan ’s Revised Consumer Sentiment Index for September was reported at 83.4, which was essentially in line with expectations. Bond prices held their position on these releases.

The bond market will be on the lookout for any stray remarks that could move the financial markets from today’s line-up of speeches from four Federal Reserve officials. Speeches are scheduled for Atlanta Fed President Dennis "The Spider" Lockhart at 10:00am ET; San Francisco Fed President Janet Yellen at 10:15am ET; St. Louis Fed President William "everyone into the" Poole at 1:00pm ET; and probably the most highly regarded Fed Governor, Frederic Mishkin will speak at 1:15 pm ET.

Bonds are showing some life after breaking above the 200-day Moving Average. But before we float blindly and start partying, the Bond does have some close overhead resistance at the Falling Window just 6bp higher at the $100.44 level. For now we will float, but be mindful that the overhead resistance nearby could push prices back lower.