Tuesday, August 15, 2006

PPI low, 10-year up 1/2, bond buyers must be high

Core PPI actually fell 0.3% last month, surprising the market and putting a charge into bond bulls. The 10-year is up 1/2.

Now it sets up that tomorrow's CPI figure can either confirm and allow the rally to stand, or contradict and erase some or all of today's gains. I don't know what its going to be, but take a look at the chart of month-over-month core CPI vs. PPI.

1) PPI is more volatile than CPI. The monthly standard deviation for PPI is 0.196 vs. 0.083 for CPI.
2) PPI and CPI aren't very well correlated: 0.138. That tells you that there is almost no relationship between the core PPI and core CPI figure for a given month.
3) Three times over the last two years (not counting today), PPI came out negative. CPI never has.

Now, maybe core CPI will also be especially low, but given this very weak relationship between the two numbers, I wouldn't bet on it. Of course, given how the market is flying today, it looks like every one else is.