Reports gauge interest-rate trends
By Laif Meidell, CMT, president of American Wealth Management, and portfolio manager of the AdvisorShares Meidell Tactical Advantage ETF (MATH)
There have been three important reports released this week that investors follow closely, among others, as a leading indicators for changes in interest-rate trends: the producer price index, the consumer price index and the Federal Open Market Committee minutes.
The PPI measures the prices of materials at the producer level before they are turned into goods and then passed along to the consumer. This indicator is used to track price trends that are coming down the road, which allows investors to anticipate inflationary consequences in coming months. For the month of October, inflation at the producer level was stronger than expected with the headline inflation posting a monthly gain of 0.2 percent, versus the 0.1 percent decline in September. If you exclude food and energy, the producer price inflation was up 0.4 percent in October. On an annual basis, the PPI was up 1.5 percent, indicating that inflation remains slow.
The CPI is the most widely followed monthly indicator of inflation, measuring the change in the average price of a fixed basket of goods and services purchased by consumers. Understanding trends in inflation is the key to understanding how interest rates are determined on your mortgage and car loans, as well as the interest you might earn on Treasury bills, notes and bonds. In other words, as monthly readings of inflation (CPI) rise and fall, markets makes an adjustment to interest rates so that we earn enough interest to maintain the purchasing power of our savings. At least, that’s how it’s supposed to work. The CPI reading for the month of October indicated that inflation was flat at 0.0 percent, with annual inflation remaining at 1.7 percent. This is below the Fed’s goal of 2 percent.
On Wednesday, the much-anticipated FOMC minutes from the October meeting were released. There was very little in the minutes that wasn’t already known. The Fed sees the economy as improving, but is still concerned with the low inflation and the sluggish labor market. Although quantitative easing has ended, according to the minutes, the first interest-rate increase does not have a timeline but will be dependent on economic reports showing improvements in the economy.
As of Thursday’s close, the Standard & Poor’s 500 was higher by 0.65 percent over the past five trading days. Due to the resiliency of the stock market this week, the top-performing bonds are convertibles, with the Barclays U.S. Convertible Bond index rising 1.03 percent over the past five trading days.
This commentary originally published in the Reno Gazette-Journal. Performance numbers used in this article were obtained through eSignal and are not guaranteed to be accurate.