Despite the contentious federal debt ceiling debate and the end of the Fed’s Quantitative Easing last month, yields on Treasury securities have fallen this month. In fact, PIMCO, the world’s largest bond manager, has actually increased its holdings of U.S. government debt. Stocks fell 2% last week but they have risen 4% in the last three weeks. With earnings season reaching a peak by late July, we could see a strong summer stock rally, despite all the frustrating political debates in Washington, DC.
Last week, the stock market recovered a bit late in the week, mostly responding to three favorable price indexes: On Wednesday, the Labor Department announced that the prices for imported goods declined in June by 0.5%, the first decline in a year. This decline was mostly due to lower crude oil prices. On Thursday, the Labor Department reported that the Producer Price Index (PPI) declined 0.4% in June, while the “core” rate (excluding food and energy), rose 0.3%. Then on Friday, the Labor Department reported that the Consumer Price Index (CPI) fell by 0.2% in June, even though the core rate rose 0.3%.
In summary, underlying (core) inflation is rising moderately while lower food and energy prices bring the overall price indexes down. Still, these very low rates of price changes are basically good for the market. Read