CNN Money is reporting Inflation again tops Fed targets

Key core price gauge up 2.4% over 12 months, fastest in 4 years; spending, income numbers match forecasts.

Core consumer prices rose a moderate 0.2 percent in June for a third straight month, but the year-on-year rate hit a nearly four-year high, keeping financial markets on edge over a possible Federal Reserve interest-rate hike.

In the same report, the Commerce Department said Tuesday that personal income rose 0.6 percent in June, with nominal spending up 0.4 percent. The data, which was incorporated in a report released Friday on second-quarter economic growth, matched Wall Street expectations.

Still, the 2.4 percent rise in prices excluding food and energy over the past year, the biggest gain since September 2002, caught the eye of traders on Wall Street.

“This should alleviate any fears that folks had after seeing that GDP number that showed the economy was slowing more than we thought,” said Mark Vitner, senior economist at Wachovia Securities in Charlotte, North Carolina.

“It looks like the economy has very good momentum going into the third quarter,” he said of the spending and income figures.

Supposedly this “caught the eye of traders”.
Here is what caught my eye.

The above chart is thanks to Bloomberg. It was created at roughly 12 Noon central. As of 12:30 there was virtually no change on the long end at all. Basically the only reaction was for the yield curve to invert further.

The market has weighed in.

My interpretation follows:

We are witnessing the final stages of the lagging effects of past Fed policy.
Future inflation is not much of a concern and if Bernanke hikes once more the curve will invert by a full 50 basis points if not more.

Of course this interpretation could be fraught with error. Perhaps today’s reaction is just a one day random event. I just doubt it. The yield curve has been singing this tune for some time now after flirting with it most of the year. We are now well into our second inversion this year. The first came back in January but the curve flattened out in February. This inversion has been deeper and has lasted longer.

There are those that think the bond market is being “manipulated”. Not me, I do not think it can be done, at least not effectively or for a sustained duration. The primary trend can be slowed or enhanced but not stopped.

Look at all the money the Bank of Japan wasted selling Yen to buy US dollars over the last few years. It did them no good. Furthermore, the YEN tanked as soon as they stopped (contrary to everyone’s belief at the time). How is that for irony?

A close look at the numbers says the treasury market is right now more worried about a recession than the likelihood of continued inflation. In this case I think the inverted yield curve is the window, and the CPI is the rear view mirror. Please look out the window. There is a curve ahead that can not be seen by watching the CPI.

Mike Shedlock / Mish/