Bonds Rally on PPI Data

This morning's release seems to have calmed fears about interest rates.
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A weaker-than-expected Producer Price Index has sent bonds rallying this morning, dropping yields to their lowest levels in almost three weeks.

And while almost nobody is expecting the Fed to change interest rates at the Dec. 21

Federal Open Market Committee

meeting, this report gave the market an added sense of comfort that inflation remains in check.

The PPI, the market's most-watched measure of wholesale inflation, rose just 0.2% in November, while the core rate, which excludes food and energy prices, was unchanged. Economists were expecting increases of 0.2% and 0.1%, according to

Reuters

.

Bonds reacted happily, bouncing higher in what will probably be one of the last active trading days of the year. The 30-year Treasury bond was lately up 16/32 to 99 8/32, dropping the yield 4 basis points to 6.18%. The market's holding its gains thanks to some opportunistic technical buying, although retail interest is limited, according to strategists.

"Traders were ready to take profits but they didn't sell, because the number was a little better-than-expected," said Astrid Adolfson, financial economist at

MCM Moneywatch

. "There's been market-timers buying as we go through each

technical level. It's moderately active, but compared to what it has been in the last week it's very active."

The overall PPI is rising at a 3.1% year-over-year rate, compared with a 0.6% year-over-year rate in November 1998. Most of that increase is due to rising energy costs. This month, the only significant increase in costs was energy, which rose 1.4%, month-over-month. That's not surprising -- the market watched crude oil prices hit a nine-year high last month.

But the market's greatest fear, after seeing 0.8% and 0.3% monthly increases in the core PPI in September and October, is that producer-based inflation will eventually manifest itself in higher costs for consumers.

The link isn't exact -- the PPI's components only account for half of what constitutes the

Consumer Price Index

, which will be released Tuesday. What's helped keep a lid on costs for producers, though, are improved productivity and a steady decrease in capital investment costs such as computers. Capital equipment costs fell 0.1% in November, which included a 1% drop in computer prices and a 1.1% decline in light motor trucks.

"That bodes well for businesses, as they try to maintain their competitive advantage through investing heavily in plant and equipment," wrote Joel Naroff, president of

Naroff Economic Advisors

. On a year-over-year basis, the core PPI is rising at a 1.8% rate, compared to a 1.4% rate in November 1998.

The

University of Michigan's consumer sentiment

index fell to 104.2 in December from 107 in November. This is the preliminary release of this index -- it will be revised on Dec. 22.