Market commentary

Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment. Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed.

The above was the opening paragraph from the FOMC (Fed) announcement post Tuesday’s meeting. The bond market is in clear disagreement with the Fed policy of QE2 and keeping interest rates low, however, depressed housing and labor markets are the over-riding concerns of the Fed.

This morning the Labor Department reported consumer prices rose less-than-forecast in November with both the headline rate of inflation and the core rate (which excludes volatile food and energy prices) rising 0.1%. Car prices fell 0.4%, the most since January. Housing prices were unchanged and represent 42% of the CPI index. All-in-all, this report confirms the weak pricing power in the economy as the headwinds to consumer demand continue. Despite the recent increases in producer prices, as reported Tuesday, those increases are not making their way down to consumers yet.

The U.S. Treasury market was caught in a whirlpool after Tuesday’s Fed announcement, with the yield on the 10 year note rising to 3.47%, a full .20% in rate from the morning open! Mortgage prices sank as well, with a slight recovery this morning.