Wednesday, February 16, 2011

January Producer Prices

Producer prices are starting to really show the inflation that the Fed tells us is not here. Companies have one of two choices:

  • Pass along higher prices to a struggling consumer which risks choking off the already limited demand.

  • Not pass along the higher prices and internally manage tighter margins through reduction in labor (which further reduces demand).

The bond market has really sold off in the face of this news today.  Interest Rate Derivative risk will be a very strong QE headwind in the face of this continued bond market weakness.


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