THE BASIS POINT

Stocks, Rates Down. U.S. Inflation & Housing Data. EU Energy Head: Japan “Out of Control”

Stocks and rates are down midway through trading day following lots of market data. February housing starts, which measure new homes construction, were down 22.5% since last month, the worst monthly drop in 27 years. The February Producer Price Index (PPI), which measures business inflation, was up 1.6% since last month and has spiked 5.6% since February 2010. Excluding volatile energy and food prices from PPI, ‘core’ inflation was up 0.2% since last month and up 1.8% since February 2010. This ‘core’ inflation figure is within the Fed’s 1-2% range of acceptable inflation, but the total annual reading of +5.6% is alarming. The debate goes on whether it’s more important to look at the much higher total inflation figure, or just isolate the more tame ‘core’ reading. By only looking at core, some argue that you’re ignoring the fact that people drive and eat. But the Fed prefers to look at core as their medium- to long-term inflation gauge since food and energy are so volatile short term.

This morning, stocks are selling (Dow -139, S&P -15.2) and bonds are rallying (FNMA 30yr 4% coupon +56 basis points) as both asset classes focus on the tame core PPI figure, the terrible housing starts figure, and most of all, the increasingly dire post-tsunami nuclear situation in Japan. As bond prices rise on this kind of rally, rates drop. The stock selloff and bond rally started on U.S. data and sharpened significantly after European Union energy commissioner Guenther Oettinger said that the Japan nuclear power plant crisis is “effectively out of control,” which it was later learned that he was not privy to new information markets didn’t already have. But markets haven’t recovered yet since his comments. For now, it’s all bad news for stocks and good news for rates.