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By G. Steven Bray
Last week’s stronger than expected jobs report had a minimal effect on interest rates, leaving them smack-dab in the middle of their recent range. Markets still are waiting for something to motivate them.
The most important motivator these days seems to be inflation data, and we have a couple measures reported this week. The one that probably will garner the most interest is the consumer price index, or CPI, this Fri. While this isn’t the Fed’s favored inflation measure, it has street cred and is widely watched by market participants.
If markets anticipate another weak inflation report, we could see rates lead off slightly lower on Thurs. However, if the report on Fri shows an uptick in inflation, rates could rise very quickly. Given that I think you could lose a lot more ground with a strong report than you could gain with a weak report, the risks of floating probably outweigh the gains.
The other motivator we’ve discussed is political uncertainty, and it’s certainly not going away. It acts as a background anchor on rates, but that could change as we get closer to Sep. Already, we’re seeing dramatic media headlines about the dangers of the fiscal cliff and a government shutdown. The drama only will increase, which means the effect on interest rates could increase, especially if Congress doesn’t start making progress when it returns from recess.