Yesterday we explained how inflation causes higher rates. Today the Fed’s May Empire State Manufacturing Survey showed inflation is rising. Bonds initially sold on the news pushing rates higher, but they’ve since rebounded to slightly positive as investors seek bond safety while Greece negotiates a larger bailout today.
As for today’s May manufacturing survey, the prices index was up 12 points to 69.9, its highest level since mid- 2008. Seventy percent of respondents reported price increases. None reported price declines. The index has moved up a cumulative fifty points over the past six months. PIMCO co-chief Mohamed El-Erian warned on inflation today, citing the same issue we discussed yesterday: only looking at ‘Core’ inflation that excludes food and energy costs is a complacent market view.