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Monday, January 30, 2006

The Fed, Core PCE, Income and Bonds

Personal Income +0.4% vs prior +0.4% & Spending +0.9% vs prior +0.5%.

Inside the number, Q4 spending on durable goods plunged 17.5%, the biggest drop in 18 years, as auto sales fell sharply. This was also reflected in Fridays advanced GDP, backing out the drop in auto sales increases Q4 GDP from +1.1% to +3.4%.

The core PCE, (ex food & energy) +0.1% vs revised prior +0.2%; In the past 12 months, the core PCE price index has increased 1.9% YOY, but accelerated to 2.2% in Q4, this is above the Feds 1-2% target range.

The reports reflect stagflation and the consumers increasing negative savings rate. People are digging further into debt or savings due to higher energy costs and its attendant stagflation.

The U.S. government expects to borrow a record net $188 billion between January and March, above its own earlier estimates of $171 billion and above the $169 billion predicted by dealers in a Bond Market Association survey.

Bonds are at a 4 month low and any further waning of foreign interest will precipitate a further drop in bonds, resulting in higher interest rates at the top end.

We believe the Fed will bump again in March, and tomorrows statement will have the word "measured" removed, which means that the data will dictate and it could be more than 25bps.

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