Daily Clueless Musings 5/13

CPI had another firm increase last month. Headline number rose 0.42% on the back of higher food and energy prices. The core CPI increased 0.19% and has risen at a 2.1% annual rate over the last three months, already above Fed's target range and trending higher. Ironically, the ongoing double dip in the housing market "helped" lowering the core CPI. Tenants' and owners'' equivalent rent increased a modest 0.07% last month and have generally decelerated since last Fall. The Five-year-ahead inflation expectations in the Michigan consumer confidence report also rose from 2..9% to 3%. Europe GDP report printed even stronger at 3.3%q/q saar, boosted by strong performances of the core countries. The strong number will cause ECB to raise rates faster. However Euro was sold off in the middle of the day, as market was concerned about bad headline news on Greek credit over the coming weekend. As risky assets are sold off again, Eurodollar back contracts rallied in a panic mode. Futures seem to habitually trade up in response to any panic sell in risky assets. On the other hand, as the volatility in risky assets increases, there is tremendous amount of cash parked in short duration security. As a result, volatility in the short duration is artificially low, which helped to attract more cash in a positive feedback loop. However the margin for error is extremely. Vols are very low and still remain above realized volatility. However the low volatility environment in the short duration securities could prove to be illusionary. Just as the ever appreciating housing prices in the previous cycle, the longer market remain artificially stable, the more complacent people will become. The more complacent people get, the more volatile the market is going to be ,when things turn.