I hope everyone had a great extended weekend and kept the thoughts of those who have fought and those who continue to fight for our freedom on your hearts yesterday. Now, down to business. If I had to sum up last week’s main movement into one word, it would have to be “inflation”.

There was not a lot of economic data last week, with the “main event” being the release of the “Fed Unplugged”, the minutes from their last pow wow. This release provides an in depth look at what the Fed gang was thinking during the last rate cut decision and more insight into why there were two dissenting votes. Bottom line was that despite the rate cut decision, all are beginning to realize inflation is a bigger concern than what they have been leading people to believe. My comment…it’s about time.

The week actually started off rather nice, with bonds moving higher both Monday and Tuesday, fueled by negative economic news and a relatively tame PPI reading. The PPI data, though, was not as tame as people were led to believe. Then came the Fed data, namely the release of the unedited version of what was happening during the last meeting and bonds began to sink as inflationary fears took over. Of course, oil consistently hitting new highs didn’t help.

As I said last week, floating was the best choice “so long as bonds hold above their moving averages.” They didn’t and the pattern that was trying to form, failed. Bonds tested their moving averages (support) Wednesday, then went crashing through the floor Thursday. They were again volatile Friday, but ended basically flat, thus ending the week down slightly (about 7 basis points).

The chart pattern that had been beginning to look bullish, requiring bonds to reach a higher peak in prices, has now turned to one that is bearish as a lower peak formed instead.

Unfortunately, inflation will likely haunt the bond market again this week. This week is going to end with the “whopper” on the inflation spectrum, likely setting the stage for where bonds will go from here. What is that “whopper”? The Personal Consumption Expenditures Index (PCE), which is the Fed’s favorite gauge of inflation when it comes to their “target” of 1.5 - 2.0%.

Beyond that report, there is nothing that will move the markets as much, though Auto Sales could give bonds a boost if they are low. Chicago PMI could also make some waves in the markets. Here is the schedule of events this week…

• Tuesday: Consumer Confidence (10:00), New Home Sales (10:00)
• Wednesday: Durable Goods Orders (8:30), Crude Inventories (10:30)
• Thursday: Initial Jobless Claims (8:30), Auto Sales (8:30), Gross Domestic Product (GDP) (8:30)
• Friday: PCE (8:30), Personal Spending (8:30), Personal Income (8:30), Chicago PMI (9:45), Consumer Sentiment (10:00)

Remember that shortened trading weeks tend to add to the volatility, as was seen on Friday’s shortened day. Locking is probably the best bet this week, at least until bonds successfully test and hold above their 200-day moving average. If the PCE shows increases in inflation, that level could break.