Mixed Bag of Data Tilts in the Direction of More QE
- The U.S. International Trade gap narrowed in February to -$46.0 billion as imports declined.
- The Producer Price Index for March was unchanged. The core PPI gained 0.3 percent.
- Initial Claims for Unemployment Insurance increased by 13,000 for the week ending April 7.
“April is the cruelest month,” said T.S. Eliot. For economic data it is a tricky month too, with weather effects and the mobile Easter holiday adding a layer of complexity to seasonal adjustments. Today’s U.S. data releases read like the prototypical April day, alternating between storm clouds and sunshine. In the February international trade data we see an unexpected narrowing of the trade gap to -$46.0 billion. Exports increased by a slight $0.2 billion while imports contracted by a hefty $6.3 billion. The price-adjusted real balance of merchandise trade for February declined by $4.9 billion ($2005), showing that international trade may be less of a drag, or even a positive, for 2012Q1 GDP growth. The first estimate of Q1 GDP is due out on April 27 and today’s trade numbers imply upside risk to our estimate of 2.2 percent real growth. Merchandise exports to the Eurozone held up, gaining $1.4 billion for the month, but the year-over-year trend still looks like it is cooling. Exports to China also showed a small $0.4 billion gain, but again, the year-over-year trend has cooled significantly. The balance of trade in petroleum products for February was -$27.8 billion, about where it has been since January 2011. Over the long term, this negative balance has the potential to significantly narrow and even turn positive as U.S. natural gas and refined petroleum products are increasingly exported to an energy hungry developing world.
The producer price index for March was unchanged, below expectations of moderate energy-driven inflation. The energy index for finished goods declined by 1.0 percent as seasonal adjustment factors drove petroleum prices down while unadjusted prices went up. Excluding food and energy, core PPI gained 0.3 percent in March. Over the past 12 months, the PPI for finished goods is up 2.8 percent, a significant improvement from the 7.1 percent year-over-year gain from last July. Weaker-than-expected inflation readings lower the bar for additional quantitative easing by the Federal Reserve. Tomorrow’s Consumer Price Index data for March takes on added significance in light of today’s producer price report and the upcoming two-day FOMC meeting over April 24 and 25. Likewise, the unemployment insurance claims data for the first week of April also give a nudge toward more QE. Initial claims increased by 13,000 for the week ending April 7 to hit 380,000. The Easter holiday does cast a shroud of uncertainty over the seasonal adjustment of the claims numbers. The improving trend in claims from mid-2011 through early 2012 may be stalling but more data is needed to be conclusive. If stalling claims coincide with weak job gains in the presence of low inflation, that would be supportive of additional QE. However, the FOMC may not have enough data to definitively make the case for more easing by April 25. Also, “Operation Twist” remains in play through June, so additional QE may wait until the twist has run its course, otherwise the Fed risks sending somewhat muddied signals to financial markets.
Market Reaction: U.S. equities opened with gains. Treasury yields are down. Oil is up to $103.47/barrel. The dollar is up against the yen and down against the euro.