Data Suggests no QE3 Taper this Month
- The May Producer Price Index for Finished Goods increased by 0.5 percent, pushed by food and energy.
- The Core PPI for Finished Goods gained a sedate 0.1 percent in May.
- Industrial Production was unchanged in May, after declining by 0.4 percent in April.
- The University of Michigan’s Consumer Sentiment Index for June dipped to 82.7.
Producer prices for May came in hotter than expected with the finished goods PPI gaining 0.5 percent, well above the consensus guess of 0.1 percent. The price index for finished energy goods was up 1.3 percent for the month, reversing a two-month drop. Natural gas prices bouncing off the bottom helped to push the energy index up. Finished food prices were up 0.6 percent as egg prices surged 42 percent in a month. The core PPI index (less food and energy) was up just 0.1 percent for the month, and is up 1.7 percent over the past 12 months. Since early 2012, the trend in the core PPI has been disinflationary, with the y/y change falling from 3.1 percent in January 2012 to now 1.7 percent. However, taking a big step back, the decades-long U-shaped curve of the year-ago change in core PPI bottoms out in late 2002/early 2003 at about -0.3 percent and has since trended upward. The point is, one can make a case for near-term disinflation at the same time that we have had a gradual longer-term increase in inflation since early 2003. Why belabor the point? Because the Federal Reserve is engaged in an ongoing debate about its QE3 program of asset purchases. One of the arguments for sustaining QE3 at current levels, and not beginning a tapering or “calibration” process is that we are in a disinflationary environment (a positive but declining rate of inflation). The danger of a disinflationary environment is that it could eventually lead to outright deflation which would be unhealthy for the U.S. economy.
The May industrial production data also reinforce the case against the start of a QE3 taper at next week’s FOMC meeting. Total industrial production for May was unchanged, after declining by 0.4 percent in April. Manufacturing production increased by 0.1 percent in May, but has dipped in three out of the last five months. The big drag on IP for May was in the utilities sector where output declined by 1.8 percent. Overall capacity utilization dipped slightly to 77.6 percent in May. The University of Michigan’s Consumer Sentiment Index dipped in May to 82.7 percent. The trend in consumer sentiment since last December has been upward. Ongoing gains to household wealth due to improving real estate markets and investment portfolios is a positive for consumer sentiment. A stronger positive would be improved job growth, so sentiment is still vulnerable to a downside correction if labor markets sputter this summer.
Market Reaction: Equity markets are down. Treasury yields are down. NYMEX crude oil is up to $97.91/barrel. The dollar is down against the yen and up versus the euro.