Two More Data Points for the Fed to Consider
- The May Consumer Price Index increased by 0.1 percent as food prices fell.
- The May Core CPI increased by 0.2 percent, gaining 1.7 percent over the previous 12 months.
- Housing Starts gained 6.8 percent in May, to a 914,000 unit annual rate.
- Building permits dipped by 3.1 percent in May, to hit a 974,000 unit pace.
At the start of their two-day meeting, the Federal Open Market Committee has two more economic data points to consider in their deliberation over the future of QE3. The Consumer Price Index for May showed weak headline inflation of just 0.1 percent for the month. Some members of the FOMC have expressed concern about weak inflation readings. Headline CPI is up just 1.4 percent over the previous 12 months, and has been trending down. The overall level of the CPI for May is about where we were last October, so for that seven-month period, we have had essentially zero inflation. Of course, a big factor in keeping headline CPI stuck has been volatility in energy prices. The core CPI (less food and energy) has been showing weak, but more consistent, gains. Core CPI was up 0.2 percent in May, and was up 1.7 percent over the previous 12 months. The 12-month growth trend in the core CPI is also downward, but it is less steep than the down trend in headline CPI. Another factor supporting the core CPI is improved housing markets. The shelter component of the CPI was up 0.3 percent in May, and 2.3 percent over the previous 12 months. Shelter accounts for about 32 percent of headline CPI, so rising rents are a major counterweight to deflation.
Residential construction activity remains a centerpiece of the U.S. economic recovery. Housing starts for May increased by 6.8 percent to a 914,000 unit annual rate. This is still below February and March, but it is a bounce back from a weak April reading. However, single-family construction has stalled out over the last eight months at about a 600,000 unit pace. The May reading was 599,000. The big step-up has come from multifamily construction, up 69.1 percent in May over the previous 12 months. Building permits dipped in May to hit a 974,000 unit annual rate, after a very strong April. The trend in permits still looks strong, fortifying expectations that builders will be busy this summer.
It still feels too early for the Fed to start “calibrating” QE3 ahead of anticipated soft (near 2 percent real growth) GDP readings for Q2 and Q3. Our view remains that calibration will begin later this year, possibly announced at the late October FOMC meeting. Recent comments by President Obama appear to be consistent with the expectation that FOMC Chairman Ben Bernanke will step down this January.
Market Reaction: Equity markets opened with gains. Treasury yields are up. NYMEX crude oil is up to $97.09/barrel. The dollar is down against the euro and up against the yen.