Data Consistent with September QE Unwind, Bernanke Testimony Likely to be Cautious
- The June Consumer Price Index increased by 0.5 percent as energy prices increased.
- The June Core CPI increased by 0.2 percent, dampening fears of deflation.
- Industrial Production expanded by 0.3 percent in June as motor vehicle assemblies stepped up.
- June Retail Sales disappointed, increasing by 0.4 percent despite the push from autos.
- May Business Inventories gained just 0.2 percent, adding to fears of weak Q2 GDP.
Data heading into tomorrow’s opening round of Humphrey-Hawkins testimony by Federal Reserve Chairman Ben Bernanke remains consistent with the expectation that the Fed will begin to “calibrate” its asset purchase program before the end of the year. Expectations are growing for a September 18 dial-down of QE3 by the Fed. Chairman Bernanke is not expected to tip the Fed’s hand concerning QE3 tomorrow, but rather, he will most likely provide very cautious testimony to Congress given expectations for weak second quarter GDP. The first estimate of Q2 real GDP growth will come on July 31 while the FOMC is in the second day of a regularly scheduled meeting. One of the concerns that the Fed has about the timing of the unwind of extraordinary monetary policy is the potential for deflation.
Today’s CPI report for June alleviates some of that concern. The headline CPI gained 0.5 percent for the month as energy prices surged with increasing tension in the Middle East and North Africa. The energy index increased by 3.4 percent in June while retail gasoline prices were up 6.3 percent. The core CPI (less food and energy) increased by 0.2 percent for the second month in a row. Pushing the core CPI higher were apparel prices, up 0.9 percent, and both medical services and medical commodities. Although a disinflationary trend in core CPI is still visible in year-over-year comparisons, the threat of actual deflation remains distant.
Industrial production for June stepped up by 0.3 percent, the first monthly increase since March. Manufacturing output gained 0.3 percent, aided by auto production. Total motor vehicles assemblies increased by 2.1 percent in June. Auto sales stepped up to a 15.9 million unit rate in June, adding incentive for ongoing production gains. Overall capacity utilization remains weak at 77.8 percent, about where it was at the start of the year.
Yesterday’s release of retail sales for June was disappointing. Despite the increase in auto sales, total retail sales gained just 0.4 percent for the month. Non-auto retail sales were unchanged for the month. Part of the drag to June sales came from building materials which eased by 2.2 percent. Gains in business inventories in May were weak, adding to concerns about second quarter GDP. Total business inventories increased by just 0.1 percent in May after gaining just 0.2 percent in April. Manufacturing inventories have been flat for two months while wholesale inventories have declined.
Market Reaction: Equity markets opened with losses. Treasury yields are up. NYMEX crude oil is down to $105.75/barrel. The dollar is down against the yen and up against the euro.