PPI Rises Above Expectations, Foreign Demand for US Assets Remains Strong

- The Producer Price Index for September rose 1.9% versus estimates of a 1.2% gain and a .6% rise in August.
- The PPI Ex Food & Energy for September rose .3% versus estimates of a .2% increase and an unchanged reading in August.
- Net Foreign Security Purchases for August rose to $91.3B versus estimates of $60.0B and $87.5B in July.

BOTTOM LINE: US producer prices rose in September by the most in 15 years after Hurricane Katrina pushed oil and gas prices to record highs and drove up costs of other materials such as plywood and chemicals, Bloomberg said. Core prices are now rising at a 2.5% annual rate. The 10-year T-note yield is lower to 4.47% on the news. I expect the PPI, which is highly correlated with the CRB Index, to decelerate meaningfully over the intermediate-term.
International investors increased their net holdings of US assets in August by the most since April 2004, as the US economy headed for a 10th straight quarter of better than 3% growth, the best streak since 1986, Bloomberg reported. US assets remain attractive to investors because the economy continues to outperform other developed nations. US GDP rose 3.6% in the second quarter versus a .6% gain in Germany, 2.1% rise in Japan and a 1.5% increase in the UK. I expect foreign demand for US stocks and bonds to remain strong as relative undperformance by emerging economies over the intermediate-term results in a flight of capital back to the US.