CPI Still Below Average, Industrial Production Jumps, Sentiment Falls

- The Consumer Price Index for February rose .4% versus estimates of a .3% gain and a .2% rise in January.
- The CPI Ex Food & Energy for February rose .2% versus estimates of a .2% gain and a .3% rise in January.
- Industrial Production for February rose 1.0% versus estimates of a .3% gain and an upwardly revised -.3% decline in January.
- Capacity Utilization for February rose to 82.0% versus estimates of 81.3% and 81.4% in January.
- Preliminary Univ. of Mich. Consumer Confidence for March fell to 88.0 versus estimates of 89.0 and a reading of 91.3 in February.

BOTTOM LINE: Prices paid by US consumers rose .4% last month, higher than estimates, Bloomberg reported. Energy prices rose .9% in February versus a 1.5% decline in January due to the fact that we saw historically cold temperatures during the month. While the CPI came in above estimates, it is still nowhere near worrisome levels. The CPI year-over-year for February rose 2.4% vs. the 20-year average of 3.1%. Current Average Hourly Earnings year-over-year at 4.1% are still almost twice the rise in the CPI. Moreover, the 10-year yield is only 1 basis point higher on this morning's reports. I continue to believe inflation fears have peaked for this cycle.

Industrial production in the US rose last month by the most since November 2005, as manufacturing rebounded and the return of cold weather prompted a surge in utility use, Bloomberg said. The report indicates factories are making headway in their inventory reduction efforts, suggesting manufacturing may soon begin adding to US economic growth. Manufacturing, which accounts for most of the report, rose .4% versus a .5% decline the prior month. Computer production surged 2.2% and home electronics production soared 9.9%. Moreover, auto production rose 3.2%. Responses to a question in the Philly Fed report also indicated manufacturing will accelerate during the second quarter. The worst of the manufacturing slowdown is likely over. I continue to believe significant inventory de-stocking will lead to a below trend 1Q GDP report. However, manufacturing should begin adding to growth in the second quarter and help boost GDP back to average rates of around 3% by 3Q.

Confidence declined this month after fuel prices rose and stocks declined, Bloomberg reported. The expectations component of the index fell to 79.3 versus 81.5 in February. The current conditions component fell to 103.6 versus 106.7 in January. Consumers expect an inflation rate of 3% over the next 12 months, the same as February. Gas prices rose to $2.55/gallon this month even as crude oil prices continue to fall. Rising gas prices, the stock pullback and media’s obsession with housing all contributed to the decline in sentiment. I expect consumer confidence to hit a new cycles high by year-end as stocks rise, inflation decelerates further, gas prices fall, housing sales stabilize at relatively high levels, the job market remains healthy and wages continue to outpace inflation.