Consumer Prices Decelerate, NY Manufacturing Improves, Foreign Demand for US Assets Strong

- The Consumer Price Index for April rose .4% versus estimates of a .5% gain and a .6% rise in March.
- The CPI Ex Food & Energy for April rose .2% versus estimates of a .2% gain and a .1% increase in March.
- Empire Manufacturing for May came in at 8.0 versus estimates of 8.0 and a reading of 3.8 in April.
- Net Long-term TIC Flows for March rose to $67.6 billion versus estimates of $71.0 billion and $58.1 billion in February.

BOTTOM LINE: Prices paid by US consumers rose less than forecast in April, suggesting inflation may be abating, Bloomberg reported. Core prices in the 12 months ended in April were up 2.3%, the smallest gain in a year, which means fuel costs aren’t filtering through the economy. The Consumer Price Index for April rose 2.6% year over year, down from a 4.7% increase in September 2005. This is also below the 20-year average of 3.1%. Moreover, the CPI has only been lower during four other brief periods since the mid-1960s. Energy prices rose 2.4% versus a 5.9% gain in March. The price of gas rose throughout the month, ending at $2.97/gallon, near the record $3.06 reached during the aftermath of Hurricane Katrina. Unusually low gasoline refinery utilization as a result of a rash of nationwide “outages” has been the driving force behind the recent rise in gas prices. Clothing prices fell .3% during the month versus a 1.0% decline the prior month. Auto prices were unchanged during the month. I continue to believe inflation concerns have peaked for this cycle as global growth slows, unit labor costs remain subdued and the mania for commodities continues to reverse course.

Manufacturing in NY state expanded at a faster rate for the second straight month in May as orders and shipments improved, Bloomberg reported. The New Orders component of the index rose to 8.0 from 3.9 prior. The Inventories component fell to zero, which indicates supplies stopped accumulating. The Future Conditions component of the index soared to 49.8 in May, the highest since August 2005, from 33.9 the prior month. This was the largest jump in this component since October 2001. The Prices Paid component fell to 34.4 from 40.5 the prior month. I continue to believe manufacturing is adding to overall economic growth this quarter, after subtracting in 1Q on substantial inventory de-stocking.

Net international buying of US long-term securities rose in March, led by purchases of Treasuries and agency bonds, Bloomberg said. International purchases of US stocks rose to a net $14.8 billion in March versus $13.5 billion in February. I continue to believe foreign demand for US assets will remain strong.