The Producer Price Index for February rose .4% versus estimates of a .3% increase and a .3% gain in January. The PPI Ex Food & Energy for February rose .1% versus estimates of a .1% gain and a .8% increase in January. Core prices were up 2.8% from February of last year, the biggest 12-month gain since November 1995. Not all the gains at the earlier stages of production have been passed on to consumers, suggesting manufacturers are relying on productivity to offset higher costs for energy and other raw materials, Bloomberg said. The price of gasoline increased 5.2% last month, the most since October of 2004. US central bankers "are setting us up for the possibility that they may need to accelerate if they think that the pace of inflation in picking up," said Edger Peters, chief investment officer at PanAgora Asset management. "There isn't any hard evidence that is happening, but there is anecdotal evidence," Peters said. Prices of raw materials, used at the earliest stage of the production process, actually fell 1.6% in February, Bloomberg reported. Cliff Waldman, an economist at Manufacturers Alliance, said "It's important to remember that labor costs hold the lion's share of total American business costs, and the data as a whole and labor costs going forward are fairly benign."
The FOMC raised the Fed Funds rate 25 basis points to 2.75%, the seventh increase in a row. The accompanying policy statement said that while the FOMC still expects "measured" rate increases, inflation pressures have picked up, Bloomberg reported. The statement's forward-looking third paragraph said inflation is "expected to be contained," a change from "is expected to be relatively low," the phrase used in February. Fed officials said they've seen little evidence that higher prices are working through to wage demands, one of the situations that might add to inflation. "Longer-term inflation expectations remain well contained," the FOMC's statement also said. The Fed's two-edged message – that while inflation risks are rising, it needn't yet step up the pace of rate hikes – may reflect disagreements among policy makers that will be clarified in coming weeks, economists and former Fed officials said. "I expect to see the 'measured' statement to go at the next meeting," said John Roberts, a managing director and head of government bond trading at Barclays Capital, Bloomberg reported.
The Consumer Price Index for February rose .4% versus estimates of a .3% increase and a .1% rise in January. The CPI Ex Food & Energy for February rose .3% versus estimates of a .2% gain and a .2% increase in January. Higher prices for gasoline, airfares and lodging contributed to February's gain, Bloomberg said. Year-over-year prices including food and energy rose 3%, right at the long-term average, Bloomberg reported. Energy prices, which account for about a 14th of the index, rose 2% in February after falling in the prior two months, Bloomberg said. The increase in the core index last month was probably exaggerated by a surge in the cost of hotel and motel rooms related to the Super Bowl, said Joseph LaVorgna, chief US fixed-income economist at Deutsche Bank Securities. Lodging costs rose 1.1% after a .7% decline in January, Bloomberg said.
Existing Home Sales for February fell to 6.79M versus estimates of 6.70M and 6.82M in January. An improving job market will give buyers the income needed to keep sales strong as the Fed raises rates, economists said. "We are still in a very, very strong market," said Daryl Jesperson, CEO of Re/Max International. "A stable employment picture, historically low interest rates and an economy that is doing well are all promoting activity," Jesperson said. The median price of an existing home rose 1.1% to $191,000 last month and was up 11% compared with February of last year. Sales were strongest in the Northeast, increasing 4.6%, Bloomberg reported. When the Fed first started raising rates in June of 2004, the average 30-year mortgage rate was 6.29% versus a current average of 6.01%, Bloomberg said.
Durable Goods Orders for February rose .3% versus estimates of a .9% gain and a 1.1% decline in January. Durables Ex Transportation for February fell .2% versus estimates of a .3% increase and an upwardly revised .9% increase in January. Orders are still up from a year earlier as companies continue to invest in equipment, software and inventories amid expectations that the economic expansion will continue, Bloomberg said. The drop in February's orders excluding transportation may be a belated response to the end of tax incentives designed to spur orders in 2004, economists said. "We were due for a pause," said Stephen Stanley, chief economist at RBS Greenwich Capital. "These figures are certainly not a cause for concern," Stanley said. Even with the declines in February, orders for non-defense capital goods excluding aircraft, an indication of future business investment, were up 16% in the first two months of 2005 compared with a year earlier, Bloomberg reported.
Initial Jobless Claims for last week rose to 324K versus estimates of 315K and 321K the prior week. Continuing Claims rose to 2673K versus estimates of 2650K and 2642K prior. The less-volatile four-week moving average was 321,750, down 5.4% from a year ago, Bloomberg reported. "Companies are generally becoming more confident despite the increase in energy costs and interest rates," said Lynn Reaser, chief economist at Banc of America Capital Management. "Sales and orders remain strong and companies are even experiencing some increases in pricing power. All of this is leading to increased hiring and a general easing in layoffs," Reaser said.
New Home Sales for February rose 9.4%, the most in more than 4 years, to 1226K versus estimates of 1150K and 1121K in January. Increasing job prospects and pent-up demand due to exceptionally wet weather in prior months spurred gains. The median sales price increased to $230,700 from a 10-month low of $210,400, Bloomberg reported. "This is clearly a boom period," said Tim Rogers, chief economist at Briefing.com. "I don't expect any serious declines until mortgage rates get into the mid-sixes," Rogers said. Measured against sales, the supply of homes actually decreased to 4.4 months in February from 4.6 months in January, Bloomberg reported. Sales were strongest in the northeast, rising 20.3%, Bloomberg said.
BOTTOM LINE: Overall, last week's economic data were mixed. Measures of inflation were only moderately higher last week, which is a positive considering the steep rise in commodity prices so far this year. I continue to expect inflation readings to begin to decelerate again during the second half of the year. Consumer prices for 2005 will likely rise around the 3.0% average of the last 40 years and below the 3.3% increase in 2004. The Fed may remove the word "measured" to describe the pace of future rate hikes from their next policy statement to allow more freedom. However, with the US dollar strengthening, foreign purchases of US assets remaining strong, the CRB Index turning lower, inflation only near average rates, global economic growth slowing and significant problems at a few major US companies, it is highly unlikely the Fed will actually raise rates 50 basis points at any meeting in the foreseeable future. While home sales may have benefited modestly from the perception that long-term rates are headed higher, the strong results were mainly a result of pent-up demand and improving employment prospects in most parts of the country. Durable Goods Orders are likely slowing to more sustainable healthy rates. The labor market continues to improve at a modest stable pace which is a big positive for the consumer and the stock market. As long as unit labor costs remain in check, inflation should stay well under control. Finally, the ECRI Weekly Leading Index fell .44% to 135.20.
In my opinion, the current environment is very similar to the period before last year's election, when almost every economic report was spun in a negative light by the media, politicians and bears. There are likely a number of reasons for this. Reality remains much more positive than current perception. However, if the extreme negativity persists, perception could begin to affect reality in a negative way, thus creating a self-fulfilling prophecy. Billionaire hedge fund investor and political activist George Soros described this type of reaction in his Theory of Reflexivity back in 1994.