Inflation Below Average Rates, Foreign Demand for US Securities Surges, Industrial Production Rises, Capacity Utilization Stable

- The Consumer Price Index for November was unch. versus estimates of a .2% gain and a -.5% decline in October.
- The CPI Ex Food & Energy for November was unch. versus estimates of a .2% gain and a .1% increase in October.
- Net Long-term TIC Flows rose to $82.3 billion versus estimates of $70.0 billion and an upwardly revised $70.2 billion.
- Industrial Production for November rose .2% versus estimates of unch. and a downwardly revised unch. in October.
- Capacity Utilization for November remained at 81.8% versus estimates of 82.1% and a downwardly revised 81.8% in October.

BOTTOM LINE: US consumer prices held steady in November after falling for two months, reassuring Fed policy makers, Bloomberg reported. The CPI is now rising 2.0% year-over-year, well below the long-term average of 2.9%. Gasoline prices fell 1.6% in November. New vehicle costs declined .7% and clothing prices fell .3%. Airfares fell 4.8%, the largest decline since 1999. Food prices fell .1%. Inflation is clearly not a problem and the 10-year T-note, the best predictor of long-term inflation, agrees with the yield falling another 8 basis points. I continue to believe inflation has peaked for this cycle as commodities fall further and unit labor costs remain subdued.

International investment in US long-term securities rose in October as stocks climbed and demand for Treasury notes surged, Bloomberg reported. Official institutions, such as central banks, bought $18.5 billion of US Treasury Notes, the most in almost 2 years. Foreign purchases of US securities have averaged $73.8 billion over the last 12 months. The US trade deficit was $58.9 billion in October, which shows how easily the US can finance its external obligations. International purchases of US stocks rose to $21.0 billion in October versus $8.6 billion the previous month. I expect foreign demand for US assets to continue to remain strong over the intermediate-term as economic growth accelerates, the US dollar firms and the mania for emerging market securities reverses course.

Industrial Production in the US unexpectedly rose in November, reflecting a jump in auto manufacturing, Bloomberg reported. Auto output rebounded 3.7% versus a 3.4% decline in October. Production of business equipment rose 1.2% versus a .1% increase in October. The gain was spurred by a 2.4% increase in computer production and a 2.6% rise in semiconductors. I suspect auto production cutbacks are subsiding, but there are more to come. This will likely weigh on industrial production until the 2nd quarter of next year. As well, while I believe the housing market is stabilizing and the worst is over, home construction will not pick up until inventories decline further from current levels.