Friday, June 15, 2007

Core CPI Decelerates, NY Manufacturing Jumps, Current Account Deficit Widens, Foreign Demand for US Stocks Surges, Production Flat, Confidence Drops

- The Consumer Price Index for May rose .7% versus estimates of a .6% gain and a .4% rise in April.

- The CPI Ex Food & Energy for May rose .1% versus estimates of a .2% increase and a .2% gain in April.

- The Empire Manufacturing Index for June rose to 25.8 versus estimates of 11.3 and a reading of 8.0 in June.

- The 1Q Current Account Deficit rose to -$192.6 billion versus estimates of -$201.0 billion and a downwardly revised -$187.9 billion in 4Q.

- Net Long-term TIC Flows for April rose to $84.1 billion versus estimates of $72.0 billion and a downwardly revised $51.2 billion in March.

- Industrial Production for May was unch. versus estimates of a .2% gain and a downwardly revised .4% increase in April.

- Capacity Utilization for May fell to 81.3% versus estimates of 81.6% and a downwardly revised 81.5% in April.

- The preliminary Univ. of Mich. Consumer Confidence reading for June fell to 83.7 versus estimates of 87.8 and a reading of 88.3 in May.

BOTTOM LINE: A measure of consumer prices in the US rose less than forecast in May, bearing out the Fed’s view that broader inflation pressures would moderate as the economy cooled, Bloomberg reported. The core CPI year-over-year rose 2.2%, well below the long-term average of 3.0% and down from 2.9% in September of last year. Energy prices jumped 5.4% versus a 2.4% gain in April. Gasoline costs surged 11%. Food prices rose .3% versus a .4% gain in April. Owner’s equivalent rent, which makes up 30% of the core reading, rose just .1%, the smallest gain since June 2005. Clothing prices fell .3% for the second month in a row. Auto prices fell .2% during the month. I continue to believe inflation concerns have peaked for this cycle, inflation measures will continue to show meaningful deceleration through year-end and long-term rates will fall from current levels as growth decelerates again in 3Q.

Factories in NY state expanded at the fastest rate in a year in June, as gains in new orders and shipments signaled a pickup in manufacturing is being sustained, Bloomberg said. The new orders component rose to 17.2 versus 8.02 the prior month. The prices paid component of the index rose to 42.6 versus 34.4 the prior month. The component measuring the outlook for the next 6 months fell to 44.1 from 49.8 the prior month. I continue to believe manufacturing will help boost overall economic growth back around 3% or slightly higher this quarter on substantial inventory rebuilding.

The current account deficit widened to $192.6 billion last quarter because of higher oil prices and an increase in government transfer payments overseas, Bloomberg said. Former Fed Chairman Greenspan said that China’s economic growth is likely to slow at some point and that he wouldn’t worry about China potentially selling holdings of US Treasuries. I expect the current account deficit to only improve modestly over the intermediate-term as slower growth in emerging markets mostly offsets lower energy prices.

Foreign buying of US financial assets accelerated in April on the second-biggest net purchase of equities, Bloomberg reported. International purchases of US stocks rose a net $27.4 billion, just off the all-time high of $27.6 billion. US investors bought a net $13.3 billion of overseas assets in April versus $47.4 billion the prior month. Japan, the largest foreign owners of US Treasury securities increased its holdings by $3.2 billion. Caribbean banking centers, which analysts link to hedge funds, sold a net $4.3 billion during the month. I continue to believe foreign demand for US assets will remain strong over the intermediate-term as the US dollar firms and emerging market growth wanes.

Industrial production in the US stalled last month as mild weather reduced demand for electricity and manufacturers of cars and machinery scaled back, Bloomberg reported. Utility production fell 1.3% versus a 3.4% gain in April. Production of computers and peripheral equipment rose 1.4% versus a 1% gain in April. Capacity utilization at 81.3% is right near the long-term average of 81.1% and well below the 85.1% seen in 1994. I expect industrial production to rise next month on further inventory rebuilding.

US consumer confidence fell this month on interest rate, gasoline and housing concerns, Bloomberg reported. However, lower confidence isn’t preventing Americans from shopping as the recent retail sales report showed retail sales jumped in May by the most in more than a year. Low unemployment, low interest rates, rising stock prices and wage growth substantially above most measures of inflation continue to give consumers the power to spend. Consumers said they expect inflation to rise 3% over the next five years, down from expectations of 3.1% in May’s report. The current conditions component of the index fell to 100.2 versus 105.1 the prior month. Gas prices are averaging $3.11 this month versus $3.12 in May and a high of $3.23 on May 23. I continue to believe both measures of consumer confidence will make new cycle highs over the intermediate-term as energy prices fall, interest rates decline, inflation decelerates further, stocks rise more, housing sales stabilize at relatively high levels and the job market remains healthy.

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