Producer Prices Decline Substantially, Net Long-term TIC Flows Decelerate

- The Producer Price Index for August fell -1.4% versus estimates of a -.3% decline and a .6% rise in July.

- The PPI Ex Food & Energy for August rose .2% versus estimates of a .1% gain and a .1% increase in July.

- Net Long-term TIC Flows for July fell to $19.2 billion versus estimates of $85.0 billion and $97.3 billion in June.

BOTTOM LINE: Prices paid to US producers fell more than forecast in August, diminishing concern over inflation as the Fed considers lowering interest rates, Bloomberg said. A drop in fuel costs brought prices down in August and slowing demand should further restrain raw-material costs, according to economists. The spread between the yield on the 10-year and inflation-indexed bonds, which reflects investor expectations for inflation, is 2.34% today, down from an average of 2.39% over the last six months. Over the last 12 months, producer prices have risen 2.2% versus a 4% gain in July. As well, the PPI Ex Food & Energy rose 2.2% year-over-year versus a 2.3% gain in July. After an uptick next month, I expect producer prices to resume their intermediate-term deceleration. I still think all main measures of inflation have peaked for this cycle.

Foreign buying of US financial assets slowed in July as the weakness in subprime mortgages tempered international demand for American bonds, Bloomberg said. Including short-term securities, such as T-bills and non-market trades such as stock swaps, foreigners bought a net $103.8 billion, up from $34.4 billion the prior month. International holdings of US stocks rose a net $21.2 billion versus a net $28.8 billion in purchases during June. The difference between the US trade deficit and securities purchased by foreigners is an indication of how easily the US can finance its external obligations, according to economists. The trade deficit shrank .3% in July as exports surged the most in three years. Caribbean banking centers, which analysts link to hedge funds, sold a net $7.4 billion in treasury securities, bringing holdings to $29.4 billion, the lowest level since April 2002. Chinese investors increased their US government debt holdings by $2.7 billion to $407.8 billion. I continue to believe foreign demand for US assets will remain strong over the intermediate-term.