Producer Prices Decelerate, Housing Starts Fall Again

- The Producer Price Index for February rose .3% versus estimates of a .4% rise and a 1.0% gain in January.

- The PPI Ex Food & Energy for February rose .5% versus estimates of a .2% gain and a .4% increase in January.

- Housing Starts for February fell to 1065K versus estimates of 995K and an upwardly revised 1071K in January.

- Building Permits for February fell to 978K versus estimates of 1020K and an upwardly revised 1061K in January.

BOTTOM LINE: Prices paid to US producers rose less than forecast in February, Bloomberg reported. Energy costs increased .8% versus a 1.5% gain the prior month. The price of gasoline rose 2.9% and natural gas prices gained 5.7%, the most since October 2005. Food prices fell .5%, led by vegetables and fruits, versus a 1.7% gain the prior month. The Core PPI rose more than expected for the month and is 2.4% higher over the last 12 months, which is above the long-term average of 1.8%, but down from 2.9% in July 2005. The 10-year TIPS spread, a good gauge of inflation expectations, is 2.36% down from 2.68% three days ago. Fed fund futures now imply a 90.0% chance for a 100 basis point rate cut and a 10.0% chance for a 75 basis point cut. I think the Fed has an opportunity here to under-deliver, which would boost the US dollar. This may temporarily pressure stocks, but would be a big positive over the intermediate-term. A stronger dollar would have a much larger negative impact on commodity prices than the market currently perceives, in my opinion. Inflation fears have likely already peaked for the year.

Housing starts in the US dropped in February and building permits fell to the lowest level in more than 16 years, Bloomberg reported. Starts fell 28% in the Northeast. They rose 5.1% in the West and 3.9% in the South. They were unch. in the Midwest. Residential construction fell 25% last year, the most since 1981. Housing construction will remain muted over the intermediate-term as homebuilders continue to work down inventories.