“In terms of what it actually tells us about overall inflation, I’m not sure it’s all that important.”
-Jan Hatzius, chief United States economist at Goldman Sachs.

“It looks to us like this is a fluke.” 
-Ethan Harris, chief United States economist at Lehman Brothers

>

Sometimes, they just want to take ‘em higher, and yesterday was a classic example of that.

Don’t believe the hype that it was based on the PPI; Any excuse would have lit the fuse, as sentiment had gotten a bit too extreme, and the market was simply due for a pop. That’s what yesterday’s move looked like. For you EMH adherents out
there, both Goldman (equities) and Lehman (bonds) prominently pointed
out to their clients all the warts in the PPI data — so this was hardly a secret.

As I stated last week in a note to RR&A subscribers, "If you are a Trader, Cisco’s good numbers and guidance might drive
equities higher today — if the markets can develop some momentum, a
summer rally is possible."

As we discussed extensively yesterday, the soft PPI was a function of heavy discounting by GM, Chrysler, and Ford on SUVs and light trucks. How much discounting?  Bloomberg, citing data from Edmunds, noted the following:

"Edmunds’s data show automakers’ total discount spending rose 15 percent to $4.5 billion last month from June. DaimlerChrysler AG’s Chrysler unit, whose July sales fell 37 percent, this month extended employee discounts for all buyers of its cars and trucks through August."

There’s your entire decline in producer prices: almost $5 Billion dollars in July incentives to move heavy iron off of dealer lots.

At the same time as car dealers were engaging in big price cutting, Bloomberg reported that:

"Price pressures for raw materials continue to build. Core prices for goods at the earliest stage of the production process rose at an annual rate of 43 percent over the last three months. Core prices for intermediate goods rose at an 11 percent pace since May. Profits may suffer if companies can’t pass rising raw material and labor costs on to consumers."
(emphasis added)

You read that correct: The past quarter’s data shows raw materials rose at an annualized rate of 43%.  (But no worries, there is no inflation in the core . . .  Ha!).

So where does that leave us today?

CPI at 8:30 will likely show much more inflation than yesterday’s PPI headline. Since the market chose to ignore the actual basis for the dis-inflation, today may very much be a tell: If the number comes in hot, and they rally them anyway, look for OER to become  the excuse. But the reality is its an options expiration week, and they have higher prices on their collective minds.

If the data comes in cool, all bets are off on the height of the moonshot.

Sometimes, the data is irrelevant — to paraphrase Thin Lizzy, "When the boys want to play, you better let them."

>

Sources:
Stocks Rally as Inflation Eases Off
JEREMY W. PETERS
NYTimes,  August 16, 2006
http://www.nytimes.com/2006/08/16/business/16econ.html

U.S. Economy: Producer Prices Unexpectedly Decline (Update7)
Joe Richter
Bloomberg.net: August 15, 2006 15:51 EDT
http://www.bloomberg.com/apps/news?pid=20601103&sid=aRGNBFVjcMWM&

Category: Economy, Federal Reserve, Inflation, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

31 Responses to “Sometimes, they just want to take ‘em higher: PPI versus CPI”

  1. ss says:

    Fascinating Barry.

    Last month you were very excited about a strong CPI number…a coincident lagging indicator. I’ll be watching if it gets the same brush stroke by you this AM, now that it shows a stabilization.

    As I said last month, I’m more interested in the leading inflation and growth numbers. I believe BB is as well. FIG is not (yet) a clear case win for bulls…but these coincident indicators will curve the perception that inflation is under control.

  2. PeterB says:

    Stabilization? Are you kidding? Did you see the energy component?

  3. S says:

    ss:

    If the capacity utilization number is hot, it will be a neutralizng influence on the Core CPI number. However, if it comes in lower than expected, this market will rip. 1300 possible. I said yesterday it felt like a submerged beachball. We’ll see if it is filled with lead or helium.

  4. Fullcarry says:

    Facts:
    Median CPI up 0.4 for July
    Dollar down 0.5% today
    Gold up 6.5 today
    Silver up 24 today

  5. ss says:

    Agree S.

    Much to the chagrin of the Cult, we’re set up for a possible melt up. The squeeze play will be dwarfed by the record cash on the sidelines (and I’m NOT talking about mutual fund cash) coming into what “most” investors consider cheap trailing and forward PE’s. Earning continue to baffle the Cult.

  6. Fullcarry says:

    Error on the Median CPI. Its not announced just yet. The 0.4 is for June. Sorry

  7. T says:

    Everything is pretty much exactly in line with expectations, market is off to the races although it’s a little weaker now than when they first released CPI.

  8. Bob_in_MA says:

    Barry,

    Can you state clearly what your complaint is with the perception of inflation?

    Is it you think no one else sees the huge increase in commodity prices?

    That you think the headline inflation numbers are poorly weighted and so don’t reflect properly the increase in commodity prices?

    That you feel any rational for looking at an inflation number that excludes commodities–the core rate–is completely misguided?

    Aren’t the price increases for commodities themselves acting as a break on the economy?

    According to today’s home starts report, 400,000 fewer houses will be started this year from last year. Home equity withdrawals are falling and could evaporate over the next year or two. Job growth is anemic. Retail sales are soft due to gas prices. We clearly are in a slowdown and will very likely enter a recession over the next six to nine months. You yourself link to such forecasts regularly, so I assume you give them some credence.

    Your tone and sarcasm indicate you think someone has it all wrong, but it isn’t clear who. Clearly, everyone is keenly aware of the commodity price increases. So what? Who should be doing what? The Fed should continue raising rates?

    Sometimes I think you’re just honing a gadfly persona to get more TV air time. ;-)

  9. ss says:

    Iran is now willing to discuss uranium enrichment issues (shocker). They got huge gains (unfortunately) through Hezzb…..

    Oils should break support (depending on supply numbers), which would topple “another brick in the wall”…

    These are not welcome events to the Cult.

  10. T says:

    SS, you forgot to mention the lowest housing starts in two years — fewer houses, less oil use!

  11. jim says:

    This must be a new Bull. CNBC has fired off Abby, Neil, and Ed Keon already today. I expect big Joe will charge in shortly with guns ablazing.

  12. suspicious says:

    ss:

    Iran agreed to sit down and tell us why it was “illogical” for them to suspend enrichment. Iran has no intention of suspending enrichment.

  13. ss says:

    Big Joe has been sporting bear fur lately.

    Yes, housing starts down could put a ceiling (doh) on some materials pricing. In fact I heard that housing companies are now squeezing their suppliers to the tune of ~ 5% cost reductions.

    Ladies and gentlemen, we hope you’ve enjoyed your flight…flight attendants please prepare for arrival. We’re ariving right on schedule…Captain Bernanke thanks you for your patronage.

  14. Craig H says:

    “Iran is now willing to discuss uranium enrichment issues (shocker).”

    LMAO!

    Why are you so busy posting here? Shouldn’t you be buying more stock (if you have any free cash)?

  15. ss says:

    Very long QLD, DDM, and MMV for a rental squeeze….oh yeah, and AAPL for long term. ;o)

  16. S says:

    I’m not in the melt-up camp (yet). But I definately don’t see the ingredients for a major melt down. With unemployment below 5%; treasury yields below 5%; employment and income growth positve; and “official” inflation below 3%; it’s hard to see how equities, that are farily to slightly undervalued, can sell off hard in the absense of an exogenous shock.

    If oil prices drift lower and more people start to price in the 100 basis points in FED easing that will likely happen next year, then I can see a case for multiple expansion. Nobody is pricing in the easing yet, preferring instead to worry about inflation.

  17. Chief Tomahawk says:

    Consumer spending. How long can it hold up now that MEW has dropped off a cliff and the housing market is slowing (oversupply, falling sales, and soon falling prices (some are already coming down.)) Foreclosures are picking up, and their danger is banks tend to want to unload them in a hurry, which tends to lower market prices (bubble prick?) Plus, there’s always the potential for war with Iran.

    Being in Iraq and Afganistan the U.S. now has Iran surrounded … is it any surprise Iran has encouraged Hezbollah’s deviant behavior? How can Iran rally support in the Arab world than by turning to the old standby of attacking Israel? This seems to have gotten under W’s skin as he was quick to proclaim victory for Israel when it seems that should be the Israeli prime minister’s job. If the U.S. turns to invading Iran look for a market selloff which will be compounded by a falling real estate market. But unlike the Iraq invasion, there aren’t as many arrows in the quiver for folks to tap to keep up the economy…

  18. ss says:

    Consumer spending…that’s a great question for my wife.

  19. Mike_in_Fl says:

    With regards to housing, I’ve noticed an interesting trend (yes, that’s a pun on interest rates) in the latest numbers. It appears that while both 30-year mortgage rates and 1-year ARM rates are going down, home purchase activity is NOT picking up, at least according to the Mortgage Bankers Association.

    Full details are available at my blog. But if this trend persists, it could put a real stake in the heart of the housing bulls who say: “Look — rates are falling! People will swarm back to the housing market! Yippee!”

    Here you go:
    http://interestrateroundup.blogspot.com/

  20. Fullcarry says:

    Median CPI finally out for July. And it is 0.4

  21. Amy says:

    Overall the inflation is rising and with it our worries. But considering the interests are lower the common man is less affected. It remains to be seen what will happen in a large scale over a period of time to draw some objective conclusions.

  22. Amy says:

    Overall the inflation is rising and with it our worries. But considering the interests are lower the common man is less affected. It remains to be seen what will happen in a large scale over a period of time to draw some objective conclusions.

  23. Bob A says:

    Guess that was all just a normal correction and we’re all just a bunch of sorry losers for thinking otherwise. And George Bush is always right, the economy is great, there will be peace in Iraq soon and Condi Rice will be the next president. What was I thinking.

  24. ss says:

    Well I could certainly eat a heapful of crow pie…but it looks like the squeeze is on…the hard trade was buying into the feared inflation numbers…higher lows are in (from a double bottom)… new highs before a rest, imho.

  25. Mike says:

    Barry, you gotta think this is what everyone is thinking:

    “Sometimes I think you’re just honing a gadfly persona to get more TV air time. ;-)” – Bob_in_MA (from above)

  26. I use no PR firm, I never ask for an appearance — I just go where I am asked to . . .

  27. Alaskan Pete says:

    Dude, you don’t need a PR firm. Just make one appearance with The Sweater™ and everyone will remember you.

  28. Why The CPI Nnumbers Were Irrelevant (This Time)

    The numbers are irrelevant if their spin fits the agenda (exiration).

  29. Blissex says:

    «mention the lowest housing starts in two years»

    Just read this nicely scary and bearish article claiming that housing is collapsing, from BusinessWeek, a fairly respected publication:

    http://WWW.BusinessWeek.com/investor/content/aug2006/pi20060815_087285.htm

    «The housing market turned in one of its worst performances in years, with existing-home sales falling 7%, to an annual rate of 6.7 million in the second quarter, according to data released on Aug. 15 by the National Association of Realtors. The results show a clear bifurcation in the market. States that had seen a big run-up in home prices are experiencing the most dramatics sales declines, while markets with strong economies and lower-cost housing are still seeing sales increases.
    “There’s a lot more merchandise and tremendous amounts of price reductions,” says Phyllis Haber, a realtor with Prudential Douglas Elliman on New York’s Long Island. “It’s crazy. It’s like someone waved a wand and everything changed.” New York saw sales drop 4.8% year over year.
    The big losers include California, Nevada, Arizona, Florida, and Virginia. All of the states saw sales fall by more than 20% from the same period last year.»

    And negative equity is starting to bite hard for some:

    «Robert Boyce, a factory worker in Miamisburg, Ohio, refinanced his home four years ago at what he felt was a manageable rate of 7.5%. Today he must pay 9.5%, and, under the terms of his mortgage, the rate could jump to 11.5% in December and 13.5% next year. He says that because of high closing fees and an overambitious appraisal by the lender, his mortgage is now more than what his house is worth.»

    But some states are booming:

    «In contrast to the gloomy sales numbers in some markets, 20 states managed to show increasing home sales. They are led by Alaska and Texas, whose oil-driven economies are producing more jobs and, as a result, new-home purchases. In Alaska, sales leapt 48%, while in Texas they increased 11%.»

    As usual, things are spread all over the place, and it not clear whether inflation or stagnation will win over (or both).

    What Would Bernanke Do? :-) [we don't know yet...]

  30. Cherry says:

    those states aren’t “booming” because they never had a any RE runup anyway, nothing more than a echo that is being shunted by the bust in the mania states, which are the majority OUCH!!!!

  31. b says:

    Access to the technology of producing heavy water automatically puts Iran on the list of the twelve countries which exclusively keep this technology at their own hand, and therefore weighs Iran’s position in the international power estimations.