US: CORE INFLATION SLOWS, SHOWING THAT PEAK MAY BEEN REACHED OR NEARED
The October CPI report showed that inflationary pressure may be lessening. The 0.5% M/M drop in the headline CPI, matching the September decline was certainly eye-catching as it pushed the Y/Y rate down to 1.3% Y/Y, the lowest level since June 2002 and down from 4.3% Y/Y in June. The 7% M/M plunge in energy prices was of course the main driver. However, still more important was the tiny 0.1% M/M increase in core CPI that pushed Y/Y CPI down to 2.7% from 2.9% previously. Consensus counted on a 0.3% M/M fall in the headline and a 0.2% M/M rise in core CPI. The good core CPI was obtained despite a strong 0.4% M/M gain on owners’ equivalent rent (and on residential rents), which accounts for 30% of the core. The steep rises of this category is controversial as it is the result from the dire state of the housing market that makes renting houses more attractive and thus pushing prices up. Car, clothing and airline transit prices all declined. The slowing in core CPI is encouraging as it might signal that the series is peaking. There are still some chances that Y/Y CPI will increase a bit further, but the report gives the impression the Fed won’t need to raise rates anymore, but should on the contrary be able to cut rates in 2007.
The November Philly Fed general business conditions index on manufacturing showed a modest improvement as it rose to 5.1 from –0.7 in October and –0.4 in September. However, the details of the report contained a high number of weaknesses that may us call the report weak. Conditions in the Philadelphia manufacturing sector seem still to be weakening or at least show no tangible signs of recovery. In this sense it contradicts the message of the very strong NY Fed survey. We need to see more surveys to get a better view of the overall situation in the US manufacturing sector, but it is our feeling that the situation still deteriorates. Looking to the details, new orders dropped into negative territory, notably to –3.7 (from 13.4), the second negative reading in three months. Shipments were little changed at 6.5, but more weakness in the labour market indices. Employment dropped to 0.2 from 9.4 and the workweek stayed nearly unchanged at 0.4 (-2 in October). Unfilled orders improved, but stayed in negative territory at –3.9, leaving it only to the delivery orders to mark good progress (5.9 versus –9.4). Regarding prices, the prices paid index dropped to 26.7 from 32, but the eye-catcher was the prices received index that plunged to 5.7 from 17.8 previously, showing that pricing power is fading rapidly. The 6-month outlook index for business conditions weakened to (12.4 from 16.7).
The National Association of Homebuilders’ survey for November showed an unexpected improvement. The headline index rose to 33 from 31 in October and 30 in September, a 15-year low. The market expected a decline to 30. Despite the improvements readings below 50 point to a bad market. That said, the recent gains suggest that conditions are slightly improving, or that the bottom might have been left behind.
Initial claims continue to surprise us as they remain so low. Indeed claims fell 2 000 to 308 000. The continuing claims stabilized at 2 443 000, keeping the state unemployment rate 1.9%.
Industrial production rose by 0.2% M/M in October, following a 0.6% M/m drop in September, falling just shy of the consensus for a 0.3% M/M increase. Capacity utilization was little changed at 82.2%. Utility output jumped 4.1% M/M reversing September’s weakness. More important the cyclical manufacturing output fell 0.2% M/M for the second month in a row pushing the Y/Y rate down to 4.1% from 6.2% previously.
OTHER NEWS: UK RETAIL SALES SURPRISE ON THE UPSIDE, BUT UNDERLY-ING TREND REMAINS MODEST
In the UK, the October retail sales rebounded strongly from the weak September sales posting the largest monthly rise so far this year at 0.9%. The underlying trend however remains modest and even slowed slightly from 0.7% in the three months to September to 0.6% in the three months to October. Three-monthly sales growth in non-food stores rose 0.8%, but was flat in food stores, which was the lowest since March 2003. The figures appear to confirm the moderate expansion envisaged by the Bank of England and thus should not change their current wait-and-see stance following the November rate hike. It may nevertheless keep the pressure on the upside given the outlook for the CPI to rise further above target in the near term.
