Import prices rose a stronger-than-expected 1.8% M/M and 9.6% Y/Y in October, following a 0.8% M/M and 5.6% Y/Y increase in September. Soaring petroleum prices, up 6.9% M/M, were the main culprit, but prices excluding petroleum were also up 0.5% M/M and 3.2% Y/Y. It is obvious that the weaker dollar is becoming a more prominent source of inflation. This may stoke some more inflation concerns, not only in the markets, but also inside the Fed. However, as economic growth slows, as many including us expect, domestic inflation drivers will help keep inflation under control.
Michigan consumer sentiment deteriorated in early November more than expected, under the influence of declining house prices and rising energy prices. The headline index dropped about 6 points to 75, the lowest level since October 2005. Both the current conditions and the expectation sub-indices contributed (almost equally) to the decline in early November. The current condition index reached the lowest level since the start of the Iraq war in March 2003. Short-term inflation expectations rose, but the longer-term expectations were only slightly up and are still below 3%.
The trade deficit continued to be smaller than expected in September, showing that the slower domestic growth and the weaker dollar are having a beneficial impact on the trade deficit. In September, the trade deficit narrowed to 56.5 B USD from a downwardly revised 56.8 B USD in August, earlier reported as a 57.6 B USD. Exports advanced 1.1% M/M, following a 0.4% M/M increase while imports rose by 0.6% M/M following a 0.4% M/M decline. The improvement was much bigger than supposed in the initial Q3 GDP estimate and as a consequence Q3 GDP may be revised higher to as high as 5%. This looks strange in an environment where recession risks are mounting, but of course forward looking markets are not so much impressed by this rear window look on the economy.
