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US: Consumer prices fall back sharply in October

Thu, Nov 20 2008, 08:49 GMT
by KBC Market Research Desk

KBC Bank

The consumer price index dropped 1.0% M/M in October, while the consensus was looking for a decline of 0.8% M/M. On a yearly basis, inflation fell back from 4.9% Y/Y in September to 3.7% Y/Y in October. Most of the plunge was due to the sharp drop in oil prices, but also other prices came out lower. Core inflation (ex food and energy) showed an unexpected decline of -0.1% M/M (to 2.2% Y/Y), the first monthon- month decline in core CPI since 1982. This might indicate that demand is slowing fast, as prices of clothes and cars showed considerable declines. Inflation has now fallen back significantly from its peak of 5.6% Y/Y in July and is expected to drop sharply in the coming months. Inflation is off the table and given the precarious eco situation, it is probably only a question of time before markets start to start about deflation.

The October housing starts dropped another 4.5% M/M from an upwardly revised 828 000 to 791 000. The housing permits came out even weaker, plunging 12.0% M/M from an upwardly revised 805 000 to 708 000, while the consensus was looking for a figure of 774 000. Both houses under construction (892 000 from 912 000) and houses completed (1 043 000 from 1 161 000) showed additional declines. These figures indicate that housing market conditions are still worsening and a recovery in not yet around the corner.

Other: BoE announces more (aggressive) rate cuts

In the UK, the Minutes of the BoE Monetary Policy Committee meeting on November 5 and 6 showed that the MPC voted unanimously for a 150 basis points rate cut to 3.00%. The Minutes revealed that the Monetary Policy Committee discussed the possibility of a 200 basis points rate cut in order to meet the inflation target in the medium term. But some members thought there was an argument for leaving some of the required policy loosening to the months ahead to support confidence as the economy weakened. The Committee also showed concern about the impact that a larger rate cut might have on the sterling. The Minutes clearly indicate that the BoE will lower its interest rate again in the coming months and it is prepared to cut rates even below 2.00%, the lowest level since the Bank of England was founded.

The November CBI industrial tends survey showed a marginal improvement (-38 from -39) in total orders and export orders (-31 from -32). Output expectations deteriorated sharply from -31 to -42, coming out at the lowest level since September 1980. Domestic price expectations plunged from +10 to 0. The survey illustrates that orders remain extremely weak and manufacturers are becoming even more pessimistic about the economic outlook.

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Published on  Thu, Nov 20 2008, 08:52 GMT