US Import Prices and this Week's Data

Import prices fell 1.0% in May in line with expectations. The drop can be fully accounted for by food and energy imports. Excluding them, prices were flat. Tomorrow the US reports producer prices and the headline is expected to fall 0.6%. There may be some downside risk to the headline. 

The key point is that headline price pressures are, as one might expect with the decline in commodity prices, softer but core prices are stable to firmer. Some observers may also put more emphasis on the dollar's appreciation as a factor curbing import inflation, though given that most of the goods are denominated in dollars, I tend to be a bit skeptical.

There are less implications for US CPI figure, which is to be released on Friday.  However, the general pattern is likely evident here as well:  headline soft, core firm.  

Those looking for action from the Federal Reserve next week are not basing their arguments on a threat of deflation.  Core measures of inflation remain not far from the Fed's target.  Rather, the arguments are mostly based on the performance of the labor market.  While there does appear to be a loss of momentum from the monthly numbers, Fed officials tend to appreciate the noise of this high frequency report.  

Remember, the economy generates hundreds of thousands of jobs a month and destroys hundreds of thousands of jobs in a month.  The non-farm payroll report is covers only the net change.    Fed officials also seem to be aware of the seasonal cycles (weather) distortions  and the echo from the Lehman event.  

The US also reports retail sales tomorrow.  When stripped away of the "noise" of softer gasoline prices, and the auto sector and building materials, which is the component that feeds into the GDP estimate, retail sales likely posted a 0.3% increase.  This compares with a monthly average of 0.64% this year, which is skewed by the 1% gain in January. 

While retail sales may have softened a bit, the demand side still appears to be faring better than the supply side.  At the end of the week, the US reports industrial production.  The key here is manufacturing.  Recall manufacturing fell 0.5% in March and rebounded 0.6% in April.  The risk is that it contracted 0.1-0.2% in May.  This in turn may leave capacity utilization near the cyclical high set in April near 79.2%.  It is not far from pre-crisis levels that averaged near 80%.   

As production moves back into line with demand, the conditions may be set for a re-acceleration of the economy in H2, but that is predicated on the consumer.   

The current account and TIC data will also be reported but tend not to be market movers.  With some deterioration in the trade figures in Q1, a somewhat wider current account deficit would not be surprising.  TIC data is next to impossible to forecast with any accuracy.  Safe haven appeal of the US Treasury market and the out-performance of US shares holds out the possibility that long-term inflows increased from the $36.2 bln recorded in March.