Disinflation, not inflation, has been the rule

Those who have been betting on much higher inflation received another dose of bad news today after the government reported that inflation continues to recede.

The Consumer Price Index increased just 0.1% in March, and the core rate of inflation, which excludes food and energy, was unchanged.

Year-over-year, the headline rate, which has been influenced by the rise in energy prices, is up 2.3%, while the core rate, which is more closely-followed by the Fed, eased to 1.1%, which is near the bottom of the Fed’s implied comfort zone of 1-2%.

The continued drop in the core rate of inflation isn’t much of a surprise given the severity of the recession, stable labor costs, excess capacity in the economy and still-weak demand.

Moreover, inflation is a lagging indicator and normally slows in the early stages of an economic recovery.

We may see a further easing in core inflation, but as the recovery broadens, we will probably hit bottom over the next few months. Nonetheless, with inflation safely at the bottom of the Fed’s implied range, don’t expect any tightening in the near term, as the focus will remain on the unemployment rate.

Even if oil prices continue to rise , it seems unlikely that higher energy costs will leak into the other areas of the economy anytime soon.

Crude oil prices jump

But U.S. well-supplied with product

The price of oil had jumped from $70 per barrel just a couple of months ago to $85 this week, even as crude oil stocks in the U.S. have been on a steady, upward climb, according to data supplied by the Energy Information Administration.

Gasoline supplies, though off the highs, remain well above the average range for this time of year. Although the economy is still weak, data out recently suggests aggregate demand in the U.S has firmed and the recovery be broadening.

In addition, production has trended higher in the U.S.

 

And imports have perked up recently.

A more in-depth look is available in my article entitled, Crude oil barrels higher but do fundamentals support price?

Progress elusive in jobless claims

Mick Jagger famously said, “I can’t get no satisfaction.”  When it comes to jobless claims reported each Thursday, the familiar tune rings true, as claims unexpectedly jumped 18,000 to 460,000.

And the stubbornly-high level is especially disappointing given signs that economic activity is slowly picking up.

A more in-depth look at jobless claims and a quick peek at upbeat same-store sales numbers is available on Examiner.com.

Fed minutes: rate hike later rather than sooner

Fed officials indicated in the minutes from the last meeting that a rate hike is contingent upon the economic recovery. And in my view, much will depend on how quickly the economy generates new jobs.

The minutes noted that the Fed's current language that interest rates will stay low for an extended period is not designed to box policymakers in by explicitly telegraphing to the financial markets that rates will stay near zero for several more months.

"A number of members noted that the Committee's expectation for policy was explicitly contingent on the evolution of the economy rather than on the passage of any fixed amount of calendar time.

"Consequently, such forward guidance would not limit the Committee's ability to commence monetary policy tightening promptly if evidence suggested that economic activity was accelerating markedly or underlying inflation was rising notably; conversely, the duration of the extended period prior to policy firming might last for quite some time and could even increase if the economic outlook worsened appreciably or if trend inflation appeared to be declining further."

Still, despite relatively upbeat economic reports that have come out recently, most officials anticipate a modest recovery and some warned against raising rates too soon.

Home sales may be set to move ahead

Early evidence suggests that despite harsh weather winter during February, the extension of the first-time home buyers tax credit and a newly-instituted credit for repeat buyers are finally having the desired effect.

The Pending Home Sales Index released by the National Association of Realtors increased 8.2% to 97.6 in February, suggesting that existing home sales are poised to rise in March and April.  Pending home sales are counted when a contract is signed, which typically takes four to six weeks to close.  At that time, the transaction is counted as an existing home sales.

NAR chief economist Lawrence Yun, said the improvement is another hopeful sign. “The rise in buyer contact activity may signal the early stages of a second surge of home sales this spring. The healthy gain hints home prices are continuing to flatten,” he said. “We need a second surge to meaningfully draw down inventory and definitively stabilize home values.”

Unlike the last expected expiration of the tax credit, which required that the home close by November 30, the current law states that a contract must be signed by April 30.

Given the uptick in February, it seems likely that we will see further gains in March and April, as potential buyers rush to meet the new deadline.  With mortgage rates heading higher, buyers have an added incentive to move off the sidelines and beat the possibility that further increases in mortgage rates are on tap.

Of course, predicting mortgage rates, which are normally tied very closely to the ten-year Treasury yield, over the short-term is haphazard at best.  However, upbeat economic data released over the past week, has nudged rates higher, and home loans have moved along with it.

Though it seems likely that realtors will be in the sweet spot over the next couple of months, the end of the tax credit could bring a new hangover in the real estate market during the summer.

Increased job security, more reasonable lending standards and a solid economic recovery would go a long way in absorbing excess housing inventory and putting the housing market on a much firmer foundation.

ISM survey shows survey sector accelerating

The ISM Non-Manufacturing Index rose  to its highest level in close to four years, indicating that the economic recovery, which had  been mostly confined to manufacturing, is now starting to gain traction in the much broader-based service sector.  And subcomponents within the index suggest that further gains are on tap.

Looking at the chart above, the tepid and uncertain expansion experienced during the fall of 2009 has given way to a more balanced recovery. 

Job growth remains weak and setbacks following the rise in March are likely, but continued economic growth should eventually make a modest dent in the unemployment rate. 

Still , a quick fix to the high level of joblessness is unlikely.

Manufacturing accelerates at fastest clip since 2004

Manufacturing continues to shine in an otherwise cautious outlook, according to the latest data from the Institute for Supply Management.

The ISM Manufacturing Index increased 3.1 points to 59.6, the fastest pace since July 2004, and most indicators point to further gains.

Both new orders, which are more forward looking, and production rose above 60, while employment dipped slightly but remained above 50 for the fourth-straight month.

Manufacturers continue to report that inventories among customers remains too low, which also suggests that production will remain on the upswing in the near term.

In addition, exports jumped 5 points to 61.5, signaling that the overseas economy continues to improve.

About the only dark spot in an otherwise stellar report was the big jump in prices that manufacturers are paying to procure raw materials (up 8 to 75.0). 

However, at this point in the business cycle, commodity inflation – sign of strong demand – is unlikely to seep into the broader price level given that there is plenty of slack in the economy and demand, though rising, is far from robust.