FYI | Jun 15 2007
By Greg Peel
The US producer price index (PPI) rose a higher than expected 0.9% in May to eclipse the rise in April. Gasoline prices were accused of being the main culprit. The PPI measures the prices of goods and services at the wholesale level.
This implies an increase in inflation, which is exactly what Wall Street has been fearing this last week or so. However, the Dow rallied 71 points on the back of the release.
The reason is that the core PPI only rose 0.2%, and that was seen to be comfortably acceptable. The core PPI strips out the volatile elements of food and gasoline, the prices of which can bounce around a lot and thus provide misleading measures. The fact that food and gasoline are somewhat vital commodities is not important here it seems. Nevertheless, Australia will always remember the Great Banana Debacle, which skewed inflation measures for about six months despite being a temporary phenomenon.
The PPI is really only a precursor to the number the Fed is more interested in – the CPI (consumer price index). This measures prices at the retail level. Usually the PPI change provides a guide to the CPI change, given retailers don’t like to allow price increases to erode their margins for too long. Given the mood Wall Street’s in at present, one assumes anything resembling a reasonable core CPI number will probably manage to push the market up even further tonight.
The flavour of the moment US bond rate edged up on the PPI release from 5.21% to 5.23%. That supposed inflation hedge – gold – eked up US50c to US$651.20 given the PPI was still positive even if the core was only marginally so. The reality is that gasoline prices rose 4.1% in May, and that’s the biggest increase in six months. Crude oil rose another 2% to US$67.65/bbl last night. Didn’t seem to bother the stock market.
Gold’s rally was also a good effort in the face of the news that Switzerland intends to sell 250t of its gold reserves. More on that later today.
Nickel surged back another 4% in New York last night as it continues to recover the ground lost since the LME sparked a sell off earlier in the week. Copper was also strong, up over 2%.
The SPI overnight gained 30 points, suggesting the local market, which closed on its highs yesterday, may yet have some more relief momentum today. No, this wasn’t the correction. Is it still coming?
Bring on the CPI.
