FYI | Aug 17 2006
By Greg Peel
Yesterday’s US producer price index increase (PPI) for July was less than expected, and last night the release of the consumer price index (CPI) saw a similar result. The Dow Jones Industrial Average responded with another solid gain, climbing 97 points to 11,327 (up 0.9%). The S&P500 was up 0.8% and the Nasdaq picked up from a 2.2% rise yesterday to add another 1.6%.
The July headline CPI rose 0.4%, but the number everyone focuses on is the core CPI, which excludes the volatile prices of food and energy. That figure rose only 0.2%, having risen 0.3% in each of the previous four months. Consensus among economists had been for another 0.3% rise.
The CPI provided heart for investors that the US economy is on track for a soft landing, rather than a full blown recession. And there was more news to come that helped to reduce the likelihood of another Fed rate rise in September.
July housing starts fell 2.5% to a level of 1.795m annually, which is down 21% from January. Building permits fell 6.5% to their lowest level in four years. As a result, 10-year bonds fell to their lowest yields in four months.
Industrial production increased 0.4% in July, down from 0.8% in June. While utilities were running hot, manufacturing was up only 0.1%, held back by a wavering auto industry.
All this seems like good news on the inflation and rate rise front, but economists are still playing it cautiously, noting that despite these better figures core inflation is still running at 2.7% for the year, compared to the Fed’s 2.0% comfort level. Softening trends would need to continue before the Fed is fully convinced.
Energy was again a major factor in the headline CPI increase, with energy prices up 20.5% over the past 12 months. The crude oil price, however, continued its retracement, falling 1.8% overnight to below US$72/bbl. This added to an overall feeling of relief.
Gold finally rallied. Having slipped with the oil price recently, and an abatement of Middle East woes, gold responded to a fall in the US dollar precipitated by the easing of inflation fears. Having traded as high as US$632/oz on the release of the CPI, it eased back to end the US session at US$628.60/oz, up US$6.10/oz on the previous night.
Kitco reports Peter Grandich, editor of the Grandich Letter, said that on a technical basis gold was setting itself for a large rally. Grandich would prefer to see a further washout to below US$600/oz to really cement the view, but he still believes it is only a matter of when, not if, the gold price breaks through US$735/oz in 2007.