FYI | Apr 18 2007
By Greg Peel
The US March CPI rose 0.6% following a 0.4% rise in February, largely reflecting higher oil prices. However, economists were expecting a 0.7% rise. Inflation is now running at 2.8% for the twelve months to March.
Stripping out food and energy to arrive at a core inflation figure, the March rise was only 0.1% compared to an expectation of 0.2%.
On face value, the result was a good one in that allayed some inflation fears. It was enough for the Dow to post a 52 point rise, assisted by the housing start number and some better than expected earnings results. However, it didn’t really answer any questions.
The overall inflation rate is still above what is deemed to be the Fed’s comfort level, but core inflation has risen only 2.3% in the first quarter of 2007 compared to the 2.6% annual figure for 2006. Those looking for moderating inflation should be pleased by these numbers. What’s more, there were some big jumps in April and May of 2006, so those month’s figures for 2007 are likely to look a lot better.
However…
The sceptics are not convinced, pointing to the fact that month-on-month figures are always subject to “noise” and can’t be used to assume a wider trend. They are expecting the CPI number to push up in coming months as higher fuel prices are more consistently felt.
The numbers do little to answer the will they/won’t they speculation of a Fed rate cut any time soon, while neither suggesting another hike. It looks like steady as she goes for the moment. The US dollar, however, suffered further weakness, as while the US figures might have been benign it was a very different story across the Atlantic.
The British pound pushed past the US$2.00 level last night for the first time in fifteen years. The pound was spurred on following the release of the UK CPI figure for March, which caused some shock. The annualised figure for March came in at 3.1% – the highest level since 1997. Analysts were expecting a rise of 2.9%.
The Bank of England is charged with maintaining an inflation rate of 2%. As the rate is now more than 1% above that figure (and has been above for 11 months) this triggered an obligatory letter of explanation from the Governor of the BOE to the Chancellor of the Exchequer, Gordon Brown. Equally worrying is that the core inflation rate rose to an annualised 1.9% when analysts were expecting 1.8% – again the highest level since 1997.
The US dollar also fell further against the euro last night, suggesting the all time low of US$1.3666 may soon be breached.
Despite a falling dollar, the gold price pulled back from its highs, settling at US$687/oz having penetrated US$694/oz briefly the night before. Market observers suggest profit taking was the reason, with gold having made a concerted push over the last week. However, that confusing relationship also comes into play as gold is a hedge against inflation – which was lower than expected.
The US$700/oz level is going to prove tough resistance, observers suggest, and in the mean time consolidation back towards the US$680/oz breakout level will not be a surprise. Expert Dennis Gartman notes the Indian rupee has recently run harder than any other currency against the US dollar, rendering the metal relatively cheap for gold loving Indians to snap up.
It was another base metal bonanza overnight, with aluminium up 1.4%, copper up 4.4%, nickel up 3.4% and zinc up 4.7% on the New York close. The strength was mainly put down to the release of the US housing starts figure.
US March housing starts rose 0.8%, which is pretty poor compared to February’s 7.6% rise, however analysts were expecting a fall. This was just another confusing piece of economic data, leading to a lack of conclusion as to just where the US economy is sitting right now.