Vital Signs: Inflation Jitters Spread

On tap: May figures for consumer and producer prices, industrial output, retail sales, consumer sentiment and business inventories

It could be another bumpy ride on Wall Street this week. Investors are getting a case of inflation jitters after Federal Reserve officials, including chairman Ben Bernanke, made it clear that inflation remains the bank's top concern (see, 6/6/07, "Bernanke: The Dilemma Ahead"). That ended hopes for an interest rate cut and caused a sell off in bonds and stocks. More turmoil may be in store for investors with the latest batch of inflation data on tap.

May figures for consumer, producer and import prices could really move the markets. Investors should look past the headline numbers. The consensus among economists is that the topline readings for these price indexes will rise 0.4% to 0.5%. Rather, the markets will be looking at how the prices of goods and services outside of food and energy are behaving. Results undershooting expectations, especially when it comes to the consumer price index, will likely be welcomed by investors. Larger-than-expected numbers could roil the markets by elevating fears of a rate hike later this year.

Any signs that the economy is picking up steam faster than expected could also elicit a big reaction. That raises the potential impact of the May industrial production report and the June Empire State Manufacturing Survey. The Fed believes inflation pressures could rise because there isn't much excess capacity available. Data showing increased output and higher capacity utilization could make investors even more nervous about inflation and monetary policy.

After chairman Bernanke caused such a stir on June 5, the markets will be sure to tune into his speech on Friday, June 15. What's more, several other Fed officials, and one ex-chairman, will take to the podium. Former Fed chairman Alan Greenspan speaks on June 12. His remarks this year about China's stock market, the U.S. housing market and the odds of an economic recession have drawn a lot of attention and rattled stock markets several times. Given Wall Street's fragile state right now, it probably wouldn't take much from Greenspan, Bernanke, or any of the upcoming reports to shake up markets some more.

Here's the weekly economic calendar, from Action Economics.

Economic Reports
Report Date Time For Median Estimate Last Period
Treasury Budget (billion) Tuesday, June 12 2 p.m. May -$66.0 $177.7
Retail Sales Wednesday, June 13 8:30 a.m. May 0.5% -0.2%
Retail Sales (ex-auto) Wednesday, June 13 8:30 a.m. May 0.5% 0.0%
Export Price Index Wednesday, June 13 8:30 a.m. May 0.2% 0.3%
Import Price Index Wednesday, June 13 8:30 a.m. May 0.4% 1.3%
Business Inventories Wednesday, June 13 10 a.m. April 0.3% -0.1%
PPI Thursday, June 14 8:30 a.m. May 0.5% 0.7%
PPI (ex-food & energy) Thursday, June 14 8:30 a.m. May 0.2% 0.0%
CPI Friday, June 15 8:30 a.m. May 0.5% 0.4%
CPI (ex-food & energy) Friday, June 15 8:30 a.m. May 0.2% 0.2%
Empire State Index Friday, June 15 8:30 a.m. June 10.0 8.0
Current Account (billion) Friday, June 15 8:30 a.m. Q1 -$200.0 -$195.8
Industrial Production Friday, June 15 9:15 a.m. May 0.2% 0.7%
Capacity Utilization Friday, June 15 9:15 a.m. May 81.5% 81.6%
University of Michigan Consumer Sentiment Index (preliminary) Friday, June 15 10 a.m. June 88.3 88.3


Monday, June 11, 10 a.m. EDT - Federal Reserve Bank of Chicago President Michael Moskow gives the welcoming remarks at the Chicago Fed's conference entitled "Transitions: The State of the Automotive Industry" in Chicago.


Tuesday, June 12, 8:30 a.m. EDT - U.S. Treasury Secretary Henry Paulson gives a keynote address at The Americas Competitiveness Forum in Atlanta.

12:30 p.m. EDT - Former Federal Reserve Board Chairman Alan Greenspan gives the keynote speech at the Commercial Mortgage Securities Association's 13th Annual Convention in New York City.

2 p.m. EDT - Federal Reserve Bank of Chicago President Michael Moskow introduces the keynote speaker at the Chicago Fed's conference entitled "Using Payment Innovations to Improve Transportation Networks" in Chicago.

ICSC-UBS STORE SALES - Tuesday, June 12, 7:45 a.m. EDT

This weekly tracking of retail sales, compiled by the International Council of Shopping Centers and UBS bank, will update buying activity for the week ended June 9. Sales fell 0.5% in the week ended June 2, after holding steady in the prior period and plunging 1.5% in the May 19. The yearly pace of growth slowed to 2.3%, from 2.9% for the week ended May 26.

JOHNSON REDBOOK INDEX - Tuesday, June 12, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the first fiscal week of June, ended June 9. For the full month of May, sales were 2.1% better than in April. Sales for the full month of April were off 4.1% compared to March.

FEDERAL BUDGET - Tuesday, June 12, 2 p.m. EDT

The federal government probably posted a sizeable deficit in May. Economists are forecasting the largest May shortfall since 2003. But that follows a blowout April, with a monthly surplus of $177.7 billion, the largest monthly surplus since April of 2001. Revenues in April were up 21.8% from the same month a year ago, led by a big jump in individual income tax receipts.

Through the first seven months of fiscal year 2007, the budget deficit stands at $80.8 billion, considerably better than the $184.1 billion of red ink spilled over the same period last fiscal year, and the smallest deficit through April since 2001.

MEETINGS OF NOTE - Wednesday, June 13, 8:40 a.m. EDT

Federal Reserve Bank of New York President Timothy Geithner gives a speech entitled "Asia, The World Economy & the International Financial System" at the Economic Society of Singapore Annual Dinner 2007 in Singapore.

MORTGAGE APPLICATIONS - Wednesday, June 13, 7 a.m. EDT

The Mortgage Bankers Association releases its mortgage application volume data for home buying and refinancing activity for the week ending June 8. In the week ended June 1, the purchase index rose 1.5% to 433.6, from 427 in the period ended May 25. The refi index kept falling, down 6.3% to 1757.1, from 1874.6 in the previous week.

The four-week moving average for the purchase index edged down to 432.8, from 433.9. The four-week average for the refi index cooled to 1975.5, from 2065.

The recent pullback in refi activity is probably due to the recent rise in mortgage rates. The average 30-year fixed-rate mortgage kept climbing, reaching 6.35% for the week of June 1, from 6.32%.

RETAIL SALES - Wednesday, June 13, 8:30 a.m. EDT

Retail sales are seen bouncing back in May, after a soft April result. Economists will be paying particularly close attention to these retail sales numbers to see if higher gasoline prices are crimping consumer spending in the second quarter.

The consensus estimate is for a 0.5% increase in sales, after a 0.2% dip in April. The decline would have been worse if not for a 1.7% rise in gasoline station sales, which largely reflected further price increases for fuel. Among the biggest drags on April results were a 1% fall in autos, a 2% reduction in clothing store receipts, and another drop of more than 2% in department store sales.

Sales excluding motor vehicles likely improved by 0.5% as well, implying no change in auto sales. In March, monthly sales outside of vehicles were flat, while the yearly pace downshifted to 3.7%, from 4.7% in April.

IMPORT AND EXPORT PRICES - Wednesday, June 13, 8:30 a.m. EDT

Import prices are forecast to tick up a little more in May. Energy prices surged in April and March by 6.5% and 8.1%, respectively. That pushed up the overall index by 1.3% in April and 1.5% in March. Outside of petroleum, import prices rose a modest 0.2% in April. Prices for food and consumer goods have also risen more quickly in recent months.

On a yearly basis, overall import prices were up 1.9%, and rose 2.9% from a year ago excluding petroleum products. Part of this recent climb in import prices is due to a weaker dollar.

Export prices rose a little in May, after gains of 0.3% in April and 0.6% in March. On a yearly basis, export prices were up 4.9% in April, from 5.3% in March, and 4.9% in February. The upward pressures have been focused in agricultural products and industrial supplies, such as steel. However, prices of consumer goods are also on the rise, with a 0.5% monthly increase in April and a yearly gain of 2.6%, the fastest pace since late 1992.

BUSINESS INVENTORIES - Wednesday, June 13, 10 a.m. EDT

Businesses probably built up inventories in April after a 0.1% decline in March. The March drawdown was centered in the retail sector. Factory and wholesale inventories were up 0.2% and 0.3%, respectively. During the first quarter, a small contraction in inventories subtracted a percentage point from economic growth.

It now appears that businesses are feeling more comfortable with current inventory levels. Demand appears to be picking up, especially for factory goods. That helped pull the March inventory-to-sales ratio back down to its lowest level since August of 2006. As a result, inventory growth should begin to pick up, which would be a plus for second-quarter real gross domestic product. Indeed, manufacturing figures for April already show a 0.5% increase.

BEIGE BOOK - Wednesday, June 13, 2 p.m. EDT

The Federal Reserve will release its compilation of regional economic activity, based on survey responses from each of its 12 districts. The Beige Book will come ahead of the two-day monetary policy meeting on June 27-28. Economists surveyed by Action Economics fully expect the Fed will leave interest rates at 5.25%. Fewer economists also believe that interest rates will be cut this year. In the past week, both Goldman Sachs and Merrill Lynch dropped their official calls for rate cuts in 2007.

The markets will look at this report for more evidence of an improving economic landscape. In a June 5 speech, Chairman Ben Bernanke stated that "we have seen no major spillovers from housing onto other sectors of the economy." He also reiterated the central bank's view that economic growth will pick up. In the first-quarter, real gross domestic product posted the smallest gain in over four years, at 0.6%.


Thursday, June 14, 8:30 a.m. EDT - The Federal Reserve will hold a public hearing on mortgage regulations in Washington, D.C.

JOBLESS CLAIMS - Thursday, June 14, 8:30 a.m. EDT

Jobless claims for the week ended June 2 ticked down to 309,000, from 310,000 in the prior period. The four-week moving average did rise to 307,250, from 304,500 in the week ended May 26. Continuing jobless claims for the week ended May 26 bounced back to 2.54 million, after retreating to 2.46 million in the prior week.

PRODUCER PRICE INDEX - Thursday, June 14, 8:30 a.m. EDT

Soaring energy prices in May probably caused another large increase in the producer price index. In each of the past three months, energy prices have jumped by more than 3%. That has pushed the yearly rate of wholesale prices up to 3.2% in April, from 0.2% in January.

Food prices, which had also been applying some upside pressure in the first quarter of the year, cooled down, with a 0.4% gain in April.

Outside of energy and food, conditions look a lot calmer, with a monthly drop of 0.2% in April and a yearly gain of 1.5%.


Friday, June 15, 8:20 a.m. EDT - Federal Reserve Bank of Atlanta President Dennis Lockhart gives the welcoming remarks at the Atlanta Fed's conference on "Credit Channel of Monetary Policy in the 21st Century" in Atlanta.

8:30 a.m. EDT - Federal Reserve Board Chairman Ben Bernanke speaks at the Atlanta Fed's conference on "Credit Channel of Monetary Policy in the 21st Century."

12:20 p.m. EDT - Federal Reserve Bank of San Francisco President Janet Yellen takes part in a panel discussion on the global economy at a free trade conference at Brandeis University in Waltham, Mass.

CONSUMER PRICE INDEX - Friday, June 15, 8:30 a.m. EDT

Consumer prices probably kept climbing thanks in large part to more expensive gasoline. In April, the headline index climbed 0.4% on a 4.7% increase in gasoline prices. That came on top of a 10.6% jump in motor fuel costs in March.

On a yearly basis, however, inflation cooled to 2.6%, from 2.8% in March. That's because energy prices led to an even bigger gain in the headline index, up 0.6%, in April of 2006.

Inflation should continue to look tamer outside of food and energy. Core inflation rose 0.2% in April, following a 0.1% gain in March. And the yearly pace of core inflation slowed to 2.3%, from 2.5% in March. Within core inflation, economists will be keeping an eye on some recent hot spots, including rents and medical care.


The New York Federal Reserve Bank's Empire State Manufacturing Survey probably improved a little more in May. The April index of general business conditions rallied to 8, from 3.8 in March, and the 22-month low of 1.9 in February. The new orders, shipments, and employment indexes all improved as well, painting a well-rounded turnaround in activity.

Expectations for the coming six months reversed. In April, the general business conditions index stood at a 21-month high of 49.8, from 33.9 in April, and 35.2 in March. Other key indexes also turned higher, with new orders, shipments, employment, and capital expenditures all bouncing higher. Overall, the April report reversed perceptions of deteriorating conditions for the region's manufacturers.


Friday, June 15, 8:30 a.m. EDT

Inflation-adjusted weekly earnings of production workers probably held relatively steady in May. That's based on the consensus forecast of a 0.5% gain in the May consumer price index, driven by higher energy prices, and a 0.6% jump in average weekly earnings. Real earnings fell 0.5% in April, after ticking up 0.1% in March. Compared to the same period a year ago, inflation-adjusted earnings slowed some more, to 0.9%, after hitting 3.3% back in October.

INDUSTRIAL PRODUCTION - Friday, June 15, 9:15 a.m. EDT

Factory activity should keep improving in May, but at a slightly slower clip. Economists queried by Action Economics are expecting a 0.2% increase in output. That would follow the April rebound where production grew 0.7% on the heels of a 0.3% fall in March.

Big swings in utility output due to changes in weather accounted for most of the movement. Both months did show solid gains in manufacturing output, up 0.5% and 0.6%, respectively. Most encouraging is the resurgence of business equipment production, which is a key signal of investment spending. Output in this area grew 0.9% in both April and March.

Capacity utilization is expected to slip to 81.5%, from 81.6% in April. However, capacity growth has been slowing over the past year, so there may be some upside risk to this forecast.

CONSUMER SENTIMENT INDEX - Friday, June 15, 10 a.m. EDT

The initial Reuters/University of Michigan consumer sentiment index for June is expected to hold steady at the final May reading of 88.3. The final April index eased to 87.1, from 88.4 in March. The small improvement in May was due to both the improved view of current conditions and a brighter outlook for the coming six months.

At the same time, consumers were less upbeat about their personal finances now and for the next twelve months. Higher gasoline prices are probably playing a big role in those results, as the average retail price for a gallon of regular gasoline topped $3.40 in May.

CURRENT ACCOUNT - Friday, June 15, 8:30 a.m. EDT

The current account deficit -- a kind of cash flow statement of U.S. international business, including trade in goods and services, net investment income, and foreign transfers -- probably widened to $200 billion in the first quarter of 2007. That's the consensus among economists polled by Action Economics.

In the final quarter of 2006, the gap was $195.8 billion, after a $229.4 billion deficit in the third quarter. The smaller current account deficit in the final three months of last year was led by a gain in exports and a decline in imports. During the first quarter, increased energy shipments led the rise in imports to outpace the additional gain in exports. The full year current account deficit for 2006 was $860 billion, or 6.5% of gross domestic product.

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