Experts Talk CPI, Industrial Production, Consumer Sentiment, Currencies

By BW Staff

Bloomberg BusinessWeek compiles comments from Wall Street economists and strategists on the key economic and market topics of Jan. 15.

Meny Grauman, CIBC World Markets

Despite the recent runup in the year-over-year inflation, U.S. consumer prices remain handcuffed by an almost unprecedented large output gap and high unemployment. Unshackled from the outsized impact of energy, the 12-month inflation rate jumped from 1.8% to 2.7% in December, following another big gain the previous month. However, that does not come as a particular surprise considering the weak year-ago comparison. More instructive of actual price trends in December are the monthly figures, which show both headline and core CPI growing by only 0.1%.

Core CPI has been consistently well-behaved throughout 2009, and at 1.8% year-over-year that measure is comfortably below the Fed's 2% implied inflation target. Although it is off its cycle low, we expect further moderation in the months ahead, before inflation starts to pick up in 2011.

Michael Englund, Action Economics

The U.S. Empire State index bounced to 15.9 in January, after dropping to an upwardly revised 4.5 (was 2.6) in December from 22.3 (was 23.5) in November and a recent-peak reading of 34.4 (was 34.6) in October. The prior adjustments reflected the annual revisions for this measure. The revised index continues to oscillate well above the –32.3 (was –38.2) all-time low in March.

The Empire State figures outperformed the other factory measures in September and October, but dropped back in November and underperformed in December, before today's January bounce. The gyrations cap the significance of today's gain, as we are likely just playing "catch up" with the other measures following the November-December lull.

Dawn Desjardins, RBC Capital Markets

Industrial production logged a 0.6% increase in December, bang on market expectations. There were offsetting revisions to the November and October levels. The capacity utilization rate rose to 72.0% from November's 71.5%, higher than the 71.8% expected by markets.

Today's IP report wrapped up the data for 2009, which showed that on average industrial production was running 9.7% lower than in 2008. On a fourth-quarter over fourth-quarter basis, which is thought to capture more fully activity over the course of the year, the drop was a more modest 4.6%, the slowest pace of decline since the third quarter of 2008.

More important, production increased in each of the past six months. This advance was mirrored in the third-quarter real GDP report, which showed a 2.2% annualized increase. Our monitoring of the monthly data indicates that the economy grew at a faster pace in the final three months of 2009 with real GDP growth tracking a 4.5% annualized gain. Some of this rise is attributable to a sharp slowing in the pace of inventory liquidation; however, our tracking indicates consumer and construction activity also posted gains in the quarter.

While the pickup in the fourth quarter is good news and signals that the U.S. economy moved firmly out of recession, these gains will only dent the large output gap that was created during the recession meaning that the significant level of spare capacity will persist in 2010.

Yelena Shulyatyeva, BNP Paribas (BNP:FP)

The University of Michigan preliminary report indicated consumer confidence remained largely unchanged early in January inching up by just 0.3 to 72.8. The reading has clearly improved from the trough of 55.3 reached back in November 2008 but it is still weak by historical standards. A positive sign is that the current [conditions] index improved further to 81.0 from 78.0 posting the strongest reading since March 2008. Labor market prospects have brightened significantly and nonfarm payrolls are expected to show further improvement early this year.

In spite of this, the economy remains overly dependent on government support and continues to face significant headwinds. In particular, credit conditions remain tight and, in addition, after weakening over the first half of December, oil prices have picked up sharply early in January. Buying conditions for durables improved sharply in early January, while conditions for homes slid down slightly and conditions for buying cars remained flat. On the inflation side, one-year-ahead median inflation expectations jumped by 0.3% to 2.8% likely reflecting a recent increase in oil prices. Five-years-ahead median inflation expectations, the figures tracked by Fed policymakers, moved up 0.1% from a very low reading of 2.7% in December, but at 2.8% remain below their historical average of 2.9%.

Nick Bennenbroek, Wells Fargo Bank (WFC)

The U.S. dollar and Japanese yen are finishing the week on a firm note, with two main themes driving today's [foreign-exchange] market moves. First, concerns about a slowing in China's economy appear to be weighing on global equity markets and currencies. Today's Chinese data were not especially soft, but there does appear to be an ongoing reaction to Chinese monetary tightening announced earlier this week. The greenback and yen are enjoying broad-based gains against the G-10 and emerging currencies and, in the second theme evident in today's trading, the euro is down more than most. Greece's fiscal worries are proving to be an extra weight on the euro, with market participants still unconvinced that the country will meet its budget deficit reduction targets, and with the ECB saying it will make no special allowances for Greece's current difficulties.

Right now there are two strong and competing forces for the euro: the soft December U.S. jobs report (a euro positive) and Greece (a euro negative). If the dollar's dip proves limited, it would be an encouraging longer-term signal for the greenback.