Producer Prices Push Out Fed News, Dollar Weakens
Retail sales data for April released Wednesday were a disappointment, coming in unchanged from March and suggesting the start of the new quarter may not be much better than the end of the damp-squib first.
Thursday, May 14, 2015 - 00:00
A part of the economy that remains a cause for optimism though, is the labor market which, based on the last few results for jobless claims, appears to be in rude health. Initial claims fell 1000 last week to 264,000, versus expectations for a rise to 276,000. The decline takes claims to a new 15-year low and pushes the four-week moving average down substantially to 271,750 from 279,500. With that metric now more than 10,000 lower than it was looking a month ago, things are looking optimistic for the monthly employment report in May.
We’ve seen a bounce in energy prices since March, particularly crude oil, , which led many to believe inflation would heat up, but price data continues to indicate benign levels of inflation. A report yesterday showed both import and export prices declining last month, while today’s Producer Price Index indicated dropping costs at the wholesale level. PPI for final demand fell a surprise 0.4% in April (and 0.2% at the ‘core’ level that excludes food and energy) and though the additional gains in oil prices since May began may yet spark higher levels of inflation, the evidence so far backs a dovish response from the Fed, especially in lieu of Wednesday’s soft retail sales.
The dollar weakened broadly on Thursday, reflecting the adjustment in expectations for Fed tightening brought by the new data. EUR/USD rose 0.40% to 1.1400, while GBP/USD gained 0.32% to 1.5795. The same line of thinking has also served to boost gold, helping to push the precious metal up 0.56% to $1222.8 a troy ounce, its highest level since February. Silver also made sharp gains, surging 1.8% to $17.43 an ounce.
The weakness in the dollar has also served to lift the US stock market. Shortly after the opening, the Dow Jones was up 126 points or 0.70% at 18,187, while the S&P 500 Index gained 0.49% to 2108.8. That puts the Dow less than 0.6% from its all-time closing high.
It will be interesting to see how the consumer sentiment index looks in its preliminary reading for May which is released on Friday. Despite the slow economic conditions in the first quarter, consumer spirits have remained elevated, though as we saw with retail sales, this has failed to translate into spending. The consensus estimate is for the consumer sentiment index to come in at 95.8 for May, little changed from April.
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