Wednesday, 19 October 2005

More inflation, no sign of economic weakness

It's more inflation yesterday.

The US producer price index jumped in September, as reported by Reuters.

U.S. producer prices shot up by an unexpectedly large 1.9 percent last month, the biggest gain in more than 15 years, as energy costs surged in the wake of hurricanes that devastated the U.S. Gulf Coast, a government report showed on Tuesday.

However, outside of volatile food and energy costs, prices received by farms, factories and refineries rose a relatively subdued 0.3 percent, the Labor Department said...

Over the past year, producer prices have increased a hefty 6.9 percent on the back of rising energy costs, the biggest 12-month gain since the period ended November 1990. In contrast, so-called core prices have gained just 2.6 percent.

But US consumers appear unfazed by the rise in prices.

So far, U.S. consumers have appeared resilient in the face of higher energy costs and retail sales appear to be getting a boost this month as cooler weather boosts apparel purchases.

The International Council of Shopping Centers and UBS said in a report on Tuesday that U.S. chain store sales rose 0.4 percent in the week ended October 15, the fourth straight gain.

Separately, Redbook Research said chain store sales so far in October have risen 1 percent compared with the same period last month and were up 3.7 percent from year-ago levels.

Foreign money undoubtedly helps sustain consumer demand.

Separately, the Treasury Department said net flows of capital into U.S. assets swelled to $91.3 billion in August. It was the largest inflow in 16 months and suggested the United States was having little trouble finding the overseas capital it needs to balance its books.

So does resilient housing prices, which looks likely to continue, based on the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) reading.

The HMI rose two points to 67 in October, returning to the same level it hit in August but still off the year's cyclical high of 72, set this June. The gain marks an end to a three-month trend of downward movements.

There was also inflation data from Europe.

Euro-zone annual inflation was 2.6% in September 2005, up from 2.2% in August. A year earlier the rate was 2.1%. Monthly inflation was 0.5% in September.

EU25 annual inflation was 2.5% in September 20053, up from 2.2% in August. A year earlier the rate was 2.1%. Monthly inflation was 0.5% in September.

And from the UK.

The Office for National Statistics said consumer prices rose 0.2 percent on the month, pushing up the annual rate to 2.5 percent, the highest rate since comparable records began in 1997 but below the 2.7 percent analysts had predicted...

A rise in petrol prices of over 4.6 pence per litre in September, which compared with a rise of just 0.1 pence a year earlier, was to blame for the rise in inflation, the ONS said...

[A]nnual growth in the core CPI, which strips out food, energy, tobacco and alcohol prices, held steady at 1.7 percent in September.

With all this global inflation, it's no surprise that the Bank of Canada hiked interest rates.

The Bank of Canada pushed up its key interest rate by a quarter of a percentage point Tuesday morning and signalled that more rate hikes are coming.

The widely expected increase in the central bank's overnight lending rate, now at 3.0 per cent, was the second in as many months.

A strong Canadian economy obviously mattered too.

Driven by strong domestic demand, the composite leading indicator posted a 0.3% increase in September, matching the gain in August. Household spending continued to dominate. Seven of the ten components rose, the same as in August.

Meanwhile, Japan confirmed its continuing recovery, based on the diffusion indices for August.

The diffusion index of coincident indicators was revised downward to 80.0 percent from its earlier reading of 88.9 percent, released Oct. 7, the [Cabinet Office] said... The leading diffusion index, which predicts economic activities about six months down the road, came to 100.0, while the lagging diffusion index, which shows activity in the recent past, stood at 75.0.

Germany is also seeing some recovery in confidence, although by less than expected.

A gauge of institutional and analyst expectations increased to 39.4 from 38.6 in September, the ZEW Center for European Economic Research said today in Mannheim. Economists expected a reading of 42, according to the median of 41 forecasts in a Bloomberg survey...

German business sentiment and expectations improved in the past four months, a survey of more than 25,000 companies by the DIHK industry and trade group showed today.

But Germany is facing some inflationary pressures too.

Optimism is increasing even as gasoline prices soar... Producer prices increased 4.9 percent in the year to September, the highest annual rate since April 2001, the Federal Statistics Office said today.

These developments in the global economy seem compatible with the views held by fund managers, based on a survey by Merrill Lynch. These views can be summed up as follows:

• Favour Japanese equities over American equities.
• Favour stocks over bonds.
• Expect a rise in market volatility.
• Shorten investment time horizons, lower risk.

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