U.S. Consumer Prices Rise 0.4% in May U.S. consumer prices posted the largest monthly increase in May in more than two years, a sign modest inflation pressures are beginning to build.
Excluding volatile food and energy categories, so-called core prices increased 0.1%.
Compared with a year earlier, overall prices were unchanged and core prices were up 1.7%.
Energy prices rose 4.3% last month, but are still down 16.3% from a year earlier. Gasoline prices were up 10.4% on a seasonally adjusted basis in May, the largest monthly gain since June 2009. Gasoline prices remain 25% below year-earlier levels.
Food prices were unchanged last month and were up 1.6% from a year earlier.
A separate Labor Department report showed Americans’ inflation-adjusted weekly earnings fell 0.1% in May. The decline reflects a pick up in inflation offsetting a modest increase in wages.
Fed Flags Slow Pace for Rate Hikes The Federal Reserve kept rates near zero but signaled it was moving toward interest rate increases in the months ahead now that signs of a dip in economic activity early in the year are waning.
“Economic conditions are currently anticipated to evolve in a manner that will warrant only gradual increases in the target federal-funds rate,” Fed Chairwoman Janet Yellensaid in a press conference following the Fed’s two-day policy meeting.
As part of its release, the Fed suggested it might raise rates only once in 2015 by a quarter percentage point, rather than twice as many officials previously anticipated. By December 2017, the Fed expects its benchmark short-term interest rate to remain below 3%, far lower than it has been for the past half century this long into an economic expansion. (…)
The median estimate for rates in 2016 has shifted down to 1.625% from 1.875% in March. The median estimate for 2017 has shifted down to 2.875% from 3.125% in March.
“I want to emphasize sometimes too much attention is placed on the timing of the first increase in the federal-funds rate,” Ms. Yellen said in the postmeeting press conference. “What should matter to market participants is the entire expected trajectory of policy.”
The shifts in interest-rate projections suggested officials have become less certain about the longer-run vigor of the U.S. economy and its capacity to withstand higher rates. (…)
In economic projections accompanying the Fed’s statement, the central bank revised down its estimate of growth for 2015. In March the Fed saw economic output expanding by 2.3% to 2.7% this year. In the latest estimate it revised output growth to 1.8% to 2.0%. (…)
The Fed is populated by officials with a wide range of views about where rates ought to go in the coming years. In 2016, for example, rate estimates among officials inside the Fed range from just above 0.25% to near 3%.
Fed officials believe short-term rates could get to 3.75%, and probably won’t even be there, by the end of 2017.
Fed Given Green Light by Pay Prospects An improving wage picture sets the stage for the Federal Reserve to start raising interest rates in September.
The Fed on Wednesday kept its target range on overnight rates steady at zero to 0.25%, but clearly indicated it doesn’t expect rates to stay there much longer. In its postmeeting statement, the Fed noted that job growth has picked up, and the economy is again growing after this winter’s icy patch.
Meanwhile, the median forecast of policy makers’ updated projections put the midpoint of overnight rates at 0.625% at year-end. That suggests the central bank will put through two quarter-point increases this year—probably at its September and December meetings. (…)
“Wage increases are still running at a low level, but there have been some tentative signs wage growth is picking up,” Fed Chairwoman Janet Yellen said during her post-meeting press conference.
The University of Michigan’s consumer sentiment report last week showed that household income-growth expectations have risen markedly. Meanwhile, a quarterly survey of chief financial officers from Duke University’s Fuqua School of Business showed that companies expect wage and salary gains to pick up. (…)
Since at least 2013, both the Fed and Wall Street have started each year far more optimistically than when they ended. This trend continued yesterday with the Fed downgrading its 2015 growth forecast to 1.9 percent, compared with a slightly more bullish Bloomberg consensus estimate of 2.2 percent. One saving grace may be that, in both of the past two years, the Fed — and private economists — wound up lifting their full-year forecasts during the final three months of the year after hitting a bottom in the third quarter.
U.S. Jobless Claims Fall to 267,000 The number of Americans seeking first-time unemployment benefits fell last week, the latest sign of steady job creation.
A broader measure designed to smooth out big swings—the four-week moving average of claims—decreased 2,000 to 276,750 last week. (Chart from CalculatedRisk)
The European Union’s statistics agency said wages were 2.2% higher than in the first quarter of 2014, double the rate of growth recorded in the final three months of last year and the fastest rise since the third quarter of 2012.
The pickup in wages fueled a 2.2% rise in total labor costs, which include taxes on workers. For many businesses, wages and taxes on workers account for the bulk of their costs. Accelerating labor costs mean they are under more pressure to raise their own prices.
In Germany, however, the jobless rate is below that of the U.S., and recent pay deals between labor unions and employers had signaled a pickup in wages. Eurostat said wages in the eurozone’s largest member were 2.9% higher than a year earlier, an acceleration from the 2% rise recorded in the final quarter of last year.
More surprising are the strong rises recorded elsewhere in the eurozone. In Spain, a country in which more than a fifth of the workforce is unemployed, wages rose by 2.1%, a jump from the 0.4% increase recorded in the previous quarter. French wages rose by 1.6%, an acceleration from 1%, while in Italy wages rose by 1.2%, having fallen in the previous quarter.
U.S. OIL DEMAND STRONG BUT PRODUCTION KEEPS RISING…
U.S. crude production increased by 10 MBbls per day from last week to 9.1 MMBbls per day, or 1.2 MMBbls per day above this time last year. Since the start of the year, U.S. crude production is up 497 MBbls per day.
Finished motor gasoline demand declined 4.4% from last week to 9.2 MMBbls per day. On a four-week moving average basis, demand is up 3.4% or 306.0 MBbls per day compared to the same time last year.
U.S. petroleum products demand was up 1.0% from last week to 20.0 MMBbls per day. On a four-week moving average basis, demand is up 6.2% or 1,149.3 MBbls per day compared to the same time last year. (Raymond James)
…WHILE PRODUCTION COSTS KEEP FALLING
This is from Canadian Natural Resources but is a good indication of what’s happening overall in the oil patch:
(…) management told a very encouraging story, with expectations of ~$900 mln in cost savings this year. Of this total, management believes 50% of the cost savings realized to date should be sustainable, with initiatives in place to try and increase that to 75% of total cost savings remaining in place once commodity prices normalize. One of the key areas to watch will be on the thermal side of the portfolio where management believes it could squeeze ~25% cost savings. If CNQ and the rest of the industry can achieve that level of success, this may allow top-quartile SAGD projects like Kirby to remain competitive under a lower oil price environment, with management suggesting Kirby economics could still make sense in the US$60-75/bbl range the company outlined for its medium-term commodity price expectation. (Raymond James)
Global oil demand rose to a new record high of 93.8 mbd based on the 12-month average through May. It’s been doing so since it recovered from the Great Recession ever since June 2010. It has been rising at a faster pace in recent months. It rose 1.2% y/y in May, up from a recent low of 0.6% during November 2014.
Does this suggest that global economic growth is picking up? I doubt it. More likely is that the drop in oil prices is boosting demand. That’s the way the price mechanism is supposed to work. While the upturn in demand has helped oil prices to rebound from their lows at the start of the year, there’s plenty of supply keeping a lid on them despite the fall in prices. Indeed, the ratio of demand-to-supply continued to fall in May as it has virtually every month since August 2013. I expect that the price of a barrel of crude will remain range bound between $46 and $68 (the year’s low and high in the nearby futures price) through the end of this year.