INFLATION WATCH
U.S. Consumer Prices Jump 0.4% Consumer prices rose at the fastest pace in more than a year in May, extending a period of higher inflation that could weigh on Federal Reserve officials as they debate when to raise short-term interest rates.
The consumer-price indexclimbed a seasonally adjusted 0.4% in May from a month earlier, the most since February 2013, the Labor Department said Tuesday.
Excluding food and energy, so-called core prices climbed 0.3%, the sharpest increase since August 2011.
The overall CPI was up 2.1% in May from a year earlier, the most since October 2012, with core prices up 2%, the most since February 2013.
However, the central bank’s preferred inflation gauge, the Commerce Department’s price index for personal consumption expenditures, has run below target for two years, though it picked up recently. In April, that index was up 1.6% from a year earlier, with core prices up 1.4%.
The CPI and PCE price index typically run in tandem over time but often diverge month to month because they are calculated differently. Over the past 25 years, PCE inflation has been about 0.5 percentage point lower per year than the CPI.
The acceleration in core prices has been rapid as the table below shows. Over the last 3 months, core CPI is up at a 2.8% annualized rate while the median CPI is up at a 3.2% annualized rate.
State Street PriceStats inflation series, a daily measure of inflation derived from prices posted to public websites by hundreds of online retailers, is up 2.05% Y/Y as of June 14. It was up 2.1% at the end of May, 2.0% at the end of April and 1.9% at the end of March.
In all, U.S. inflation is back to 2% and is threatening to move higher. This will add to markets nervousness.
The two previous episodes of accelerating inflation (2010 and 2011) were dismissed by the Federal Reserve as transitory due to relative price changes. Dismissal will not be easy this time around. That’s because all of the main components of the CPI are growing at a much faster pace. As today’s Hot Charts show, owners’ equivalent rent, medical care, and food prices all show price increases in excess of two percent from year-ago levels. This is occurring at the same time that hourly wage inflation for non-supervisory workers is accelerating. This is the first time since the recovery began that we see inflation exceeding 2% for all of these main components. This suggests that the current buildup in inflation is much more than just a relative price change. (NBF)
Cass Truckload Linehaul and Intermodal Price Index
Compared to the same time last year, truckload linehaul costs in May averaged 5.8% higher – an increase that is consistent with those of the previous two months (5.7% in April and 6.0% in March). With demand improving and capacity exiting the marketplace at a faster pace, the 2014 bid season (~70% of all contracts are negotiated in the first 4 months) has resulted in higher truckload costs for the shipper. Industry analyst firm Avondale Partners expects truckload pricing to increase 4-6% in 2014.
From April to May, pricing fell 2.2% (slightly less than the historical average), after displaying above-normal sequential increases in five of the last six months.
Total intermodal costs rose 2.6% year over year in May, after seeing increases of 1.4% in April and 1.8% in March. Sequentially, intermodal costs fell 2.7%, in line with seasonal trends.
UPS to Factor Box Size Into Pricing
The move follows rival FedEx Corp.’s decision in May to start pricing packages according to size instead of by weight alone.
UPS on Tuesday said it thinks the new pricing—which will use so-called dimensional weight—will encourage shippers to pack lighter items in smaller boxes. Packages have become less dense in recent years, with the ratio of weight to external packaging declining, the company said.
$120 Seen Danger Point for Oil Return as Economic Threat
The rule of thumb favored by many economists is that every $10 increase in the price of a barrel of oil ends up cutting global growth by about 0.2 percentage point.
Upshot of Domestic Oil Boom: Fewer Shocks The latest spasm of Mideast violence has sent crude-oil prices climbing in recent weeks, a familiar action-reaction that frequently has proved to be a drag on economic growth. Yet that dynamic figures to ease as U.S. dependence on Mideast oil is at a generational nadir.
So, this is Fed week:
The Fed, which concludes a two-day policy meeting Wednesday, is expected to reduce its monthly bond purchases by another $10 billion to $35 billion a month, staying on track to wind down that program later this year. Fed officials have been looking for higher inflation for reassurance the economy is stable as their bond-buying program ends. But if inflation continues to accelerate faster than the steady pace they have projected, officials could give stronger consideration to raising short-term interest rates sooner. Fed officials are also set Wednesday to release updated forecasts for economic growth and inflation, which they use to steer their decision making (WSJ)
The Federal Reserve will probably raise its benchmark interest rate faster than money-market investors expect, according to most economists surveyed by Bloomberg News.
But Tim Duy thinks the Fed will be patient:
(…) Increasingly the Fed will be concerned that the balance of risks is shifting from prematurely reducing financial accommodation to concern about falling behind the curve. And that transition may be abrupt – not unlike what we witnessed recently on the other side of the pond.
All that said, if such a change were to occur, it will not be in this week’s statement. My expectation is that Yellen sticks to the fairly dovish tune she has been singing. If there are clues that the tenor of the tune is changing I think they would be subtle. Watch for any language from Yellen regarding proximity to goals, optimism on the JOLTS numbers, or references to inflation bottoming out and turning higher. These would be hints that the Fed is increasingly concerned of the possibility of falling behind the curve. Such talk would also hint at the possibility that the new Board members seek to edge policy in a different direction.
On the other side of the coin, look for policymakers to make note of geopolitical risk. The mess in Iraq is already pushing oil prices higher, which the Fed should read as more likely to soften the recovery rather than fuel inflation
Bottom Line: My baseline expectation is minimal policy changes this week. Moreover, my baseline remains a still long period of low rates. I think the Federal Reserve would like to hold onto the “low wage growth means plenty of slack and no inflation story” as long as possible. Watch also the geopolitical risk, as that will tend to reinforce the Fed’s existing path. Overall, the situation altogether still argues for the first rate hike in the second half of next year. The Fed’s low rate story, however, will come under increasing pressure as the Fed gets closer to reaching its policy goals. And that pressure will only intensify if growth does in fact accelerate. That leaves me feeling that the risk to my baseline assumption is that the first rate hike comes sooner than currently anticipated.
U.S. Housing Starts Fall 6.5% A gauge of new home construction fell in May after several months of gains, another sign of the housing sector’s uneven recovery.
Single-family housing starts fell 5.9%, while multifamily fell 7.6%. April’s surge in home building was revised down slightly to 12.7% growth from 13.2%.
Newly approved applications for building permits, an indicator of future construction, fell 6.4% in May to 991,000 on a sharp decline the volatile multi-family segment.
But in one bright spot, single-family permits jumped 3.7% to 619,000, their fastest rate of increase since September 2012. Single-family construction represents the bulk of the housing market and is considered a better gauge of demand.
But in reality, the single-family permits pace is now trending in line with the full-year 2013 average of 620,000. There is really no upward momentum building in housing as these Haver Analytics charts demonstrate:
Summer Job Outlook Sunnier for Teens as U.S. Market Mends
(…) Teen hiring posted the biggest gain in eight years this May, not counting for seasonal adjustments. If the nascent job recovery retains steam through the summer, it could bolster wallets and resumes for U.S. youth.
Sixteen-to 19-year-olds last month gained the most jobs for May since 2006, based on Bureau of Labor Statistics data not adjusted for seasonal fluctuations. The group added 217,000 jobs, compared with 215,000 the prior year.
BOE Edges Toward Rate Increase
Bank of England officials Wednesday signaled that interest rates in the U.K. could rise before the end of the year—but only if they are satisfied the economy can cope with higher borrowing costs. (…)
“The relatively low probability attached to a Bank Rate increase this year implied by some financial market prices was somewhat surprising,” the minutes record, referring to the BOE’s benchmark rate. (…)
Li Says China Will Avoid Hard Landing While Limiting Stimulus
“The Chinese government is adjusting its economic operations to ensure the minimum growth rate is 7.5 percent, the level to ensure job creation,” Li said in a speech at Mansion House in London today. Inflation won’t exceed 3.5 percent, he added, without specifying a time period for the prediction.
China will have “medium to high-level” growth in the long run and will rely on “smart and targeted regulation” rather than strong stimulus measures, Li said.
“I can promise everyone honestly and solemnly, there won’t be a hard landing,” the premier said.
Is that a stronger promise than “read my lips”?
CEBM Research’s surveys reveal no change in momentum just yet:
Up to now, high-frequency real estate sales Y/Y are still close to -20%. Sales Y/Y in Tier 2 and Tier 3 cities were higher than -10% in previous weeks and then deteriorated again. Meanwhile, inventory levels remained high.
In addition, other hard indices, such as electric power output, crude steel, and cement output remain sluggish Y/Y. Loosening monetary policy began at the end of May, so it will take time for those hard indices to recover. The Politburo meeting in July will be critical to gauge the policy outlook going forward.
Bond star Hasenstab warns on US debt Fall in US yields has ‘stretched envelope’ says fund manager
Like many investors, Mr Hasenstab was wrongfooted by this year’s unexpected fall in US Treasury yields; also like many others, he has yet to find a single convincing explanation. But, he maintains: “We have really stretched the envelope in terms of how much lower US yields can go.” He wants to be “negative correlated” with US yields.
EARNINGS WATCH
First Call’s earnings revisions index surged to 57.5 this week, suggesting 2Q earnings are likely to surprise. 
WTO warns of creeping protectionism
G20 economies have introduced more measures to restrict trade than encourage it over the past six months even as the global economy has seen a faltering recovery in both growth and trade.
(…) a report released on Wednesday by the World Trade Organisation as part of its remit to monitor any post-crisis trade restrictions by G20 members offers a picture of creeping protectionism even as the global economy continues its struggle to recover from the crisis.