U.S. Import & Export Prices Strengthen; Petroleum Prices Ease
Import prices edged 0.2% higher (4.6% y/y) during February following a 0.6% January increase, revised from 0.4%.
Petroleum import prices eased 0.7%, though they remained three-quarters higher y/y. Nonpetroleum import prices improved 0.3% (0.8% y/y), the largest increase since July. Industrial supplies & materials prices excluding petroleum jumped 1.4% (7.0% y/y), strong for the fourth straight month. Foods, feeds & beverage prices rebounded 1.0% last month (4.4% y/y), following declines in three of the prior four months. Nonauto consumer goods prices improved 0.7%, but the y/y decline accelerated to -0.7%. Motor vehicle & parts prices remained unchanged both m/m and y/y, after declines in the prior two months. Capital goods prices also were steady (-1.0% y/y) after declining from 2013 through 2016.
Export prices improved 0.3% following a 0.2% rise. The y/y increase of 3.1% follows declines in the last four years. (…)
ECB Won’t Apply Brakes to Stimulus—Yet The European Central Bank hinted at the beginning of the end of its massive monetary stimulus, but stopped short of a significant move to rein it in, brushing off concerns that its policies are excessive as the eurozone’s economy picks up speed.
(…) In a small concession to critics of easy money, Mr. Draghi indicated that the ECB probably won’t need to take any fresh action to support the economy. (…)
The eurozone is currently the fastest-growing of any major developed economy, according to financial-data firm IHS Markit. The bloc’s jobless rate is at its lowest level since 2009, and inflation jumped to 2% in February, slightly above the ECB’s target. (…)
German Finance Minister Wolfgang Schäuble on Thursday called for a “timely start to the exit” from loose monetary policy, while his Bavarian counterpart, Markus Söder, told the mass-market Bild newspaper that Mr. Draghi was expropriating German savers. Also on Thursday, Germany’s influential Ifo institute called on the ECB to start winding down QE from next month or risk overshooting on inflation. (…)
Mr. Draghi also weighed in on the debate over Germany’s massive trade surpluses, which have come under attack from the new U.S. administration. (…) “I don’t think there is any merit in attacking Germany,” Mr. Draghi said. He argued that it’s actually the dollar whose exchange rate is out of line with its historical average. “The euro isn’t the culprit,” he said.
People’s Bank of China Governor Zhou Xiaochuan said the yuan’s rate should be relatively stable this year even as rising U.S. interest rates contribute to foreign exchange volatility. Interest rate differentials won’t lead to persistent speculation, and rates will be mainly based on the domestic economy, Zhou said today at a rare press conference during the annual National People’s Congress sessions in Beijing. He said China has many monetary policy tools, policy will be prudent and neutral, the drop in foreign reserves is “not bad,” and suggested attacking the nation’s soaring debt load may be more of a longer-term goal. (Bloomberg Briefs)
Skinny Caa Spread Defies Default Outlook
An exceptionally thin median spread for default-prone Caa-rated bonds reflects an unsustainably high tolerance of credit risk. Often, an ultra-thin spread for Caa-grade bonds is followed by wider yield spreads for both the Caa category and the entire high-yield market. (…)
A Key Part of the GOP’s Plan to Overhaul the Tax Code Is in Deep Trouble
(…) Importers hate the BAT. Big retailers such as Walmart Stores Inc. and Best Buy Co. contend that border adjustments will dent profit margins and force them to raise prices on everything from avocados and furniture to Nike shoes and French cheese. In a Feb. 28 letter to congressional leaders, the Americans for Affordable Products coalition said the tax would raise consumer costs “by as much as $1,700” in the first year.
To counter that argument, exporters and pro-BAT groups say border adjustments would cause the U.S. dollar to strengthen over time. A stronger dollar would lower the cost of imports, helping to offset the effects of the tax.
Well, that’s the theory. A border adjusted tax of the type House leaders envision has never been put to the test in the real world. Importers say they haven’t seen much benefit from a stronger dollar in the past. “If I see any price reduction due to a stronger dollar, it is a minor miracle, and it will probably take a year or more of arguing with my suppliers,” says Don Chernoff, founder of SkyRoll Luggage Co., a Reston, Va.-based company that imports its luggage from Thailand. “In the end I get mostly zero benefit from a stronger dollar. The academic economists never seem to understand any of this reality.” (…)
Ryan and Brady aren’t backing down. Without border adjustments, they say, their plan to rewrite the tax code can’t happen. That $1.1 trillion in revenue is crucial to the politics of the BAT, since it helps keep it deficit-neutral, a prerequisite for passing a tax bill through the Senate without Democratic votes. “What it boils down to is that it’s a way to pay for the rest of the tax plan,” says Veronique de Rugy, an economist at George Mason University. “Only revenue comes from this feature—economic growth doesn’t.” That $1 trillion is also crucial to how the BAT might affect the economy. Says Ross, “That is way too big a number to get wrong.”