Tags: PPI | Indicating | Halt | Fed | Hikes?

PPI Indicating Halt to Fed Hikes?

Tuesday, 18 April 2006 12:00 AM

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Today, a Commerce Department statement is reporting that all across the United States, the rates of both annual housing starts and construction permit applications dropped more than expected for March, hitting the lowest levels in 12 months.

Permits for future construction are a primary barometer of builder confidence. The National Association of Home Builders said Monday that members' optimism about future construction was at its lowest level since November 2001.

"Increased borrowing costs contributed to a 21% drop in new home sales during the five-month-period running through February, when the annualized pace of contract signings fell to a three-year-low of 1.08 million units," according to Bloomberg News.

"The number of unsold homes reached a record 548,000 dwellings."

On the year, home construction declined "16% in the West to an annual rate of 486,000, 8.2% in the Midwest to 291,000, 4.8% in the South to 994,000

Meanwhile, Commerce says that "March housing starts fell 7.8% to a 1.960 million unit pace from an upwardly revised 2.126 million unit rate in February," according to a report from Reuters.

The report contradicted the expectations of many economists who were anticipating a smaller drop in new homes starts – something closer to 2.030 million units.

"The latest signs of cooling in the long-hot U.S. housing market, however, suggest a slower pace of economic growth ahead may help keep inflation pressures tamped down," Reuters reports.

The Fed will also welcome today's announcement of the Producer Price Index, which failed to demonstrate any firming of inflationary pressures as a result of the continued energy-led rally.

Read on to learn more.

The core U.S. producer price index (PPI) – which excludes food and energy – barely changed in March, increasing a mere 0.1% for the month and 1.7% over the past year.

Meanwhile, the overall PPI rose 0.5% last month and has gone up 3.5% over the past year – marking the lowest year-over-year rise since September 2004. The Labor Department made that announcement today, partially attributing the minor increase to the price of gas, which has demonstrated the largest gain in 16 months.

"Economists were expecting the PPI to rise 0.4% and the core to rise 0.2%," according to MarketWatch.

The combination of mild inflation data and weak future housing construction expectations reduced the likelihood that the Fed would raise interest rates two more times before mid-year.

"Today's PPI report clearly tells us the higher oil price is not inflationary. The Fed has little reason to continue raising rates, especially in view of a serious downturn in the housing market," Michael Cheah, portfolio manager at AIG SunAmerica Asset Management, told Reuters.

The PPI and housing data also sent U.S. Treasury debt prices higher, while pushing the dollar lower.

Meanwhile, the dollar "was down 0.2% against the Japanese currency at 117.53 yen, down from 117.95 yen just before the two economic reports came out," according to Reuters, and it "was down 0.4% against the Swiss franc at 1.2740 francs, around its lowest since late January."

The price of crude oil jumped to a fresh record in trading Tuesday.

This is a result of mounting concern that the global standoff over Iran's nuclear ambitions might lead to a halt in exports from the world's fourth-largest producer.

Frank Verrastro, director of the Center for Strategic and International Studies' energy program, said in an interview with Bloomberg News that the world simply wouldn't be able to make up for the loss of the two million barrels that Iran supplies daily. "There is no spare capacity, so consumers don't want to use their stockpiles," he said.

Iranian President Mahmoud Ahmadinejad has made blunt references to his nation's desire to use "the latest technology" against its enemies. The knowledge that Iran has the power to enrich uranium has only served to dangerously elevate political tensions.

Crude for May delivery touched $70.88 in electronic trading overnight, while oil trading in the open outcry session rose to $70.65 a barrel on Tuesday morning.

Verrastro points to the deficit of one million barrels per day following the refinery carnage in the aftermath of Hurricane Katrina last August. And the escalation of rebel attacks in Nigeria - plus the subsequent loss of oil output there – has the market on tenterhooks.

The militant attacks in Nigeria - Africa's largest oil producer - have forced a 25% reduction in output. Add to that the unstable political environment, violence and car bombings in Iraq, and the situation seems to be one of nightmare proportions. Iraq houses the world's third-largest proven oil reserves.

No one knows for certain what might ease the oil price back to a more normal level.

Already, forward futures prices are slowly rising to discount yet-higher prices to come in the summer months. For example, the June 2006 contract touched $72.20 today, crude's highest price since trading was launched back in 1988.

Some observers believe that only when inventories have been built to such a significant level will traders ignore the potential consequences of the Iranian escalation.

OPEC recently announced that the biggest risk to demand growth for oil comes from the liabilities to the world economy.In other words, should global growth be derailed, oil output will slide. OPEC produces four out of every 10 barrels of global oil.

Monday's announcement of stronger-than-expected first-quarter growth in China did little to quell traders' woes.The 10.2% rise in GDP was more than economists had expected.

Last week, the Energy Department reported a 7.9% decline in gasoline Inventories, and this week analysts expect a further 1% drop (2.2 million barrels).

We are just six weeks away from Memorial Day. The holiday traditionally marks the start of driving season in the U.S., which runs until Labor Day in September. One in every ten gallons of gasoline ends up in the tanks of U.S. consumers.

May gasoline futures rose close to 3% today to $2.19 per gallon – the highest since October 2005.

According to AAA, the nationwide average price of regular gasoline at the pump jumped 13% over the last month. The price is up 24% from a year ago. Gasoline rose 2.1 cents to $2.782 a gallon yesterday.

After yesterday's announcement that Berkshire Hathaway will purchase sporting-goods apparel manufacturer Russell Corp. for about $600 million, many people will now be asking: Is Warren Buffett making moves to solidify his "fiscal fitness"?

Russell Corp., based in Atlanta, owns the Russell Athletic, Jerzees, Spalding, Brooks and Huffy brands, among others.The deal means that Russell stockholders will get $18 in cash per share. As of Monday's numbers, that's a premium of about 35% to Russell's closing stock price of $13.30.

According to the INET electronic brokerage network, after the deal, Russell's stock rose 36.4% to $18.14.

"Russell is a perfect example of the kind of company Buffett likes to buy," George Whalin, president of California-based Retail Management Consultants, tells Reuters."He seems to buy companies that are really the basic backbone of consumer products. He holds on to them for a long time, so paying a premium is OK."On Feb. 16, Russell reported a slight rise in earnings – even though investors didn't seem too excited about a cost-cutting plan to outsource work to other countries. The company plans to send 1,200 jobs to Mexico and Honduras, in addition to slashing 2,500 more jobs and freezing retirement benefits.Russell earned $11.8 million – or 36 cents per share – in the fourth quarter, compared to $10.3 million ( 31 cents per share) a year earlier. The company's sales rose 6.2% to $354.6 million.


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(Headlines - scroll down for full stories) Today, a Commerce Department statement is reporting that all across the United States, the rates of both annual housing starts and construction permit applications dropped more than expected for March, hitting the lowest levels in...
Tuesday, 18 April 2006 12:00 AM
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