KEY DATA: PPI: -0.2%; Goods: -0.7%; Energy: -3.1%; Services: +0.1
IN A NUTSHELL: “With business costs well contained and consumer confidence rising, maybe even the Fed members will start feeling good about the economy.”
WHAT IT MEANS: What am I missing? I keep looking at my forecast for 2015 and I am well above most others. Yet the recent data seem to point to an economy that is clearly accelerating and is being pushed forward by falling energy costs and improved consumer confidence. On the cost side, wholesale prices fell in November, but that should shock absolutely no one. We know that oil prices are slip, sliding away, so the headline decline was expected. But even excluding energy, producer costs went nowhere. Indeed, goods prices excluding energy were down a touch as food price increases eased up. They had been soaring and that was offsetting some of the decline in oil. If you look through the report, there were few goods categories where prices are rising. The one place you can find it is in capital equipment. I actually think that is just fine as it signals growing investment activity. As for producer services, they continue to increase at a moderate pace. Over the year, most wholesale prices are up between 1.5% and 2%, which is hardly threatening since the path from producer costs to consumer prices is not very direct.
There was some really good news on the consumer front. The Thompson Reuters/University of Michigan’s early reading of December consumer sentiment was released and it looks like confidence is soaring. The index hit its highest level in nearly eight years with expectations that growth would improve in the future leading the way. This report reinforces the Bloomberg Consumer Comfort Index numbers that indicated that confidence has reached a seven-year high.
MARKETS AND FED POLICY IMPLICATIONS: If the early returns on holiday shopping are any indicator, people are translating their more ebullient outlook and the additional money left in their wallets after filling up into lots of gifts. The costs of products should stay down as there is little reason for most retailers to raise prices. The question, though, is how the FOMC members will balance a clearly strengthening economy with inflation that is generally below desired levels. I suspect that in next week’s statement, the focus will shift clearly to the economy and the tightening labor market. The Fed needs to set up its excuse, I mean rationale, for raising rates. It is not likely it will get much help from too high inflation or even surging wages. So it needs something else to explain why it is starting on the pathway to rate normalization. The easiest thing is to focus largely on the economy and that is what I suspect them to do. As for investors, if anyone can explain why stocks go up or down on any given day, tell me. I know all the ex post explanations, but today’s excuse du jour, whatever it may be, doesn’t really provide me with any real knowledge.