KEY DATA: Imports: -0.3%; Nonfuel: -0.3%; Exports: -0.2%; Farm: -1.0%/ Claims: +3,000

IN A NUTSHELL:  “Maybe the Hubble telescope can find inflation, but I can’t.”

WHAT IT MEANS:  Well, another inflation number, another sign that inflation is going nowhere.  Import prices fell in May.  We knew that energy costs were down, so the drop was hardly a surprise.  What was surprising was the broad based nature of the decline in the costs of imported products.  Food, non-petroleum industrial supplies, capital goods and vehicles all posted negative numbers.  The only outlier, if you can really put it that way, was consumer products, which were flat.  In other words, prices of all the major products groups were either flat or down in May.  Part of the drop comes from the strong dollar, which has started to slip.  But it could be months to see any change.  Also, tariffs are not part of the imported goods price.  They are paid by the importer based on the cost of the imported product.  On the export side, we saw a similar pattern.  Almost every category posted declining prices, with agricultural products leading the way.  Farmers are suffering the most from the trade war and loss of markets and we see them in the prices, which are down by 4.6% over the year. 

Jobless claims rose a touch last week, but as usual, that is hardly anything to worry about.  The number may not be at historically low levels, but it is not that far away. 

MARKETS AND FED POLICY IMPLICATIONS:  There are all sorts of cries for rate cuts, but don’t expect that to happen soon.  While inflation may be below target, growth and the unemployment rate are not.  Could the Fed lower rates and not risk igniting inflation?  Maybe a little, but what good would one or two cuts do?  Long rates have already plummeted and there hasn’t been any major uptick in housing sales.  And its not as if businesses don’t have the capital or the tax incentives to invest already.  Will they really decide to increase capital spending if short-term rates go down?  Wouldn’t rate cuts send the message that the Fed is worried about growth? What would that say about the prospects of stronger growth going forward that would be needed to make the investment profitable?  And if the Fed does lower rates and it accomplishes little other than supporting the equity markets, as I suspect it would, there would be even fewer arrows in the Fed’s quiver to fight the next real slowdown.  We will get some information abut the Fed’s thinking from next weeks FOMC statement and the Chair’s press conference, but I am not sure there is a whole lot of consensus on the Fed.  Its not as if the economy is falling off the cliff, even if second quarter does come in low.  My view is that a rate cut now is not needed and it would only be done to satisfy the lust in the equity markets, and that is just not good enough.   The Fed should stick to dealing with its dual mandate and skip the Jerome Powell created third one, maximizing equity values.