Market Talk

Today’s CPI report — and the deflationary risks it illustrates — provides some cover fire for the Fed and its QE2 program, not that they really need it. Elsewhere, GM’s IPO is set to price tonight.

Get back in there and keep blowing that bubble! Don't let that thing deflate!

A mighty fine gumbo of data we’ve gotten this morning, folks. Even the stock market seems to be taking notice of the bad news, something it’s been ignoring lately, and the cover fire that the euro’s been laying down isn’t helping (so far, at least.)

Taken together, this morning’s reports — consumer prices, weekly jobless claims, the Philly Fed index and the Conference Board’s leading economic indicators report — paint a picture of an economy that has at least plateaued, and is in danger of rolling over into the dread double-dip. That isn’t what you want to see at this point in the recovery.

Look, some pull back shouldn’t be unexpected. It was silly to think the jobs market would move in a straight line of improvement, and as that’s probably the single-most important factor in the economy, it was silly to think we’d have an easy, V-shaped recovery. The fear, though, is that with Europe still on edge, with people still not spending money, with jobs still not being created, that we risk falling right back into the soup.

Consumer prices fell in May from the previous month, the second month in a row, albeit the so-called “core” rate was marginally higher. Now, there’s a word for a condition where prices are falling, as opposed to rising. Oh, what’s that word again? Deflation. Yes, that’s it. Think Ben Bernanke noticed? You bet he did.

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We may have to change that sign again.

Consumer prices edged slightly higher last month and core prices held steady, which can mean only one thing: the economy isn’t likely to ignite inflation anytime soon.

That provides more fuel for the Fed to keep interest rates near zero for the time being. And Fed chairman Ben Bernanke even signaled as much today in his testimony, saying he anticipates low interest rates will be needed “for an extended period” of time given current economic conditions.

Consumer prices rose only 0.1% in March, while core prices, which excludes food and energy prices, remained unchanged. Unrounded, prices were up only 0.063% and core prices were up 0.039%. And keep in mind core prices are up only 1.1% from a year earlier, which marks the smallest annual increase since January 2004.

“The bottom line is that inflation as measured by the government is going nowhere but down,” writes Dan Greenhous, chief economic strategist at Miller Tabak.

More pointedly, Paul Ashworth of Capital Economics notes the annual rate of core inflation dropped to 1.1% last month, from 1.3% in February and 1.8% at the end of last year. The decline in core inflation reflects more than just the deflationary pressure seen in housing costs.

“The disinflationary forces unleashed by the recession are only now beginning to have their full effect on the consumer price figures, even as the real economy shows signs of springing back to life,” Ashworth says.

I'm glad the price hasn't gone up, but I still don't have a job.

Weekly jobless claims eased 5,000, slightly less than the boys on the Street expected, but at a total of 457,000, still at an elevated level that doesn’t suggest the monthly numbers are going to rise soon. Even more disturbing, the numbers for emergency compensation jumped again, up 360,000 to 5.9M.

That pushed total continuing claims to 11.6M, a fresh record, and a number that highlights once again, painfully, that employers are not hiring, despite the fact that some observers (and you know who you are) think all those folks on the dole are just sitting around waiting for their bennies to run out.

Then there’s consumer prices, which were flat in February, and up only 2.1% on the year. When you think about how much money the Fed’s been pumping into the system, to have this number flat is not a good sign. Where would we be if the Fed hadn’t put a trillion plus into the game? We’re thinking of a word here, begins with a “d.” What is it again?

“February’s US consumer prices figures show there is next to no inflationary pressure in the US economy,” Capital Economics’ Paul Dales writes. “Deflation may yet emerge as the real risk.”

That’s it!

And, despite the fact that there are no inflationary pressures whatsoever, wages are still sliding. BLS reported real average weekly earnings  fell 0.2%, as a decline in the workweek offset a slight rise in hourly wages. Real wages have been flat for six months now.

So, to sum up, nobody’s hiring, more people than ever are collecting, prices aren’t moving, wages are sliding for those who do have jobs. Oh, and the DJIA is at a nearly 18-month high.

That’s where things stand.

- Deflationary winds kicking up? Core CPI slips into negative territory for first time since 1982. “It’s hard to overlook the fat that negative monthly readings for this data series are extraordinary rare,” James Picerno says. “For the sake of economic stability, let’s hope it stays that way.”

- With Goldman Sachs’ (GS) image under attack, spokesman Lucas van Praag’s tough talk has only served to “alienate potential allies and enablers in the press and project a supercilious institutional arrogance which only serves to confirm the unflattering portrayals offered up by the firm’s detractors,” the Epicurean Dealmaker blog says.

- “High volatility in sentiment is a clear sign of utter confusion on the part of market participants and creates a landscape that is ripe for dramatic moves in either direction,” the Pragmatic Capitalist writes.

- Fed’s discount rate hike has more to do with technical reasons than a policy shift, former Dallas Fed president Bob McTeer says.

- Barclays scooped up a lot of talent throughout the financial crisis, according to LinkedIn data.

- Matt Taibbi’s latest account of the financial crisis misses one key point that no one wants to talk about: we could be in a depression without government intervention, Andrew Leonard writes. Still, reflecting on current bank profits, banks’ resistance to regulation and inability of government to do anything about it, “I’m beginning to come around to the view that maybe it would have been more effective to just blow everything up and start all over.”

- Deal activity has gotten off to a sluggish start in 2010, but investment bankers remain busy keeping up with secondary offerings, DealBook reports.

- Bottom line to this economy recovery is job growth. “The good news is Washington is working on it,” S&P’s Howard Silverblatt says. “The bad news is Washington is working on it.”

- Record bank profits may be tough to come by as the Fed starts raising rates.

- Tiger made the world stop from 11:00 to 11:15 this morning. How’d he do? Bill Simmons says the press conference was “a borderline train wreck.”

Today on a very special Tomorrow’s News Today, Madeleine and I are talking about consumer prices and the Fed (and not Tiger Woods.)

Premarket US stock futures suggest a modest early rebound to follow up yesterday’s declines, but today’s ultimate outcome hinges on reaction to the FOMC statement, due around 2:15 pm ET.

Markets in Europe are higher, mostly led by financials, which helps support a positive early bias ahead of the US open. November CPI and housing starts both due at 8:30 am.

US dollar index lower after a strong session yesterday, oil and gold both higher. S&P 500 futures up 5.40; 10-yr higher, yield at 3.58%.

Cha...ching?

Good morning, Mr. and Mrs. America and all the ships at sea (especially the freighters moored, and empty, off the coast of Singapore.) We bring you the following special report:

Consumer spending is not making a comeback.

Not yet at least.

Much was made of the August retail sales report, which showed consumer sales rose 2.7% from July. But that surge in demand certainly didn’t show up in consumer prices. This morning’s consumer price index was up 0.4%, mainly on the back of crude oil prices; the so-called core index was up a scant 0.068%.

To me, that shows there’s very little demand out there. In fact, retail sales through the first eight months of 2009 are down9.1% from eight months of 2008, even despite the purportedly “successful” cash-for-clunkers scheme. That reflects rising unemployment, and underemployment, rising savings rates concurrent with consumers cutting back on credit-card usage, and stagnant wages. Also, just the fact that consumers this year have been – in the aggregate, as they say on Wall Street - freaked out of their wits.

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Game on!

US stocks see their biggest single-day surge in more than three months, on Intel’s bullish outlook as well a jump in financials after several credit-card issuers report moderating delinquencies. Video recap here.

DJIA jumps 257 (3.1%) to 8616, its biggest one-day percentage jump since April 9 and about 6% in three days. Is that excessive? We’ll let you decide that one. S&P 500 rises 27 (3%) to 933, Nasdaq Comp gains 63 (3.5%) to 1863.

Call us cynical, but the rally seems more about numbers than fundamentals. It’s all about the risk trade, and it’s on today: crude, euro, equities all rise. Treasury fall, although gold rises.

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We're from the government, we're here to help.

We’ve been noticing a dynamic in the consumer and producer prices reports lately, where the month-to-month changes are positive, but the year-to-year changes are negative, in some cases wildly so.

It happened again this morning. Consumer prices rose 0.7% in June from a month ago. But they were down 1.4% from a year ago, the biggest decline since 1950, back when the buck stopped at Harry Truman’s desk.

The discrepency is mainly due to crude prices, which have whipsawed between $145 last summer and $33 earlier this year. But a larger culprit is monetary policy itself, as the Federal Reserve lurches from flooding the plains, to draining the pool sharply, to flooding the plains again.

That makes it harder for people to properly allocate their money, to know what”ll it cost to heat their homes in the winter or drive their cars in the summer. It makes it harder for investors to properly value assets, because it creates volatility that wracks the idea of efficient markets.

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