“In terms of what it actually tells us about overall inflation, I’m not sure it’s all that important.”
-Jan Hatzius, chief United States economist at Goldman Sachs.
“It looks to us like this is a fluke.”
-Ethan Harris, chief United States economist at Lehman Brothers
Sometimes, they just want to take ’em higher, and yesterday was a classic example of that.
Don’t believe the hype that it was based on the PPI; Any excuse would have lit the fuse, as sentiment had gotten a bit too extreme, and the market was simply due for a pop. That’s what yesterday’s move looked like. For you EMH adherents out
there, both Goldman (equities) and Lehman (bonds) prominently pointed
out to their clients all the warts in the PPI data — so this was hardly a secret.
As I stated last week in a note to RR&A subscribers, "If you are a Trader, Cisco’s good numbers and guidance might drive
equities higher today — if the markets can develop some momentum, a
summer rally is possible."
As we discussed extensively yesterday, the soft PPI was a function of heavy discounting by GM, Chrysler, and Ford on SUVs and light trucks. How much discounting? Bloomberg, citing data from Edmunds, noted the following:
"Edmunds’s data show automakers’ total discount spending rose 15 percent to $4.5 billion last month from June. DaimlerChrysler AG’s Chrysler unit, whose July sales fell 37 percent, this month extended employee discounts for all buyers of its cars and trucks through August."
There’s your entire decline in producer prices: almost $5 Billion dollars in July incentives to move heavy iron off of dealer lots.
At the same time as car dealers were engaging in big price cutting, Bloomberg reported that:
"Price pressures for raw materials continue to build. Core prices for goods at the earliest stage of the production process rose at an annual rate of 43 percent over the last three months. Core prices for intermediate goods rose at an 11 percent pace since May. Profits may suffer if companies can’t pass rising raw material and labor costs on to consumers."
You read that correct: The past quarter’s data shows raw materials rose at an annualized rate of 43%. (But no worries, there is no inflation in the core . . . Ha!).
So where does that leave us today?
CPI at 8:30 will likely show much more inflation than yesterday’s PPI headline. Since the market chose to ignore the actual basis for the dis-inflation, today may very much be a tell: If the number comes in hot, and they rally them anyway, look for OER to become the excuse. But the reality is its an options expiration week, and they have higher prices on their collective minds.
If the data comes in cool, all bets are off on the height of the moonshot.
Sometimes, the data is irrelevant — to paraphrase Thin Lizzy, "When the boys want to play, you better let them."
Stocks Rally as Inflation Eases Off
JEREMY W. PETERS
NYTimes, August 16, 2006
U.S. Economy: Producer Prices Unexpectedly Decline (Update7)
Bloomberg.net: August 15, 2006 15:51 EDT