Economic data

Dec Housing Starts totaled 557k annualized, 15k below expectations and down from 580k in Nov. The decline was solely led by the single family category as multi family construction rose. Single family starts fell to the lowest since May. However, single family permits rose to 508k, the most since Sept ’08 and in terms of trying to equalize supply and demand, the last thing we need is a ramp up in home building, especially with the still massive foreclosure overhang. With this said and with respect to GDP growth, residential construction in response to the pickup in permits will give it a boost, albeit temporary if existing home inventory remains high.

Dec PPI rose .2% m/o/m vs expectations of flat but ex f&f PPI was flat, .1% below forecasts. A 1.2% drop in the wholesale price of light trucks weighed on the core reading. Food prices rose by 1.4% but energy prices fell by .4%. The y/o/y gain now with headline PPI is 4.4%, the most since Oct ’08 due to an easy comparison. Core PPI is up .9% y/o/y. With the CPI already out last week, the market moving impact from PPI is limited but inflation in the pipeline is still running hot. Intermediate goods prices rose .5% m/o/m both headline and core and crude prices (initial stage of production) rose 1% headline and 5% core (yes, m/o/m). Bottom line, with respect to inflation going forward or lack thereof, it won’t come from the historical viewpoints of the output gap and the unemployment rate (thus wage pressures), it will be led by commodity prices, therefore headline inflation should be the accurate measurement.

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