Economic data

Sept PPI fell a sharp .6% vs expectations of flat and the core also unexpectedly fell .1% vs a forecasted rise of .1%. The headline drop was led by a 2.4% fall in energy prices, especially in gasoline which was down by 5.4%. This will reverse though in Oct as gasoline prices are back up by over 4%. The drop in natural gas prices kept a lid on residential gas prices. A 1% rise in the wholesale price of passenger cars was offset by a 1.4% drop in trucks. Inflation in the pipeline though, ex f&f, is rising as goods in the intermediate stage of production saw a rise of .9% m/o/m and prices at the initial stage rose 3.6% m/o/m ex f&f. Bottom line, with the CPI already out last week, the PPI today lost its market moving impact and with the continued rise in commodity prices, the drop in today’s data should reverse. The implied inflation rate in the 10 yr TIPS is unchanged this morning at 2.04%, up 6 bps from Friday and the highest since June.

Sept Housing Starts totaled 590k, 20k less than expected and Permits at 573k were 22k below forecasts. A drop in multi family construction was the drag on starts as single family homes rose but the reverse was true for permits. With the housing tax credit possibly about to expire, the drop in single family permits was not a surprise and buyers rushed to take advantage of it going into Sept, thus helping starts. Single family Permits fell in the Midwest, South and West but rose a touch in the Northeast. I highlight permits because the recent trends in starts becomes irrelevant in extrapolating future building IF the tax credit doesn’t get extended as we’ll have another Cash For Clunker type hangover since most of those who took advantage of the tax credit were going to buy a house anyway and all we did was pull forward demand.

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