Oct PPI rose .3%, .2% less than expected and unexpectedly fell by .6% ex food and fuel vs forecasts of a gain of .1%. A sharp drop in car and truck prices was the main culprit. Motor truck prices in particular fell 5.2% m/o/m. Car prices fell .5% but follows increases in the two prior months. Inflation in the pipeline is evident but mostly due to the rise in food and energy prices. Headline prices of intermediate goods (middle stage of production) rose .3% but fell .2% ex f&f m/o/m. At the first stage of production, prices rose 5.4% headline but .5% ex f&f m/o/m. With respect to market moving inflation data, tomorrow’s CPI will be more relevant.
Foreign purchases of longer term US assets totaled a net $40.7b in Sept, about $10b above forecasts. The main factor was $44.7b of net buying of Treasuries vs an increase of $28b in Aug. Foreigners were net sellers of govt agency bonds by $1.8b and corporate bonds by $2.9b (sellers of corporates for a 4th straight mo). They were net buyers of US stocks by $15.7b. US investors sent $15.5b into overseas stocks but sold $540mm of foreign bonds. Japan, the 2nd largest foreign holder of Treasuries, bought $20.3b more, mainland China, the biggest holder, bought a net $1.8b, Hong Kong bought $7.5b and the UK bought $22.4b (could be UK hedge funds or UK banks on the behalf of foreign central banks, etc…). Net-net, considering the continued weakness in the US$ in Sept, buyers still came out for Treasuries, the biggest asset class that sees foreign flows. The $64k question remains of course of when that money chooses other asset classes, if ever.
Oct IP rose .1%, .3% less than expected and is a slow down from the gains seen in the prior 3 months and the main reason is a 1.7% drop in motor/vehicle parts production which follows sharp gains seen in July thru Sept as auto plants ramped up again. There was also a .3% fall in computer/electronics production but that also follows gains in the prior 3 months. Mining production fell by .2%. Machinery production rose by .2% and utility output was up by 1.6%. Capacity Utilization was 70.7%, a .2% increase from Sept but .1% less than expected. It is at the highest level since Jan ’09 but remains well below the long term average of 80% and gives fuel to the output gap argument in keeping inflation pressures subdued. Bottom line, while inventory destocking continues, the inventory build over the past few months, outside of auto’s, remains lackluster but all we need is a slowdown in the rate of inventory declines in order to statistically boost GDP.