Morning stuff

PPI rose 1.1% m/o/m, above expectations of up .8% and it brings the y/o/y rise to 4%. The headline gain was led by a 6.4% rise in gasoline prices and .8% rise in food. Keeping a lid on the core was a rarely seen .1% fall in prescription drug prices and also a .4% drop in passenger car prices. The BLS said that almost 60% of the core increase was due to a 2.9% rise in cigarette prices. Inflation in the pipeline continued to grow as Intermediate goods prices rose 1% m/o/m headline and .4% core and Crude goods were up a whopping 4% m/o/m and 3.1% core. As a reference, in Dec the CRB index rose 10% m/o/m and even ECB’s Trichet acknowledges in his press conference today that inflation rates could rise further in the short term because of rising commodity prices, although he thinks the outlook overall is broadly balanced. CPI tomorrow will reveal how much commodity inflation has spilled over into consumer prices although the process will take months.

With the likely influence of the holidays distorting seasonal adjustments, Initial Jobless Claims totaled 445k, 35k above expectations and 35k higher than last week. To better smooth the data of its holiday volatility, the 4 week average rose to 417k from 411k. Continuing Claims fell by 248k to the lowest since Oct ’08 but Extended Benefits rose a net 128k. Bottom line, the labor market is improving but the pace and quality is still not linear.

Following the successful (likely with the help of its banks) Portuguese debt offerings yesterday, Spain and Italy today sold longer term paper and yields are falling across the board for a 2nd day. We await an expansion of the EU/IMF bailout facility as they realize what’s currently in place is not big enough. The BoE left rates unchanged as expected at .5% even as y/o/y CPI has run 3%+ for 11 straight months. The ECB also sat on their hands as expected. With respect to us and the Fed, all eyes are on the PPI today and CPI tomorrow. With commodity inflation rising around the world and the US economy continuing to recover, I best describe the Fed’s policy (same with BoE) as Kamikaze monetary policy as this won’t end well the longer they wait to normalize. In contrast and due to concerns with rising commodity prices, South Korea unexpectedly raised interest rates by 25 bps, following the same move by Thailand yesterday.