Non-energy Prices Lift Wholesale Prices in January

Transcription

1 Non-energy Prices Lift Wholesale Prices in January February 17, Northern Trust Global Economic Research 5 South LaSalle Chicago, Illinois 3 northerntrust.com Asha Bangalore agb3@ntrs.com The Producer Price Index (PPI) rose.3% in January after a.% increase in the prior month. In 5, the sharp increases in the PPI were largely due to higher energy prices. By contrast, the January increase in the wholesale price index is from higher prices for food and core items (excluding food and energy). This is noteworthy but we need additional data to say with conviction that it is more than a random event. Part of the sharp hike could be a lagged pass through of higher energy prices in 5. Today s report and a string of recent economic data temporarily justify the Fed s hawkish stance. The energy price index held steady in January, with lower prices for gasoline and heating oil offsetting higher prices for natural gas and residential electricity. Food prices rose.% in January vs. a.% increase in the previous month. PPI: Finished Goods [Including Foods & Fuel] % Change - Year to Year NSA, 19=1 PPI: Finished Goods Less Food and Energy % Change - Year to Year NSA, 19= Source: Bureau of Labor Statistics /Haver Analytics 5 The.% increase in the core PPI (excluding food and energy) of finished goods follows two monthly gains of only.1%. In January, higher prices of cars (+1.1% vs. minus.1% in December) and light trucks (+.7% vs. minus.7% in December) were in large part the cause for the significant increase of the core PPI. Prices of sporting goods and beverages rose, while clothes and cigarettes were cheaper in January.

2 The PPI of intermediate goods moved up 1.% and the core PPI for intermediate goods advanced 1.%. On a year-to-year basis, the core intermediate PPI has risen.% in January, a slight acceleration from the.5% increase recorded in 5. The crude goods price index declined.5%, reflecting mostly lower energy prices. PRODUCER PRICE INDEX JANUARY % change prior month 3 mo. ago mo. ago year ago y-o-y '** PPI - FINISHED GOODS ALL ITEMS CORE - ALL ITEMS LESS FOOD & ENERGY FOOD ENERGY CAPITAL EQUIPMENT PPI - INTERMEDIATE GOODS ALL ITEMS CORE PPI - CRUDE GOODS ALL ITEMS CORE ** - Dec.-to-Dec. annualized change % change In other news, the University of Michigan Consumer Sentiment Index dropped to 7. in February from 91. in the prior month. Both the Current Economic Conditions Index (17.7 vs. 11.3) and Expectations Index (7. vs. 7.9) declined in February. Amanda Mason am9@ntrs.com Mexico: Rate Cuts May Not Be the Cure Despite sustained monetary tightening in the US, the central bank of Mexico (Banxico) is expected to cut the benchmark lending rate (TdF) for the seventh consecutive time in as many months at next week s February th policy meeting. Moderating inflation expectations and sluggish growth figures spurred the onslaught of the current easing cycle, during which Banxico cut the TdF by bps to 7.75%. But with contentious political elections looming on the horizon and inherent structural deficiencies that stunt domestic growth, are additional rate cuts warranted? Consumer prices rose.59% in January. Annualized headline inflation edged up to 3.9%, an uptick from December s record low reading of 3.33%, but core inflation dropped to its lowest 1-month reading (.9%) since inflation records began in 19.

3 Inflation History CPI (INPC) Core CPI (INPC) PPI (INPP) Jan- Jan-1 Jan- Jan-3 Jan- Jan-5 Jan- This convergence towards Banxico s 3% target level is a reflection of the rate hikes imposed throughout and into early 5, the strength of the peso, lower-than-expected agricultural prices, and government measures that contain the pass-through of high energy prices to domestic consumers. Inflation levels have comfortably settled within the central bank s targeted -% range, but numbers will start to rise just as the political elections are in full swing an upshot from the current easing cycle. The bps reduction in the TdF and the measured hiking of US rates has considerably decreased the interest rate spreads between Mexico and the US for all maturities. The peso has remained strong, however, buoyed by substantial inflows from oil revenues, portfolio investments, and workers remittances. This strength has helped mitigate imported inflation, but at the expense of the export market a major contributor to GDP. Real GDP increased only.7% y-o-y in the fourth quarter, down from a revised 3.% in Q3, and overall growth for 5 was a sluggish 3.% compared to.% in. JP Morgan Broad Real Effective Exchange Rate Index: Mexico =1 1 Foreign Exchange Rate: Mexico New Peso/US$ Sources: JPMorgan, Federal Reserve Board /Haver Analytics 1. 3

4 Real GDP Growth.%.% y-o-y % change.%.%.% -.% -.% Q 5 While it is undeniable that the strong currency is crimping growth by slashing Mexico s export competitiveness, this is not the only piece to the underperformance puzzle. Domestic demand has remained slack despite significant improvements in financing conditions, substantial workers remittances, and the lowest inflation rate in years. Many analysts blame Mexico s perennial underachievement on the lack of structural reform following trade liberalization. Rigid labor laws, inadequate tax collection, and government-controlled energy markets to name a few issues are stunting domestic growth. Additional rate cuts may stem peso appreciation and help revitalize the export market, but they won t fix the country s inherent structural problems. And with China and India producing more and more cheap goods every day, how low will rates have to go before the export markets see any benefit? Economic policy has surfaced as the biggest challenge facing candidates in the upcoming presidential elections, and given the broad ideological differences between the two frontrunners it is safe to say that investors will be closely watching the campaigns leading right up to the July nd poll date. The current front-runner is populist candidate Andres Manuel Lopez Obrador (AMLO) of the Democratic Revolution Party. He favors public works projects as a means to stimulate growth and thinks social programs are the most expedient way to help the tens of millions of impoverished Mexicans. Polling second is Conservative National Action Party candidate Felipe Calderon. Calderon supports the free-market solution of the current president, Vincente Fox, and has stated his commitment to opening the state-controlled oil and electricity markets for private investment.

5 AMLO represents the political shift to the left that has concerned Latin American investors. Instead of pushing through with needed structural reforms he will focus on populist measures as a near-term fix to economic problems. Calderon is a more investor-friendly candidate but unless he is able to pass reforms through parliament, his administration will be plagued with the same challenges that have held down economic activity during Fox s reign. Regardless of the victor, the closeness of the elections will create notable market noise. If Banxico continues to cut rates in a battle against the peso, it runs the risk of overshooting and having to make drastic policy reversals just as the volatility from elections is hitting the market. So, while the February rate cut seems like a foregone conclusion we hope Banxico will exhibit some caution going forward rather than risk driving rates too low. 5