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Bevy of Inflation Data to Inform Markets, Fed

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Tuesday, June 15, 2021

Plenty of economic data for market participants — as well as the Fed — is on tap this morning: Retail Sales and PPI for May, and the Empire State Manufacturing survey for June, show some wide variances from expectations. Pre-market indexes were fairly frozen prior to the reports’ releases, and have flattened out by way of immediate reaction.

Retail Sales for May were expected to take a dip to the downside following break-even in April and a double-digit gain in the March of the stimulus checks. Yet the actual print almost doubled to the downside: -1.3% versus -0.7% expected. Lack of supply and availability was expected to have had a downward effect on Retail Sales — but this much?

Then again, take a look at the April revision: from 0.0% originally reported to +0.9% now — more than making up the downward slide from May expectations. Going back even farther, the March read, which initially came out at +9.8%, is now sitting pretty at +11.3%. In May, stripping out auto sales, today’s figure reverts back to -0.7%, still lower than expected. Ex-autos & gas was even worse: -0.8%. This takes the Control number, which the Fed is expected to plug in various places, to -0.7%.

May’s Producer Price Index (PPI) was hotter than expected: +0.8% versus an expected +0.5%, following an unrevised +0.6% for April. This is a bigger jump on the producer side than the Consumer Price Index (CPI) reported last week, which at +0.6% topped the consensus estimate by 10 basis points. Subtracting food & energy costs, May PPI reached +0.7% — 20 basis points above expectations and exactly in-line with CPI last month.

The big numbers on PPI come from the cumulative effect; that is, year over year: +6.6% is an all-time high for a 12-month period (going back to 2010), with +4.8% absent food & energy prices, another all-time high. Ex-food, energy & trade came in at +5.3% year over year — a new all-time high (going back to 2014). From this vista, it’s hard to shrug off inflation pressures. This goes not only for the producer side but the consumer, as well.

The Empire State Manufacturing Survey came in at a disappointing 17.4, dropping nearly 7 points month over month and lower than the 22.3 expected. However, this calls for a little perspective: 17.4 is the exact read we saw for March, before the Empire State was putting up gaudy 2-handle headline numbers. Going back 12 weeks, we see 17 as right around the median for production in the country’s fourth-largest state, including the biggest city in the country.

Industrial Production in May was hotter than expected — +0.8% outpaced the +0.5% consensus — and also 30 basis points higher than April’s headline. Consider this keeps on the higher levels achieved following March’s +1.0%, which itself was a big up-swing from -5.7% in February. It is in these productivity numbers where our Great Reopening is most evident.

Capacity Utilization tells the same story, though not quite in such vivid colors: 75.1% is a tad higher than expectations, and half a percentage point above April’s 74.6%. On its face, this number is a strong one, with 3/4 of all factory capacity utilized, and it inches back to where we were immediately pre-pandemic: 76.3% in February 2020.

With a big two-day meeting gathering today for the Federal Open Market Committee — and with the official word coming out of previous Fed meetings that inflation was generally considered to be transitory (due to the glut of demand as the Great Reopening launched largely at the same time across the country) — it’s clear there will be much focus on what, if anything, changes in the Fed language regarding inflation.

We already know the Fed finds 2% inflation optimum, and the other side of its dual mandate is to foster full employment. Even with a record 9.3 million job openings last month, we’re still way down in the U.S. labor market compared to the pre-pandemic period. And even without federally mandating a (much) higher minimum wage, we’re seeing natural wage hikes enticing Americans into entry-level jobs. This would suggest less “transitory” inflation than something stickier than that.

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