KEY DATA: PPI: -0.7%; Excluding Food and Energy: +0.1%/IP: -0.5%; Manufacturing: -0.4%
IN A NUTSHELL: "With no pressure on wholesale costs, there is little reason to believe that consumer prices will be rising very much anytime soon, especially if the nation's manufacturing base doesn't see demand rise faster."
WHAT IT MEANS: For the Fed to keep pushing hard, even if it is on a string, inflation has to remain well contained. It looks like it is. Yesterday we saw that import costs were down and today we see that producer prices fell as well in April. The lack of cost pressures was across the board and at all stages of production. For the consumer, the news was nothing but good. Food prices tanked - except for confectionery products. Other consumer costs were also basically flat with only residential gas and toy prices jumping. Energy prices were also down sharply. On the business side, capital equipment prices rose just a touch. Looking outward, prices at the intermediate and crude level were also off. The only warning sign in the entire report was a jump in crude fuel prices. The decline in crude petroleum costs may be coming to an end. Gasoline prices are starting to increase already.
Industrial production was off sharply in April as utility output tanked. We can thank the weather for that. But more importantly, manufacturing production also dropped. The decline was everywhere as the output of consumer goods, business equipment and construction all fell. Fifteen of the nineteen industrial sectors posted negative numbers. Motor vehicle assembly rates eased a touch as well.
MARKETS AND FED POLICY IMPLICATIONS: The total lack of inflation at the wholesale level points to modest consumer price pressures for a while. We could see some increase in energy costs but otherwise, all signs point to tame inflation. The concern is the soft manufacturing sector. The supply managers' index eased in April and today we saw the New York Fed's reading of early May activity in its region was also off. Somewhat sluggish economic growth and limited inflation are the equivalent of rocket fuel for the Fed. There is absolutely no reason to back down so look for the Fed to keep buying like crazy. That should keep investors smiling as the Fed is also a lot of the energy that is helping power the equity market rise.