Indicators Hint That Soft Patch Is a Thing Of The Past

Friday, July 15, 2005

This week's US economic indicators have all come in on the positive side, jobless claims being the exception confirming the rule.
A= Actual; C= Consensus; L=Last.
Import Prices June: A 1.0 %; C 1.2 %; L minus 1.3 %.
Export Prices June: A 0.0 %; C none, L 1.2 %.
Trade Deficit May: A 55.3 billion dollars; C 57.5 billion; L minus 56.9 billion
Treasury Budget: A 22.4 billion dollars; C 23 billion; L minus 35.5 billion.
CPI June: A 0.0 %; C plus 0.2 %; L minus 0.1 %.
Jobless Claims: A 336,000; C 323,000; L 319,000.
Retail Sales June: A 1.7 %; C plus 1.0 %; L minus 0.5 %.
Retail Sales ex Autos: A 0.7 %; C plus 0.6 %; L minus 0.2 %.
Business Inventories May: A 0.1 %; C 0.2 %; L 0.3 %.
PPI June: A 0.0 %; C plus 0.4 %; L minus 0.6 %.
PPI core: A minus 0.1 %; C 0.1 %; L 0.1 %.
Capacity Utilization June: A 80.0 %; C 79.7 %; L 79.4 %.
Industrial Production June: A 0.9 %; C 0.4 %; L 0.4 %.
Michigan Consumer Sentiment July: A 96.5 %; C 95.0; L 96.0.
NY Empire State Index: A 23.9; C 10.0; L 11.7.
The latest indicators seem to confirm the view of the Federal Reserve that the economy went through a soft patch earlier this year and not even record breaking oil prices could dampen the dynamics of the ongoing expansion.
The further outlook for the US economy therefore seems to hinge on two factors: Real estate prices which are a corner pillar for consumer optimism and their spending; and the ability of the government to succeed on its path toward budget deficit consolidation which so far has only benefitted from higher than expected tax receipts. As these are a one-time factor that is not likely to be repeated next years the administration has to come forward with some innovative ways to achieve that goal.
The Fed will go into a relaxing weekend, seing that the recent slight steepening of the yield curve will enable them to stay with their "measured" pace of rate hikes, now that the 10-year yield has been rising 30 basis points to 4.19 points from its yearly low reached in June. The spread between Fed Funds and the benchmark 10-year Treasury note has widened to 95 basis points after it had reached a low of 71 basis points before the latest Fed Funds hike on June 30. This should not be taken as a sign of complacency though as this is the same spread as before the latest Fed Funds rate hike. What is more important though is that the long end of the bond market does not seem to escompt a weakening economy anymore.

US 10 year yield 2005

CHART: The recent rise in the 10-year yield has just equalized the latest Fed Funds rate hike. The yield curve is more or less as flat as it was before the latest FOMC decision.


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