KEY DATA: CPI: -0.4%; Non-Food and Energy: +0.1%/Philadelphia Fed: down 6.5 points
IN A NUTSHELL: "The slowdown in inflation is good news but the growing number of gloomy economic numbers is beginning to catch my attention."
WHAT IT MEANS: The April reading on consumer prices came in as expected: it was down. This was the third inflation report this week and after we saw declining import and wholesale prices, it was logical to assume that the Consumer Price Index would post a decline. And, as expected, energy led the way. The details, though, were fascinating. You know all that excess supply of natural gas, well it is not doing much as utility supplied gas posted its third consecutive large rise. I guess there is a new economics in gas, if you want to sell more, raise the price. The energy companies are trying to emulate schools, where prices and demand continue to rise. Actually, there has been a cut back in production in order to get prices up and it seems to be working. I will not comment on what that says about the market. We are also continuing to get good news on the medical care front as costs are largely going nowhere. That helps everyone and explains some of the large decline in the expected budget deficit that was released this week. Food costs were tame (but not bakery products) and clothing prices fell so it is safe to go to the mall and the supermarket. The one place, other than education, where prices seem to be rising is for vehicles. Solid sales have provided the vehicle makers with some pricing power.
The Philadelphia Fed's May survey of local manufacturing dropped sharply, mirroring the New York Fed's report. Orders were down and that led to thinning backlogs and payroll cut backs. The weakness in the regional Fed surveys is a warning that the Institute For Supply Management's next report could be disappointing. We could see it turn negative for the first time since last November, when we were in the midst of an election and a fiscal cliff debate.