The Good:
First, import prices declined: Prices for U.S. imports declined 0.6 percent in May, the U.S. Bureau of Labor Statistics reported today, after a 0.7 percent drop the previous month. Falling fuel and nonfuel prices contributed to the decreases in both months. U.S. export prices fell 0.5 percent in May following declines of 0.7 percent in April and 0.5 percent in March. What's interesting here is that non-fuel imports have also been dropping.
Retail sales increased .6%: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for May, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $421.1 billion, an increase of 0.6 percent (±0.5%) from the
previous month, and 4.3 percent (±0.7%) above May 2012. Total sales for the March through May 2013 period were up 3.7 percent (±0.5%)
from the same period a year ago. The March to April 2013 percent change was unrevised from 0.1 percent (±0.3%)*.
This is by far the best news of the week. With manufacturing slowing consumers will have to provide more economic activity to keep the economy moving forward. This report indicates they're more than up to the task. Equally impressive was the .3% increase ex-autos.
Neutral
Producer prices are right on the edge of being a concern for a one-month print. The Producer Price Index for finished goods rose 0.5 percent in May, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Prices for finished goods fell 0.7 percent in April and 0.6 percent in March. At the earlier stages of processing, prices received by manufacturers of intermediate goods declined 0.1 percent in May, and the crude goods index advanced 2.2 percent. On an unadjusted basis, prices for finished goods moved up 1.7 percent for the 12 months ended May 2013.
Regarding PPI, most of the increases are due to large movements of single products that make up an index. For example, fuel prices account for 60% of the increase in finished goods while a 41.6% increase in egg prices is responsible for over 60% of the increase in finished consumer foods. Also note that 2/3 of the increased in the finished core prices are attributable to a .4% increase in light trucks and autos. It's entirely likely that the prices related to eggs and autos are one-off events. Energy is a bit more volatile, but there isn't much demand pull or price push pressure right now.
There is no way anyone can say that inflation is an issue or even a potential issue in the current environment. However, bigger moves in a single month's print of an inflation statistics is something to keep your eye on going forward.
Industrial Production was unchanged: Industrial production was unchanged in May after having decreased 0.4 percent in April. In May, manufacturing production rose 0.1 percent after falling in each of the previous two months, and the output at mines increased 0.7 percent. The gains in manufacturing and mining were offset by a decrease of 1.8 percent in the output of utilities. At 98.7 percent of its 2007 average, total industrial production in May was 1.6 percent above its year-earlier level. The rate of capacity utilization for total industry edged down 0.1 percentage point to 77.6 percent, a rate 0.2 percentage point below its level of a year earlier and 2.6 percentage points below its long-run (1972–2012) average.
The good news is the print wasn't negative. The bad news it the print was just barely good. And the .1% overall increase in manufacturing -- especially on the heels of two straight contractions -- is pretty concerning. It does appear that external events like the global slowdown and the sequester are starting to take a bigger bite out of manufacturing.
The Bad
US Export prices dropped: U.S. export prices fell 0.5 percent in May following declines of 0.7 percent in April and 0.5 percent in March. Lack of pricing pressure indicates that exporters may be under profit margin pressure over the next 3-6 months.
Let's turn to the charts.
The daily chart (top chart) shows that prices are using the trend line connecting the early January and mid-April lows as technical support. The high from early April in the 159-160 and 50 area is providing support as tell. The technicals are bearish: the shorter EMAs are entangled with prices, while the MACD and CMF is declining.
The top chart is the 60 minute prices chart and shows that prices are consolidating in a triangle pattern.
The big story in the bond market -- and all markets at large -- is when will the Fed start to taper off its bond buying program. Last week, there was an emerging concensus it would be soon -- leading to the sell-off in the bond markets. However, traders started to change their minds about that assessment, leading the bell of the treasury curve to rally above resistance. As it stands right now, the IEIs still have support at 122 and the IEFs at 105.
The dollar has broken support at the 38.2% Fib level with the new price target of ~21.5. Any rally will hit resistance at the 10, 20 and 200 day EMAs as well as the 38.2% Fib level.
Market outlook for the week: slightly negative. The dollar's drop indicates that traders are short-term bearish on the US, which is confirmed by Treasuries inability to make a sustained move below support.
