INFLATION
Rate hike rumbles
As Mideast violence continues, commodity prices are on the march, with not only oil but gold heading higher. At some stations, gasoline has topped $1.75 a gallon.
To economists, the scenario raises a caution flag that inflation may be flaring anew. And some believe it suggests that interest rates must be pushed higher, and soon.
Such a move by the Federal Reserve would, of course, be pre-emptive, not a response to current inflation. But that’s the way the central bank operates, for good or ill.
In 1999 and 2000, the pre-emptive Fed pulled the trigger on rates so many times that it managed to pre-empt the economy into a recession, albeit one now described as relatively mild.
Chicago economist Brian Wesbury says Friday’s report on the March producer price index will bear watching. He is looking for it to show a gain of 0.5 percent, on top of the 0.2 percent advance in February.
He said a typical index of commodity prices has risen about 5 percent in the last month, with oil up 11 percent, natural gas 6.5 percent and gasoline 10 percent, with more increases to come. Also, factories still have plenty of excess capacity.
“Worries about deflation have passed and the Fed is on razor’s edge about interest rates,” said Wesbury, of investment firm Griffin, Kubik, Stephens & Thompson.
He said this is the first surge of inflationary pressure seen in a long time, and it doesn’t mean that the Fed needs to ratchet up rates immediately.
But, he said, “We will be surprised by the end this year at the strength of the economic recovery. The Fed cannot hold its short-term rate at 1.75 percent if the economy is truly regaining momentum. So a hike in rates will take place in either June or August.”
RETAILING
Gas price revs up
Spend-happy Americans have been slow to shed their buying enthusiasm, regardless of the global situation, and Friday’s report on March retail sales is likely to show them still loosening their wallets. Economist Paul Ferley expects the report to show a gain of 0.4 percent, on top of the 0.3 percent advance a month earlier.
“Department store sales weakened a bit last month, and sales at auto dealerships were relatively flat,” said Ferley, of Chicago’s Harris Bank and its parent, Bank of Montreal.
The strength in the report, he said, will come from auto service stations, which posted much higher prices for gas.
Still to be determined: Whether the steep costs of refueling Americans’ vehicles will negatively impact their spending on other goods in the weeks ahead.
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JOBS
Weakness lurking?
Watch Thursday’s report on first-time jobless claims for any evidence that the labor market is weakening. Last week’s report showed an outsize bulge of 460,000 applicants, up from 396,000 a week earlier, but some analysts blamed a new program that requires people to apply anew for extended benefits, part of the economic stimulus plan.
The March employment report released Friday showed payrolls grew by 58,000 positions, but economist Ian Shepherdson said, “We note that February payrolls were revised down–to negative 2,000 from the initial estimate of a rise of 66,000.” Shepherdson, of High Frequency Economics in Valhalla, N.Y., said that although payroll growth is weaker than expected, and wage gains continue to slow, “real pay remains strong.”
STOCKS
Cry of caution
The Mideast problems are hitting the stock market just as companies are ready to roll out first-quarter profit reports, and the net effect may prove poisonous, says Chicago investment manager William Hummer.
“The Mideast crisis presents an ominous development, because it is taking place just as the global economy was showing signs of life,” he said. “Any loss of confidence would have a negative effect on world trade.”
Hummer, of Wayne Hummer Investments, said the stock market “loathes uncertainty, and this situation creates uncertainty of many facets.”
“Not a soul can tell us what will transpire. It is like an illness with a fever–one that goes into remission but then comes back.”
His bottom line: Investors should remain cautious.