Producer Price Index (PPI) - A Hottish Core

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Producer Price Index (PPI) - April

A rare event by recent standards, April's PPI mimicked the CPI data, as it was impacted favorably by energy prices that declined in April. We need not remind you that oil prices have since, shall we say corrected... We have a well-overdue energy report to write for you, promised last week. Expect that article later this week my friends. The past couple weeks have offered much data and information to digest in the energy market, so we'll try to make some sense of it for you, and energy pricing behavior.

Headline PPI increased 0.2%, month-to-month in April, short of economists' expectations for a rise of 0.4%. Core PPI, excluding food and energy, increased 0.4%, contrasting perfectly with headline as it exceeded expectations for a 0.2% increase. Expressing our feeling in song, "feeling hot hot hot!"

The core PPI increase was greatly driven by higher priced crude goods, which rose 3.2% from March. Intermediate goods prices rose 0.9%. So, what do we see here then? We see pressure building in the system because finished goods prices rose less. Of course, in periods of economic growth, some fat is built up into the system, and that gets quickly worked off. However, that's gone now. What follows if conditions worsen, is further capacity consolidation, workforce reduction, and/or price rise to the next level, if it will so bear it. In other words, if the market can handle price increase, it will take it, and if it cannot, then some businesses will shrink or cease operating, while more competitive players survive.

Some of the main factors behind the finished goods price rise were light motor trucks (+1.3%), passenger cars and commercial furniture. That's not going to change in the near future either, since Toyota Motors (NYSE: TM) just recently announced a price increase. Some of the year-over-year change is likely due to General Motors (NYSE: GM) and Ford (NYSE: F) moving away from past fleet sales to rental firms and large organizations. Still, the month-to-month increase clearly reflects pass through of higher materials costs. The index for crude non-food materials rose 7.9% in April, driven by increases in iron and steel scrap (+32.2%). Intermediate goods price rise was driven by increase in metals and chemicals, including construction materials. That clearly reflects emerging market demand.

Food & Energy

Food was less of a driver this past month, as various factors offset each other, and others held somewhat steady. Big movers included wheat price decline (-23.1%) that was partly offset by an increase in hogs (+10.5%). Foods pricing was unchanged on the whole.

So with temporary benefit from energy and no change in food, one might get complacent and forget the secular changes in effect in both markets. Still, we are relatively certain that smart money is behind the rise in oil prices, and for geopolitical reason. Otherwise, it's very hard to explain the current momentous run.

The market did not digest this pre-market news well, as it started lower from the get-go. It did not help that oil prices surpassed $129 this morning. So, despite the positively interpreted CPI report last week, the market sees future trouble within today's news.

Please see our disclosure at the Wall Street Greek website. Article interests AMEX: DIA, AMEX: SPY, AMEX: DOG, AMEX: SDS, AMEX: QLD, Nasdaq: QQQQ.