Instant View: U.S. producer prices rise; housing starts fall

NEW YORK (Reuters) - U.S. producer prices rose for the third month in a row in December, increasing by 0.2 percent on a surge in food prices and recording their largest year-on-year gain since October 2008, according to a government report on Wednesday.

New U.S. housing starts unexpectedly fell in December, pulled down by a drop in construction activity for single-family dwellings, a government report showed on Wednesday.

KEY POINTS:

CPI * The annual gain of 4.4 percent, though, was slightly below analyst expectations of a 4.5 percent increase. On a month-on-month basis, analysts polled by Reuters had anticipated monthly prices paid at the farm and factory gate to remain unchanged in December. * The Labor Department said core prices, which exclude food and energy, were steady in December. Analysts had expected a 0.1 percent gain.

HOUSING * The Commerce Department said housing starts fell 4 percent to a seasonally adjusted annual rate of 557,000 units. Analysts polled by Reuters had expected housing starts to rise to 580,000 units. * November's housing starts were revised upwards to 580,000 units from the previously reported 574,000 units. The drop in housing starts was likely the result of unusually cold weather last month. * Groundbreaking activity dropped a record 38.8 percent to an all-time low of 553,000 units for the whole of 2009. * Starts for single-family homes fell 6.9 percent last month to an annual rate of 456,000 units after rising 4.0 percent in November. Groundbreaking for the volatile multifamily segment rose 12.2 percent to a 101,000 unit annual pace, after surging 69.8 percent in November.

COMMENTS:

ANNA PIRETTI, SENIOR ECONOMIST, BNP PARIBAS, NEW YORK:

"Overall I would say core inflation pressures are very contained. Capital equipment prices are still very contained, there was weakness in trucks. Overall I think consumer demand for discretionary items is still weak.

"We're not likely to see big increase in manufacturing prices going forward. So again, that goes with the contained PPI story. I would think inflationary pressures are weak going forward at different stages of the pipeline.

"The one risk we're likely to see is food prices. There was strength of food prices in December... We have seen a string of increases at all stages in import prices... This is part of the correction that we're seeing.

"We obviously had a surge in food prices in 2008, a big dollar correction in 2009 and now we're actually correctly back on the upside. We're likely to see an ongoing upward trend. This is going to be one of the stories supporting the headline going forward. But ex-food and energy, there's no pressure, no worries."

JAMIE COX, MANAGING PARTNER, HARRIS FINANCIAL GROUP, COLONIAL

HEIGHTS, VIRGINIA:

"The real surprise to me was the permits data, showing permits were way up. If you are a forward-looking person you have to be just a little bit positive for the housing market."

TOM SOWANICK, CHIEF INVESTMENT OFFICER, THE OMNIVEST GROUP,

PRINCETON, NEW JERSEY:

"It was a smidge better than expected but it's up considerably from the preceding month. Most of that, if not all, is energy related. Unfortunately, if energy is going up and the cost of producing is going up, then costs have to be absorbed by the consumer. This number is neither good or bad for stocks -- it's all about earnings."

CRAIG THOMAS, SENIOR ECONOMIST, PNC FINANCIAL SERVICES GROUP,

PITTSBURGH:

"We are producing far fewer new houses than we are new households, and this pace of construction is healthy in terms of getting the supply and demand balance back together.

"We get about 1.1 to 1.2 million new households every year, so if permits are edging up it likely reflects improving confidence among both home buyers and builders."

BORIS SCHLOSSBERG, DIRECTOR OF FX RESEARCH, GFT, NEW YORK:

"The U.S. data is a little bit mixed today. But inflation doesn't really matter. What the market is focusing on is the housing number. It's not a great number but I think the worst in the housing sector is already behind us. What this goes to show is that the housing market is stabilizing but not stalling. Overall, the data should be dollar-constructive because of the high risk aversion in the market given the China news. Bottomline, I think the U.S. economy is still doing much better than Europe and that's why we're going to see the dollar do well against the euro."

MICHELLE MEYER, ECONOMIST, BARCLAYS CAPITAL, NEW YORK, NEW

YORK:

"At first glance housing starts were disappointing. But, they were offset by a huge jump in building permits. The data is suggestive of a continued gain in housing construction over the next several months. The data, however, is volatile, especially due to the huge swings in the multifamily sector. Housing construction is clearly on an uptrend from unsustainable low levels, but there is also uncertainty over the impact of the tax credit. Housing construction should continue to add to GDP growth and the recovery in construction should help bring back some of the lost construction jobs."

TOM SIMONS, MONEY MARKET ECONOMIST, JEFFERIES & CO., NEW YORK:

"The PPI came in relatively close to expectations. The story was energy -- it was down four tenths of a percent. I think foods was up a little bit more than expected. Overall, I don't see anything in here that creates any kind of immediate concern for inflation.

"There was a big pop in building permits, which presents some good prospects for a recovery in housing starts down the road. It's encouraging to see any kind of positive element to the data there. I think those building permits rising presents some good prospects for growth in the economy.

"I don't think either of these data releases changes the Fed story.

"I don't know if the data this morning has a whole lot of an effect on the market. We're at kind of an awkward period now trying to set up for next week's auctions and of course the FOMC meeting is in the middle of all of that.

"Neither of these came in wildly off expectations either so I think they're being pretty easily digested."

MARK PAWLAK, MARKET STRATEGIST, KEEFE, BRUYETTE & WOODS, NEW

YORK:

"It's a wash between housing starts, permits and the upward revisions. PPI is also a bit of a wash between the headline and core readings. I think the (bond) market is paying more attention with the stock index futures being lower, partly due to the Bank of America results. We are seeing some unwinding of yesterday's trades."

DAN COOK, SENIOR MARKET ANALYST, IG MARKETS, CHICAGO:

"It's kind of a mixed message as far as the housing market goes. There was a big surge in building permits, which suggests optimism, but the starts dropped. That's mixed as far as I'm concerned. I don't know what the market will make of that, especially with earnings out.

"I also don't expect a big market impact from PPI, which was pretty much in line. Again, a mixed message, which I think we'll hear more of in other data that's still to come.

"I think today will be all about earnings. Bank of America had a wider than expected loss, and we'll see an impact from Morgan Stanley as well."

MARKET REACTION: STOCKS: U.S. stock index futures hold losses BONDS: U.S. Treasury debt prices steady at higher levels DOLLAR: U.S. dollar holds gains versus euro