INSTANT VIEW: PPI soars, retail sales weak

NEW YORK (Reuters) - Producer prices rose a far larger-than-expected 1.8 percent in June as energy costs soared, but core inflation at the producer level edged up just 0.2 percent, Labor Department data showed on Tuesday.

The Labor Department said producer prices over the last 12 months were up 9.2 percent, the biggest increase since a 10.4 percent gain in June 1981.

Core producer prices, which strip out volatile energy and food costs, increased by 0.2 percent, the same margin as in May. Economists had expected core prices to rise 0.3 percent in June. On a year-over-year basis, core prices were up 3.0 percent.

Total sales at U.S. retailers rose a less-than-expected 0.1 percent in June, as auto sales had their biggest drop in more than two years, a Commerce Department showed on Tuesday.

Auto and auto parts sales fell 3.3 percent in June, their worst month since February 2006. They tumbled 9.5 percent from a year earlier.

Excluding autos, retail sales rose 0.8 in June, which was also below the pre-report consensus estimate of 1.0 percent. Excluding autos, building supplies and gasoline, retail sales rose 0.4 percent in June.

Meanwhile, manufacturing in New York State contracted in July for the third consecutive month, though the rate of decline was less severe than in June, the New York Federal Reserve reported.

The New York Fed's "Empire State" general business conditions index came in at minus 4.92 in July from minus 8.68 in June, while its gauges of inflation also posted increases.

COMMENTS:

DANA SAPORTA, ECONOMIST, DRESDNER KLEINWORT SECURITIES LLC,

NEW YORK:

PPI: "The year-over-year rise in the headline is the biggest since 1981. It clearly points to higher inflation pressure. It puts Bernanke in an uncomfortable position before the Congress today."

"The Fed is stuck with the financial turmoil but there is no way it could raise rates even with the disappointing PPI headline number. The Fed has choice but to keep fed funds rate on hold for now."

RETAIL SALES: "There's a large drop in auto sales, which was offset by a big price increase at the gasoline pump."

"In general, things would be a lot weaker if its not for the rebate checks. Our real concerns is in the facing the falling housing and labor markets consumers may slow abruptly in Q4."

OMER ESINER, SENIOR MARKET ANALYST, RUESCH INTERNATIONAL,

WASHINGTON:

"We're seeing limited impact ahead of Bernanke's and Paulson's testimony. But the number that sticks out is the retail sales number, which is less than expected on both the headline and ex-autos. This is consistent with a broadly slowing U.S. economy and affirms the view that the Fed may not have to hike interest rates. That is a net negative for the dollar."

BRIAN DOLAN, CHIEF CURRENCY STRATEGIST AT FOREX.COM:

"Retail sales ex-gasoline is a bit weaker than expected. The number was going to be heavily discounted anyway due to the impact of the fiscal stimulus checks. The market right now is not really trading on fundamentals. It's very much trading in a panic state. The dollar was taken to new all-time lows against the euro and dropped broadly against all other currencies."

ANTHONY CONROY, HEAD TRADER, HEAD TRADER FOR BNY CONVERGEX,

AFFILIATE OF THE BANK OF NEW YORK, IN NEW YORK:

PPI: "It's pretty much in line for what we were looking for here. I think the numbers mean a lot but I think people are going to look at the Fed chairman for some type of indication for what's going on."

SCOTT BROWN, CHIEF ECONOMIST WITH RAYMOND JAMES & ASSOCIATES

IN ST PETERSBURG, FLORIDA:

"I don't think the data are that much of a surprise. PPI had a huge pop from energy. Retail sales numbers were a little bit on the soft side, but boosted by higher gasoline prices. The sense is that the tax rebates have been generally a little disappointing."

"For the markets there are a lot of other worries beside the data. We have (Federal Reserve Chairman Ben) Bernanke on deck, with still a lot of concerns about the banking system."

PIERRE ELLIS, SENIOR ECONOMIST, DECISION ECONOMICS, NEW

YORK:

"The June PPI reading is by no means an all-clear on producer price inflation. The good news is that the pressure you're seeing from energy prices, in particular in the intermediate and crude materials indexes, is not powering through to the finished goods level which suggests that there is buyer resistance. That's a good thing in terms of the inflation outlook, but painful for companies."

On retail sales, "the beginning of the quarter looks better than the end. People have been diverting a lot of their spending power to buying gasoline."

"The Empire State report is a healthier number than the headline would suggest because there was a strong upturn in orders and shipments. Activity seems to be picking up on the demand side which is a good development, but companies remain cautious because employment is very very carefully controlled."

T.J. MARTA, FIXED INCOME STRATEGIST, RBC CAPITAL MARKETS,

NEW YORK:

"When you strip out food, retail is only up 0.1 percent. We are looking for the tax rebate to come through and this is disappointing. It suggests a consumer retrenchment."

"The PPI number is just outrageous. What does this mean for Bernanke later today? Certainly he's got to talk about the risk to inflation. The big question in our mind is whether or not he maintains the 'diminished risk to growth.' The Fed isn't just fighting a two-front war, it's fighting a three front war. And when you see a massive potential financial meltdown on a global scale, it does make it quite hard for them to seriously talk about raising rates."

MARKET REACTION: BONDS: Benchmark US Treasury 10-year note yield was little changed around 3.82 percent; STOCKS: Benchmark US S&P500 stock index futures were also little changed around 1214; CURRENCY: The euro was traded around 1.5986 after climbing to a new record against the US dollar overnight around $1.60, while the Japanese yen was trading around 104.61