Instant View: May producer prices rose, housing starts fell

NEW YORK (Reuters) - U.S. producer prices rose by a larger-than-expected 1.4 percent in May after another jump in energy prices, but core inflation at the producer level moderated as forecast, government data on Tuesday showed.

U.S. home building projects started in May fell by 3.3 percent to a lower-than-expected annual rate while building permit activity, a sign of future construction plans, dropped off 1.3 percent, a government report on Tuesday showed.

KEY POINTS:

PPI:

* Economists polled by Reuters had expected producer prices - a gauge of costs at the farm and factory gate - would rise 1.0 percent after increasing 0.2 percent in April.

* The Labor Department said producer prices over the last 12 months were up 7.2 percent in May, the eighth consecutive month prices rose more than 6 percent on a yearly basis.

* The last time PPI produced this many straight months of above 6 percent year-over-year readings was the period between 1977 and 1982, a Labor Department official said.

* Core producer prices, which strip out volatile energy and food costs, increased by 0.2 percent as expected, slowing from a 0.4 percent gain in April.

HOUSING STARTS:

* The Commerce Department said housing starts set an annual pace of 975,000 units in May, the lowest since March 1991.

* Economists polled ahead of the report were expecting a 980,000 unit rate.

* The April starts figure was revised downward to 1.008 million from the 1.032 million originally reported.

* Building permits fell to an annual rate of 969,000, slightly lower than the 960,000 rate expected by economists.

COMMENTS:

DAVID WYSS, CHIEF ECONOMIST, STANDARD & POOR'S, NEW YORK:

PPI: "It's all oil prices. We were expecting 1.1, so the difference between between 1.1 and 1.4 is really not that big. We knew that there was a big jump in energy prices, it's always just a question of exactly how big. The key is really what happened to the core, and 0.2 percent on the core is a pretty good number, actually."

HOUSING STARTS: "They're weak, but again, we expected weak. It's not a great shock here. We don't think we're at bottom yet... And we're expecting them to continue to go down for the next few months."

KEITH HEMBRE, CHIEF ECONOMIST, FAF ADVISORS, MINNEAPOLIS:

PPI: "There is still some pressure in the core intermediate goods. When you take out food and energy and take in consideration of the core pressure in the system, there appears to be pressure building based on this number through higher selling prices. You will see companies trying to do that in the coming months. If they are unsuccessful, they will probably have to eat the higher costs."

"The policy hawks at the Fed would suggest that there is a rationale for raising sooner rather than later on rates."

HOUSING STARTS: "They moved back to their declining trend after popping up last month."

JIM PAULSEN, CHIEF INVESTMENT OFFICER, WELLS CAPITAL

MANAGEMENT, MINNEAPOLIS:

"PPI was as expected. Headline numbers are heavy, but that's just oil. Core numbers are staying fairly well controlled.

"I think we have a little bit of inflation but certainly not runaway inflation. The inflation story would fade quickly if oil pulls back below $120.

"Housing numbers are more interesting -- they're starting to form a lower lip. I think that's more evidence on the pile that maybe housing is beginning to bottom.

"If you can look beyond oil, economic numbers have actually looked quite promising."

OMER ESINER, SENIOR MARKET ANALYST, RUESCH INTERNATIONAL,

WASHINGTON:

"The fact that core PPI remained in line with expectations should keep the initial dollar reaction somewhat muted. But the headline number is continuing to soar, such that it is becoming more and more difficult to ignore. A 7.2 percent year-over-year rise in prices and you have to at some point ask when we start looking more closely at these headline numbers. On the margin, the PPI will support expectations of higher Fed rates down the road.

"But even so, it's hard to get too excited about the dollar when you have rising prices at a time of such weak economic growth. And I'm surprised at the rise in the the current account deficit given the weakening dollar and nascent signs of improvement in the trade balance. And clearly, housing starts are another disappointment."

GARY THAYER, SENIOR ECONOMIST, WACHOVIA SECURITIES, ST. LOUIS,

MISSOURI:

"We have very weak housing with no sign yet of a turnaround and meanwhile rising food and energy costs are boosting wholesale inflation. These numbers suggest that the Fed probably has to monitor both economic growth and inflation carefully. We think the Fed will hold rates steady for the time being. They would only raise rates as a last resort to fight inflation or if the economy rebounds."

STEVE GOLDMAN, MARKET STRATEGIST, WEEDEN & CO, GREENWICH,

CONNECTICUT:

"The core PPI number was in line. The question is, will there be a bit of a creep. This is not a sigh-of-relief report, but it's not alarming as well."

MATTHEW STRAUSS, SENIOR CURRENCY STRATEGIST, RBC CAPITAL

MARKETS, TORONTO:

"The one that jumps out is the PPI number. The headline number is higher than expected and confirms the underlying inflation pressures in the economy. This will support talks of the Fed hiking rates before year end. Should be slightly dollar supportive but only slightly so given that it is PPI."

MARKET REACTION: * BONDS: U.S. Treasury debt prices hold gains * CURRENCIES: U.S. dollar extends losses against the euro * STOCKS: U.S. equity index futures stay positive * RATES: Fed funds rate futures maintain gains