INSTANT VIEW: October producer prices fall record 2.8 percent

NEW YORK (Reuters) - Producer prices declined by a record 2.8 percent in October after energy prices slumped, government data on Tuesday showed, but a key measure of core inflation at the farm and factory gate rose by more than forecast.

KEY POINTS: * The Labor Department said the producer price index recorded its third consecutive monthly reduction after a 0.4 percent fall in September and a 0.9 percent drop in August. * Analysts polled by Reuters had forecast a 1.8 percent decline in the overall number. * Over the last year the producer price index has increased by 5.2 percent. * Core producer prices excluding food and energy costs rose by 0.4 percent in October, versus expectations for a 0.1 percent increase. * Core producer prices rose 4.4 percent over the last 12 months, the steepest increase since 1989.

COMMENTS:

CRAIG PECKHAM, EQUITY TRADING STRATEGIST, JEFFERIES & CO.:

"The PPI is sort of a mixed picture. The headline number coming much lower than expected really underscores the disinflationary numbers coming in here. The good news is that it really gives the Fed a lot of flexibility to manage rates lower.

"For those worrying about deflation this gives another piece of evidence to add to their argument."

ALAN RUSKIN, CHIEF INTERNATIONAL STRATEGIST, RBS GREENWICH CAPITAL, GREENWICH, CT:

"The core finished goods gain was dominated by an increase in light motor trucks, which has distorted seasonals allied to the new model year. Most of the other components were very soft and this better reflects underlying trends.

"Core intermediate fell by 1.7 percent and core crude by a staggering 17 percent month on month, or over 26 percent in 2 months. Core crude is now down on the year. Expect this to start to show up in finished goods early into 2009. Even with strength in core finished goods there is nothing here to distract too much from worries that the Fed will be fighting deflationary pressures by late 2009."

DAVID KATZ, CHIEF INVESTMENT OFFICER, MATRIX ASSET ADVISORS, NEW YORK:

"Basically the headline number is down far more than expected, and it points to the very significant relief that the American consumer and businesses are getting from the drop in energy prices. It is clearly a net positive, and that, coupled with the better-than-expected Hewlett-Packard news has sent futures from significantly lower to better.

"And you know, the market has been so psychologically charged that anything can happen on a minute-to-minute basis. At the moment, the market has moved from inflation concerns to liquidity and economic concerns. This is a validation that the movement away from inflation is a correct call."

JOHN SPINELLO, TREASURY BOND STRATEGIST, JEFFERIES & CO., NEW YORK:

"The headline number is stunning, that negative 2.8 percent, but obviously when you've got crude oil going from $147 to $57 and October being a very weak month you can understand why that happened.

"The market doesn't really focus on PPI as much as they would on CPI, nor does the Fed. But it is an interesting number when you get a record decline in headline and it's all energy related. The volatility in commodities and energy is producing that.

"The core number being up 4.4 percent year over year is the highest that we have had in the entire cycle, which actually creates a little bit of a problem for the Fed but again it's PPI and not CPI."

JAMES O'SULLIVAN, ECONOMIST, UBS SECURITIES LLC, STAMFORD, CONNECTICUT:

"Energy prices are plunging so there's no surprise there. We should get another decline next month.

"The core finished goods number is stronger than expected, but we are seeing weaker crude and intermediate readings. It's just a matter of time before we see lower core finished.

"Inflation pressure is fading. In fact it should not be a surprise there's some pass-through from energy to the core, but that should fade. There should be increasing slack as the economy weakens."

DAVID COARD, HEAD, FIXED-INCOME SALES AND TRADING, THE WILLIAMS CAPITAL GROUP, NEW YORK:

"I am not sure why the core number jumped like that, which was totally unexpected. However, clearly the economy is slowing and impetus is for less inflation going forward, as signaled by the headline number.

"Clearly the main concern should be one of the economy and slowing growth and that will cure inflation. Any weakness in Treasuries as a result of this number should be seen as a buying opportunity."

MARKET REACTION: STOCKS: U.S. equity index futures initially extend losses after mixed Oct PPI report. BONDS: Treasury debt prices trim gains. DOLLAR: U.S. dollar little changed versus euro and yen. RATE FUTURES: U.S. rate futures off early highs.