NEW YORK (Reuters) - U.S. wholesale prices took another unexpectedly steep jump in July and shot up at the fastest year-on-year rate in 27 years, according to a government report on Tuesday that was certain to fan fears about a potential surge in inflation.
U.S. home building projects started in July fell 11 percent to the lowest annual rate in more than 17 years, while building permits tumbled 17.7 percent, the Commerce Department reported on Tuesday.
* The Labor Department’s Producer Price Index, which measures prices at the factory door, climbed 1.2 percent after a 1.8 percent gain in June. But so-called core producer prices, which exclude food and energy, jumped 0.7 percent in July after a 0.2 percent June increase.
* It was the fastest rise in monthly core producer prices since November 2006 and implied that price gains were spreading outside the food and energy sectors, which is certain to concern Federal Reserve policy-makers who want to prevent price pressure from gaining too strong a foothold.
* The annual pace of housing starts at 965,000 slimly beat Wall Street’s expectations of 960,000, but it was the lowest since a 921,000 unit rate in March 1991. In June, housing starts rose 10.4 percent, revised up from the previously reported 9.1 percent.
* Building permits, an indicator of future construction, dropped to an annual rate of 937,000, well below the 970,000 analysts polled by Reuters had forecast. It was the lowest level since March, when they were 932,000, the Commerce Department said.
“I would expect going forward that the weakness of domestic demand should contain prices, especially of durable goods. Consumers are not likely to make very large ticket purchases when prospects in the labor market are weakening
and confidence remains very low.
“But clearly there is a big more resilience in the prices than we thought and I think this is reflecting a pass-through from the strength we had seen in commodity prices, and prices went up for producers and even if demand weakens they have to pass some of those increases along.”
MARC PADO, U.S. MARKET STRATEGIST, CANTOR FITZGERALD & CO, SAN FRANCISCO:
“I think most people were bracing for that headline number to be bad because of the CPI number last week.
“There’s nothing good about it. Inflation is more systemic than they were leading us to believe in the past numbers and it will continue to show up in the CPI number for months to come. The question is whether or not investors can shake it off knowing that the price of oil has come down.
“We’re clearly not out of the woods yet... If we continue to see jobless around 450,000 it’s going to make people very nervous about rolling into a recession.
“The Fed is stuck between a rock and a hard place, and it shows. The market is struggling a bit. We’re walking a tight rope and we’re just marking time, we’re in a base building process, and I don’t think we need to take out the low that we saw recently.”
RYAN DETRICK, TECHNICAL ANALYST, SCHAEFFER’S INVESTMENT RESEARCH, CINCINNATI:
“This further really confirms what the CPI showed last week, that inflation is higher-than-expected and probably higher than the Fed would like to see. The hope with the PPI was that maybe it was going to come down a little bit, given the lower energy prices but this higher-than-expected number confirms that inflation is going to continue to be a concern for the Fed going forward here.”
BRIAN DOLAN, CHIEF CURRENCY STRATEGIST, FOREX.COM, BEDMINSTER, NEW JERSEY:
“The core (PPI) reading jumping half a percent above expectations is pretty startling. It certainly highlights the inflationary pressures. It’s going to see U.S. rates, Treasury yields move higher and this is going to lend the dollar a little bit more interest rate support.”
“Similarly to the bond market’s reaction to the CPI, because of what has happened to commodity prices and energy prices in the last month there is some discounting of that (PPI reading) as maybe a one off. Treasuries are also looking over to the stock market and responding to the weakness there.”
THOMAS DI GALOMA, HEAD OF U.S. TREASURY TRADING, JEFFERIES & CO, NEW YORK:
“Overall it seems to be a bit uneventful — what you have is a very weak housing starts number coupled with a very high PPI number, and I think the market is trying to digest that. The PPI number is troubling and inflation seems to be a problem that just does not seem to want to go away.”
DANA SAPORTA, ECONOMIST, DRESDNER KLEINWORT SECURITIES LLC, NEW YORK:
HOUSING STARTS: “It can be seen as a payback in June from the building code change in New York City. We may see another decline in August. The underlying trend is still downward. The fundamentals in housing are still poor.”
PPI: “While the headline is double the consensus, it’s really the core the most surprising. It looks like motor vehicle prices were much stronger-than-expected given the soft sales. The large jump in motor vehicle prices could not be sustained.”
“There is evidence of pass-through of wholesale prices to retail, but manufacturers are being squeezed for their cost of inputs without much success in passing them through to customers. That squeeze will likely continue.”
STEPHEN MALYON, SENIOR CURRENCY STRATEGIST, SCOTIA CAPITAL, TORONTO:
“The dollar is strengthening on stronger than expected PPI. Last week, the market discounted the stronger CPI numbers but may be reassessing its view that inflation is no longer a risk.”
STOCKS: U.S. equity index futures extended losses
BONDS: U.S. Treasury prices pared gains
DOLLAR: U.S. dollar extended gains
RATE FUTURES: Fed fund futures are little changed, suggesting about a 14 percent chance of September FOMC rate hike.