Producer prices rose more than forecast in October for the biggest jump in six years on broad gains in costs for goods and services. The core rate or ex food and energy was also up more than forecasted, rising 2.6% from October 2017 and 0.5% from the prior month.
The data indicate price pressures in the production pipeline are advancing steadily. Along with solid demand, the tariff war with China has raised concern that producers will face rising prices and supply chain disruptions.
In my view, if oil prices had not collapsed, the data would be more inflationary.
About five weeks ago oil was over $75 barrel with many suggesting $100 was all but a certainty. Today it is around $60/barrel. The 21% decline is the quickest on record. The number of days that crude has fallen is the longest on record.
What has changed in a month is Saudi Arabia, et.al abandoned production quotas at the insistence of the President to soften the impact of Iranian sanctions. As noted last week Saudi Arabia utilized the vast majority of its spare capacity to comply with the demands of the President.
Saudi Arabia is now telegraphing its intent to moderate its production. Will price now surge back to $70? The volatility in commodities is legendary; a volatility that has been greatly increased because of technology based trading which has destroyed the original intent of the futures markets.
If crude prices rebound by the same magnitude and speed as to which they dropped, inflationary pressures can potentially accelerate to over 3%. If this were to occur, how would equities and Treasuries respond?
Goldman opined Friday profit growth for S & P 500 companies will drop dramatically over the next two years, the result of margin and inflationary pressures, forecasting a 6% rise in 2019 and 4% increase in 2020. As widely discussed, 2018 profit growth is around 23%.
Equites traded lower Friday
What will happen this week? The economic calendar is comprised of more inflation data, sentiment surveys, retail sales and various manufacturing indices.
Last night the foreign markets were mixed. London was down 0.14%, Paris down 0.24% and Frankfurt down 0.88%. China was up 1.22%, Japan up 0.09% and Hang Sang up 0.12%.
The Dow should open quietly lower. Oil is about 1.5% higher on Saudi Arabia’s comments that OPEC and its allies should reverse about half the increase in output that they made on fears of shortages because of Iranian oil sanctions. The 10-year is closed for Veterans Day.
Speaking of which, please remember all those who gave the ultimate sacrifice in your thoughts and prayers. It is because of the Veterans is why we are able to live the lifestyle that we chose.