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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.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.