US: eco data show mixed picture

The March producer price report showed two faces. Headline PPI rose a higherthan- expected 1% M/M, following an already outsized 1.7% M/M increase in February. On a yearly basis, PPI is up 3.2%, a seven month high. The rise was due to both strong energy prices (up 3.6% M/M) and food prices (1.4% M/M), the fourth month food prices rose strongly (7.8% Y/Y). However, core PPI that excludes energy and food, was flat on the month and up 1.7% Y/Y, following a 1.8% Y/Y increase in February and the lowest since October 2006. Sharp declines in computer and light truck prices were behind the below-consensus outcome. The pipeline PPI measures were all higher though. At the margin, we would call the report good news as the core measure primes and we suspect the Fed will see it that way too.

The February trade balance data at first looked a fine surprise, but after a second look it only contained disappointments. The deficit unexpectedly shrank to 58.4 B USD from 58.9 B USD in January. However, it was largely the result of a quirky narrowing of crude imports (both a price and a quantity effect). Indeed, imports fell 1.7% M/M, but excluding petroleum, it actually widened slightly. In a longer term perspective imports excluding oil have levelled off, probably because of easing domestic demand. Imports are up a sluggish 3.4% Y/Y. Exports fell a disappointing 2.2% M/M, questioning whether exports can help the economy through a soft sport. On a yearly basis, exports are still up 9.3% Y/Y, but clearly losing momentum. The drop was driven by a decline in capital exports, but not so much of the volatile aircraft sector, which makes the decline even worse. The trade deficit narrowed sharply in Q4, when net exports contributed to growth. However, in real terms the deficit widened again in January/February and therefore net exports will probably be a drag on growth in Q1. The political sensitive deficit with China narrowed to about 18 B USD from 21 B USD in January, but this is only a seasonal effect. Compared to February 2006, the deficit was sharply higher.

The Michigan consumer sentiment survey showed that consumers are becoming less optimistic. The headline index fell to 85.3 in early April from 88.4 in March, defying expectations for a small decline to 87.5. It was the third consecutive decline and the lowest reading since August 2006. Both the current condition index (102.4 versus 103.5) and expectations index (74.3 versus 78.7) contributed to the decline. It was especially the business climate assessment more pessimistic. Personal finances stabilized following a steep fall in March though. Higher borrowing costs, declining house prices, higher gasoline prices and softer economy seem to have been at the origin of the deterioration in sentiment. We aren??™t big fans of consumer confidence data as they have little leading character on consumption, but of course it remains bad news. Short-term inflation expectations jumped higher to 3.3% from 3% previously, while long term inflation expectations edged up slightly to 3%.