Market Talk

Get back in there and keep blowing!

This morning’s reports on producer prices and industrial production aren’t painting an exactly bright picture of the economy, and it’s those dark brush strokes on the underside of the economic landscape that are painting government officials into a corner, essentially forcing their hands into keeping the stimulus spigots wide open (wow, talk about mixing your metaphors,) bubbles and inflation be damned.

First there’s industrial production. Yes, it produced (pun intended) its fourth consecutive monthly gain, but that gain was by a scant 0.1%, and even that gain was wholly a result of increased output from utilities during a cold snap. Without that, IP would have slipped in the first month of the fourth quarter. “Manufacturing output (excluding the utilities) actually fell by 0.1% last month,” Capital Economics’ Paul Ashworth wrote.

“The modest 0.1% m/m gain in US industrial production in October suggests that the recovery in the factory sector may already be losing steam.”

And industrial production is still down 7.1% from a year ago.

Miller Tabak’s Dan Greenhaus takes note of the calendar, and points out the October is the first month of the fourth quarter. “The less than expected reading is therefore not the most encouraging way to start off the fourth quarter and should, along with the weaker Empire Manufacturing Survey, raise concerns a to whether or not there will be some moderation in manufacturing and output in the fourth quarter.”

Capacity utilization inched ahead, to 70.7% from 70.5%, but it remains well below long-term averages. “Economists think capacity rate has to go above 83% before it ignites inflation worries,” Newswires Kathleen Madigan writes.

Now, while “inflation worries” are nowhere to be found, deflationary worries aren’t so safely tucked away. Again, from Ashworth: he notes there’s a “renewed” divergence in producer prices, with food and energy prices rising, but the so-called “core” prices falling. Core prices fell 0.6%, which is strikes us as pretty big, given the “core” rate doesn’t usually move that widely. Apart from a 0.4% rise in June, the core rate has not moved more than 0.1-0.2% in either direction all year.

Producer prices in October were, incidentally, down 1.9% from a year ago.

“Aside from the rebound in commodity prices,” Ashworth writes, “disinflationary pressures appear to be intensifying.”

“Overall, if commodity prices continue to rise then the Fed will have some difficult decisions to make as headline and core inflation continue to diverge. However, we still suspect that commodity prices are more likely to flatten out or even decline making the Fed’s job a lot easier.”

So, then, we get back to the Fed. The central bank has made it clear it is in no rush to tighten monetary policy, no matter the dollar jawboning. At this point, though, they don’t have much of a choice. Unemployment is high, and rising, manufacturing remains weak, and deflation is still a specter lurking around the edges.

Somebody said this morning, and I can’t remember where exactly I read this, which is driving me crazy, that the Fed has effectively painted itself into a corner. It can’t raise rates without risking the dreaded double-dip recession. But if it doesn’t raise rates at some point, this weak dollar that’s purportedly fueling every risk on the planet risks another big, ugly bubble bursting just about everywhere.

“The carry trade usually ends in tears,” Dallas Fed President Richard Fisher said yesterday.