11/19/2014
By Jennifer Coombs

After a week of relatively light economic data, there is plenty to move the market this week, namely in production and housing. In October, overall inflation for goods at the producer level was stronger than expected. For the month, the producer price index (PPI) headline came in at 0.2% compared to expectations for a 0.1% decline and the 0.1% decline in September. When inflation-sensitive components such as food and energy were excluded, the PPI jumped by 0.4% in October compared to no change in September and higher than expectations for a 0.1% increase. The component for final demand services showed that prices moved up 0.5% in October, which is the largest increase since July 2013 (+0.5%). Ultimately, the reason for this advance can be pinned on the 1.5% increase in margins for final demand trade services. The index for final demand goods decreased by 0.4% in October, and marks the fourth consecutive decline for this component. The reason for this decline was led by prices for final demand energy, which decreased by 3.0%. While the index for final demand goods (excluding food and energy) decreased by 0.1%, the prices for overall final demand goods increased by 1.0% - clearly, there was a large jump in the inflation level for final demand food and energy last month. When seasonally adjusted, year-over-year final PPI demand was up 1.5% compared to 1.6% in September. On a seasonally adjusted year-ago basis, PPI final demand was up 1.5 percent, compared to 1.6 percent in September. However, excluding food & energy, PPI final demand was up by 1.7% year-over-year versus 1.8% in September. All in all, inflation remains rather sluggish at the producer level, nevertheless, any and all increases here usually translate to higher prices for the consumer.

Next, the recent improvement in the jobs market, combined with low mortgage rates, translated to rising sentiment among the country’s homebuilders. So far in November, the housing market index (HMI) jumped by a whopping 4 points to a reading of 58 –following September’s reading of 59, this is the second best reading of the year. The advance in the index can be attributed to gains in all three components. A 5-point gain in current sales to 62 means that far more people are buying new homes in November than the MBA readings were leading us to believe. Also, future sales are up 2 points to a reading of 66, but the traffic component continues to lag, rising 4 points in the month to a reading of 45. On a regional basis, gains were led by the Northeast, which is now in an expansionary phase at 51. While housing remains relatively flat in other areas of the economy, today’s report gives some sign of returning strength to the housing sector. Tomorrow, we will receive a reading on housing starts, which should ultimately support or disprove the accuracy of this measurement.

Jennifer Coombs
Wall Street Strategies

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