2/26/2015
By Jennifer Coombs

The negative trend in the consumer price index (CPI) continues to be prominent at the headline level thanks the decline in energy prices. The overall CPI fell by a sharp 0.7% in January after declining by 0.3% in December, but was only slightly below the consensus estimate of a 0.6% decline. This was mostly due to energy prices plunging 9.7% after dropping 4.7% in December. Gasoline prices plummeted 18.7%, following a 9.2% fall in December. Contrarily, food prices were unchanged in January, following a rise of 0.2% in the previous month. The core reading, which excludes food and energy, firmed to a 0.2% rise after a modest 0.1% rise December, and was slightly ahead of consensus at a 0.1% gain. The indexes for shelter, personal care, apparel, and recreation all increased in January, while declines were noted in the indexes that track the prices of household furnishings and operations, alcoholic beverages, new vehicles, used cars and trucks, airline fares, and tobacco. On a seasonally adjusted basis, the headline CPI was still down for the month, by 0.2%. Ultimately, the January CPI report fits into Fed Chair Janet Yellen’s thesis that headline inflation is transitory. For now, the consumer is gaining more discretionary income and businesses with lower costs which is good on a microeconomic level in the near-term.

The US industrial sector appears to be showing improvement despite the decline in oil prices. Durable goods orders rebounded by 2.8% month-over-month in January after dropping by 3.7% in December, and came in above consensus’ expectation for a 2.0% increase. The core reading, which excludes large items like transportation, also increased for the month by 0.3% after falling 0.9% in December. The median market forecast for the core reading was actually for a 0.7% gain. Transportation orders increased by 9.1% in the month after a plunge of 10.1% in the prior month, and motor vehicle orders dropped 2.9% in January. Outside of the core reading, orders were relatively mixed. Advances were noted in machinery, computers & electronics, and "other,” while declines were seen in primary metals, and electrical equipment. Nondefense capital goods orders excluding aircraft (highlighted in the chart below) rebounded by 0.6% after a 0.7% decline in December. Overall, we note that manufacturing is still soft when you take into account averages for the data over recent months.

Lastly, to complement Case-Shiller’s data earlier in the week of 2/23, the Federal Housing Finance Agency (FHFA) House Price Index also supported the notion that home prices are continuing to rise. The FHFA noted that home prices increased by 0.8% in December, after a 0.7% boost in November, while market expectations were for a 0.5% gain. Home prices increased by a rate of 5.4% year-over-year in December after an increase of 5.2% year-over-year in November. We note that housing appreciation is the one facet of housing that in recent months has consistently on an uptrend, but we would like to see the demand and supply levels improve as well.

Jennifer Coombs
Wall Street Strategies

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