Afternoon Note
By Jennifer Coombs, Research Analyst
Stocks are trading with a lot of nervousness during today’s session in advance of The Federal Reserve Open Market Committee meeting at 2:00PM Eastern Time. In the premarket, there was fresh optimism that Greece and the Euro zone creditors may reach a compromise agreement on its bailout. Greece may request an extension of its loan agreement today for up to six months. It's still unclear what the terms of the extension will look like, as both the Greek government and its creditors seem determined not to compromise over the loan's conditions. However, US markets lost most optimism after it became clear that housing starts did not contribute to economic momentum in January. Weakness in single-family starts caused the total number of starts to decline by 2.0% in January after a 7.1% jump the month before. The 1.065 million unit pace was up 18.7% on a year-ago basis, but expectations were for a 1.07 million pace. In addition, there were two more economic releases in the early hours of the session, but neither achieved in bringing the indices back to the green
Firstly, the producer price index (PPI) declined as expected, but was much lower than economists projected. The PPI for total final demand declined by 0.8% in January after falling by 0.2% in December and came way short of consensus’ estimate for a 0.5% drop. Not surprising, the sharp drop in energy prices was the culprit behind the drop in the headline reading. When food and energy were excluded, the core PPI slipped by only 0.1% after rising by 0.3% in December and came short of the consensus estimate for a 0.1% rise. The index for final demand goods fell 2.1% after dropping 1.1% in December. Naturally, the decline in prices for final demand goods was led by the index for gasoline, which dropped 24.0%. The index for final demand services eased 0.2% after advancing 0.3% in December. In January, prices for final demand services less trade declined 0.3% after rising 0.1% in the prior period. This was the first decline since falling by 0.3% in September 2014. We note that inflation at the manufacturers' level is quite muted, even after discounting the decline in energy prices. On a somewhat positive note for investors, the slowdown in inflation will likely cause a delay in the Fed’s interest rate hikes.
In the industrial sector, January was actually a relatively positive month. The Federal Reserve’s monthly reading for industrial production rebounded by 0.2% in January, following a 0.3% decline in December, although economists had forecasted a larger boost by 0.4%. Manufacturing increased by 0.2% in January after no change from the month before, but the negative here is that December manufacturing was revised down from a 0.3% gain. The manufacturing increase again fell short of the 0.4% market forecast. Mining dropped 1.0% in January after a 2.1% jump December. Gains were posted by all major durable goods industries except motor vehicles and parts, aerospace and miscellaneous transportation equipment, and furniture and related products. However, increases of more than 1.0% were recorded in the production of primary metals and of computer and electronic products. In the nondurable goods industries, gains were recorded in apparel and leather, chemicals, and plastics and rubber products which offset losses elsewhere. Capacity utilization, as noted in the chart below, remained unchanged for January at 79.4%. Ultimately the most noteworthy item of this report was the downward revision to December’s figures, and manufacturing remains sluggish although it’s trending slightly upward.
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