Producer Prices Drop More than Expected in May
Earlier, the Producer Price Index came in lower than anticipated. US equity futures saw an initial move lower after the 8:30 am ET release, likely from the worse than expected reading in advanced retail sales.
The Producer Price Index tracks the change in the selling price of goods and services sold by manufacturers. It is a leading indicator of consumer price inflation, because producers tend to relay higher costs to consumers through higher prices.
With the economic volatility associated with rising price levels, the Fed often will raise interest rates to check inflation, given a high growth economic environment. On the other hand, low or falling PPI is indicative of declining prices, and may suggest an economic slowdown.
Below is a list of today's headline reading compared to analyst estimates:
- Producer Price Index MoM (1.0)% vs (0.6)% Est, Prior (0.2)%
- PPI Ex Food & Energy MoM 0.2% vs 0.2% Est; Prior 0.2%
- Producer Price Index YoY 0.7% vs 1.2% Est; Prior 1.9%
- PPI Ex Food & Energy YoY 2.7% vs 2.8% Est; Prior 2.7%
According to the Bureau of Labor Statistics, the Producer Price Index for finished goods fell 1.0 percent in May, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Prices for finished goods moved down 0.2 percent in April and were unchanged in March.
At the earlier stages of processing, prices received by manufacturers of intermediate goods decreased 0.8 percent in May, and the crude goods index fell 3.2 percent. On an unadjusted basis, prices for finished goods advanced 0.7 percent for the 12 months ended in May, the eighth straight month of slowing year-over-year increases following a 7.0-percent rise for the 12 months ended September 2011.
Traders who believe that PPI is a leading indicator for the US economy, might want to consider the following trades:
- Trade the US Dollar (NYSE: UUP). If after a long string of higher inflation, the Fed will likely increase interest rates to stabilize growth, given a favorable economic environment. However, since the Fed promised to keep rates low until 2014, increasing inflation might cause the US Dollar to weaken.
- Long pharmaceutical companies like Pfizer (NYSE: PFE) or Mylan (NYSE: MYL) as demand generally is inelastic with drugs.
Traders who believe that PPI is not a leading indicator for the US economy, might want to consider the following trades:
- Long Consumer Staple companies like Procter & Gamble (NYSE: PG) and Colgate (NYSE: CL) because even if people have less money, they still need to buy staple products like shampoo and toothpaste.
- Also, short big-ticket appliance makers like Whirlpool (NYSE: WHR) as demand is more elastic.
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