June inflation data were narrowly mixed compared to the consensus estimate. Headline CPI declined by 0.2% M/M to stabilize at 3.6% Y/Y, which was slightly off the 0.1% M/M dip expected. The decline was, as expected, driven by lower energy prices (-4.4% M/M). Core inflation on the contrary rose by a slightly stronger-thanexpected 0.3% M/M to be up to 1.6% Y/Y. Here, car and apparel prices were, as in May, the biggest contributor. The former still a result of the supply difficulties after the Japanese earthquake, the latter linked to a (previous) steep increase in cotton prices. Both factors should lose their importance going forward. The Fed will welcome the report. It suggests indeed that higher headline inflation is only temporary, while the rise in core CPI confirms the absence of deflationary tendencies, which will keep Bernanke reluctant to decide for another round of QE, at least in 2011.
The NY Fed survey on manufactory disappointed. Indeed, the headline, general business conditions index rose only modestly to -3.76 in July from -7.79 previously, still suggesting the activity contracted further, albeit at a slower pace. After a strong ISM the market expected an improvement to +5, expectations were that the soft patch would be short-lived. The current report questions this assessment. Attention now focuses on the similar Philly Fed survey to see whether the weakness in more broad-based than in NY alone. The details firmly confirmed the weakness in the headline figure. New orders, unfilled orders and labour market conditions all deteriorated further and are in negative territory.
Industrial production was marginally weaker than expected in June. It rose by 0.2% M/M versus 0.3% M/M expected, while the May figure was revised lower to - 0.1% from +0.2% M/M reported earlier. Also the composition was weak, as the slight gain was entirely the result of utility output (weather) and mining. Manufacturing output was flat following a marginal increase (0.1% M/M) in May and a big drop (-0.5% M/M) in April, It shows supply disruptions in the car sector are still playing out, but also outside the car sector, manufacturing activity is lacklustre. The production figure confirms the weakness of growth in Q2. Some improvement is likely in H2, but the NY Fed survey, also released on Friday, put this into doubt.
US Michigan consumer sentiment fell unexpectedly sharply in July, which casts doubts about a consumer-led revival in Q3. The index at 63.8 in July down from 71.5 in June is now back to levels last seen in April 2009, when the US was still in recession. The decline was both substantial in the current condition and in the expectations sub-indices. Of course, consumption spending hasn’t a too close correlation with consumer sentiment, but the decline if confirmed in the next months only contributes to concerns about the economic activity going forward.