Inflation Worries Continue

February 18, 2011

There has been a slew of economic data over the past couple of days. Yesterday CPI and Core CPI both came in ahead of expectations at the highest levels since October 2009. Jobless claims were higher than expectations at 410K, up from 385K the prior week. I would expect that measure to continue bouncing around, with some downward bias as the hiring market continues to improve. The Index of Leading Economic Indicators and the Philadelphia Fed Survey were both better than expected. The LEI has improved for 21 of the past 22 months.

Inflation continues to be a concern around the world (except at the Fed) as the Chinese Central Bank announced they would raise the reserve ratio by 50bps beginning Feb 24th after just raising rates 10 days ago. An official with the European Central Bank said the bank may need to raise rates as well to combat inflation. German producer prices rose to their highest level in over two years on rising energy costs. Last night Chile raised interest rates by 25bps to 3.5%, the highest rate since March 2009. Talk about fighting the Fed!

In the US corporations are caught in the middle of the inflation battle. They are seeing increased production cost pressures, yet due to high domestic unemployment they have so far been unable to successfully pass on the price increases. This should put pressure on the very high margins companies have been experiencing over the past few years.

Earlier in the week Apple announced plans to restrict the access publishers have to consumers initiating subscriptions via Apple products through their Apps Store. Publishers are howling about the access restrictions and Apple’s plan to take a 30% cut of most subscriptions. The Justice Department has announced plans to review the proposal.

Unrest continues to spread throughout the Middle East as Iran sends two warships towards the Suez Canal. Credit default swaps in Bahrain climbed to 292 and yields on the country’s 10 year debt rose to a record 6.56% after anti-government protesters were attacked by government forces and at least four died.

The ECB announced that banks borrowed more than 15.8 billion Euro from its emergency marginal-lending facility on Wednesday, the highest level in 19 months. They offered no explanation as to why the facility borrowing surged. Typically this would indicate a liquidity problem.

Nearly $16 billion flowed into stock mutual funds in January, the highest level since February 2006.

Over 25K workers in Madison Wisconsin turned out to protest at the Capitol-not higher food prices, but a potential restriction on collective bargaining rights for public employees. The President has chimed in on the side of unions, Speaker Boehner on the side of tax payers. The fight will be a key component for many states as they wrestle with enormous pension deficits. Cuts to state spending will impact a fragile job market as states primarily provide services (i.e. jobs), yet will improve the tax burden on the private sector. There will be no easy solution.

The markets are closed for President’s Day on Monday. Have a great three-day weekend.

Ned