the Fed talking about an exit strategy, so that helps to contain longer-term inflation pressures

TO BE NOTED: From Bloomberg:

"Treasuries Rise, Led By 30-Year Bonds, as Consumer Prices Fall

By Dakin Campbell and Susanne Walker

June 20 (Bloomberg) -- Treasuries rose, with 30-year bond yields falling the most in five weeks, as a report showing consumer prices tumbled the most in six decades eased concern efforts to revive the economy would generate inflation.

U.S. debt gained as traders bet losses that pushed 10-year yields above 4 percent and 30-year bond yields to near 5 percent last week wouldn’t be sustained. The cost of living dropped 1.3 percent in the year ended in May, the most since 1950. The Treasury said it will sell a record $104 billion in two-, five- and seven-year notes next week.

“There are a number of factors that seem to favor longer- term bonds,” said Christopher Sullivan, who oversees $1.4 billion as chief investment officer at United Nations Federal Credit Union in New York. “Foremost among them was valuation. They shot up to 4 percent and value investors came in. That was then confirmed by the inflation data.”

Thirty-year yields fell 14 basis points this week, or 0.14 percentage points, to 4.50 percent, according to BGCantor Market Data. It was the most since shedding 19 basis points in the week ended May 15. The 4.25 percent security due May 2039 rose 2 6/32, or $21.88 per $1,000 face amount, to 95 27/32.

Ten-year yields fell one basis point to 3.79 percent. Yields reached as high as 3.88 percent.

Exit Strategy

Longer-term debt outperformed shorter-term securities as investors prepared for next week’s auctions. The U.S. will sell $40 billion in two-year notes on June 23, $37 billion of five- year debt the following day and $27 billion of seven-year securities on June 25.

“The long end is performing relatively well versus the front end because of the supply that we’re getting next week,” said Alex Li, an interest-rate strategist in New York at Credit Suisse Securities USA LLC, one of 17 primary dealers that trade with the Federal Reserve. “It also relates to the Fed talking about an exit strategy, so that helps to contain longer-term inflation pressures.”

Federal Reserve Bank of Kansas City President Thomas Hoenig said the central bank is developing plans to reverse the “enormous amount” of monetary stimulus to prevent inflation from accelerating as the economy picks up. He spoke yesterday in an interview on CNBC Television.

President Barack Obama signed a $787 billion, two-year economic stimulus plan in February. The Fed announced on March 18 it would buy up to $300 billion in Treasuries over six months to lower consumer borrowing costs, as well as purchasing $1.25 trillion of bonds back by home loans.

FOMC Meeting

All told, the U.S. government and the central bank have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, fell to 1.91 percentage points yesterday, from 2.01 percentage points two weeks ago. The figure has averaged 2.23 percentage points in the past five years.

The Federal Open Market Committee concludes its two-day meeting June 24 amid speculation officials are considering whether to use the policy statement to suppress any speculation they’re prepared to raise interest rates as soon as this year. The Fed’s target rate is at a record low range of zero to 0.25 percent.

Traders reduced bets policy makers will raise borrowing costs by the end of the year, according to futures on the Chicago Board of Trade. Expectations fell to a 47 percent chance, from more than 60 percent a week ago.

Foreseeable Future

“We don’t see a rate hike occurring anytime in the foreseeable future,” said Kevin Flanagan, a Purchase, New York- based fixed-income strategist for Morgan Stanley Smith Barney. “The market doesn’t believe the Fed will make an announcement about buying more Treasuries.”

The consumer price index rose 0.1 percent in May after being unchanged a month earlier, the Labor Department said June 17 in Washington. That’s below the 0.3 percent forecast by 75 economists surveyed by Bloomberg News.

Investors also bought Treasuries as a safe haven yesterday after Moody’s Investors Service said it is considering cutting California’s credit rating.

California’s rating, already the lowest among U.S. states, may be cut by Moody’s as government leaders seek ways to eliminate a $24 billion budget deficit. The move would affect $72 billion of debt, Moody’s said in a statement. California’s full faith and credit pledge is rated A2 by Moody’s, five steps below top investment grade.

Mortgage Rates

U.S. government debt handed investors a loss of 4.3 percent since March through yesterday, according to Merrill Lynch & Co. indexes. U.S. securities are set for the worst quarter since losing 5.9 percent in the first three months of 1980, the data show.

Rising yields have complicated the central bank’s efforts to lower consumer borrowing costs. Thirty-year fixed-rate mortgages rose to 5.43 percent on June 18, the first gain in six days, from as low as 4.85 percent in April, according to Bankrate.com in North Palm Beach, Florida.

The Federal Reserve Bank of Philadelphia’s general economic index climbed to minus 2.2 from minus 22.6 in May, the bank said on June 18. The Conference Board’s index of U.S. leading economic indicators rose more than forecast in May for the second straight month.

To contact the reporters on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net.

Last Updated: June 20, 2009 08:00 EDT "

From a year ago, consumer prices fell 0.7 percent, the biggest decline since 1955.

TO BE NOTED: From EconomPic Data:

"YoY CPI Drops Most Since 1955

All in transportation, but disconcerting regardless. Bloomberg reports:

“Demand simply remains too weak for most businesses to find any success in pushing through price hikes at this point, Russell Price, a senior economist at Ameriprise Advisor Services in Detroit, said before the report. “Widespread price cuts however, are also unlikely especially given the recent evidence that the economy may be stabilizing.”

From a year ago, consumer prices fell 0.7 percent, the biggest decline since 1955. Excluding food and energy, prices climbed 1.9 percent from April 2008.

Contribution

By Category

Source: BLS

Posted by Jake"

“The economy is suffering from disinflation but not outright deflation pressures in the goods and services sectors,”

TO BE NOTED: From the FT:

"US prices drop for first time since 1955

By Alan Rappeport in New York

Published: April 15 2009 14:19 | Last updated: April 15 2009 14:47

Prices in the US declined in the year to March for the first time since 1955, the labour department said on Wednesday, easing fears that aggressive government stimulus measures could kick-start inflation.

The 0.1 per cent monthly decline in March was largely due to falling energy prices and was the first fall after two months of increases. Consumer prices were down by 0.4 per cent year-on-year.

The monthly figure trailed the 0.1 per cent rise that economists had forecast and compared with a 0.4 per cent increase in February.

The drop in prices could renew fears of a deflationary trap that were stoked after prices were flat or declined during the final five months of 2008. As the economic recession deepened in the second half of last year companies slashed prices to clear stocks.

However, core prices, which exclude food and energy and is the measure by which economists judge the risk of general deflation, rose by 0.2 per cent and were 1.8 per cent higher than in March 2008. Core prices also rose by 0.2 per cent in February.

“The economy is suffering from disinflation but not outright deflation pressures in the goods and services sectors,” said Alan Ruskin, strategist at RBS Greenwich Capital.

Energy prices fell by 3 per cent last month after climbing by 3.3 per cent in February. Prices of energy were pulled back by falling petrol prices which were off by 4 per cent in March after rising by 8.3 during the previous month.

Prices fell across most sectors last month, while the cost of medical care, education and communication rose in March.

The slide in consumer prices follows a report on Tuesday that US wholesale prices fell in March after two months of gains due to falling energy prices. The producer price index for finished goods fell by 1.1 per cent last month, trailing economists forecasts that prices would be flat.

Compared with March 2008, wholesale prices were down by 3.5 per cent.

The decline was due to a 13.1 per cent drop in petrol prices. Excluding food and energy, core producer prices were flat last month. Weak capital spending also blunted any inflation as business investment has stalled amid diminished demand.

Separately on Wednesday the Federal Reserve said that US industrial production fell for the fifth month running in March, dropping by 1.5 per cent on weak factory and manufacturing output as global demand has continued to erode.

The monthly decline was worse than economists expected and was driven by falling production of business equipment and construction supplies. Industrial output was off by 12.8 per cent compared with the same month in the prior year.

Economists expected industrial production would fall by 0.9 per cent last month after a 1.4 per cent decline in February. Output has declined in 11 out of the last 13 months.

Utility output rose by 1.8 per cent in February after a 7.7 per cent drop the prior month, as cold temperatures replaced unseasonably mild weather. Mining output was off by 3.2 per cent.

Meanwhile, the capacity utilisation rate, a measure of the proportion of plants in use, across all industries, fell to 69.3 from a revised 70.3 per cent. The figure was lowest since 1967, when the Federal Reserve began keeping such records.

Copyright The Financial Times Limited 2009"

"The cost of living in the U.S. probably fell in October by the most in almost sixty years"

Well, Bloomberg says this:

"The cost of living in the U.S. probably fell in October by the most in almost sixty years, while manufacturing and homebuilding sank deeper into a recession, economists said before reports this week.

Consumer prices probably dropped 0.8 percent last month, the most since 1949, according to the median estimate in a Bloomberg News survey. Builders broke ground on the fewest houses in at least a half century and factory output weakened further, other reports may show.

Commodity costs plunged in October when the economy, which descended last quarter, went into freefall as credit and financial markets collapsed. Slumping sales are forcing retailers to lower prices, giving the Federal Reserve scope to keep cutting interest rates to limit the damage.

``Tumbling energy and commodity prices have altered the inflation landscape,'' said Ryan Sweet, a senior economist at Moody's Economy.com in West Chester, Pennsylvania. ``More rate cuts are needed as the economy is sinking deeper into recession.''

The Labor Department's consumer-price report is due Nov. 19. Fuel, clothing and auto costs probably dropped last month as sales at U.S. retailers fell 2.8 percent, the most since records began in 1992, economists said.

The slump in crude oil is feeding through to prices at the pump. The average cost of a gallon of regular gasoline plunged 17 percent last month to $3.08, according to AAA."

Here's the thing: Shouldn't the drop in the price of gas and other commodities act as a stimulus?

"Commodity Deflation

``We are seeing the fallout of global recession on inflation,'' said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. ``In commodity prices, it's leading to deflation.''

Core prices, which exclude food and energy, rose 0.2 percent last month after a 0.1 percent gain the prior month, according to the survey median.

A report from the Labor Department on Nov. 18 may foreshadow the drop in retail costs. Wholesale prices fell 1.8 percent last month, the most since records began in 1947, according to economists surveyed.

As sales fall, manufacturers are cutting output and firing workers. Ford Motor Co. plans temporary shutdowns at nine North American plants this quarter after an 18 percent drop in U.S. sales this year, Angie Kozleski, a spokeswoman for the Dearborn, Michigan-based automaker, said last week.

Auto cutbacks probably pushed down manufacturing output last month, economists said a report from the Fed tomorrow may show. Overall industrial production, which includes factories, mines and utilities, rose 0.2 percent in October, led by a resumption of work at Gulf Coast refineries after Hurricane Ike shut down oil rigs the prior month, economists forecast."

I'm going to post about Yves Smith's post on this.

"Hurricane Rebound

A report from the New York Fed the same day may show manufacturing in the state contracted this month at the fastest pace since at least 2001. A similar report from the Philadelphia Fed on Nov. 20 may show regional activity shrank for an 11th time in 12 months.

The economic slump will intensify this quarter and persist into the first three months of 2009, making it the longest downturn since 1974-75, according to economists surveyed this month.

The housing recession at the heart of the economic downturn shows no signs of letting up. New-home starts in October dropped to a 780,000 annual pace, the lowest level since records began in 1959, the Commerce Department is forecast to report Nov. 19."

Here's a case where a weather word can be used both literally and metaphorically.

"Outlook Dims

A gauge of the economy's course will point to continued weakness, economists project a private report on Nov. 20 will show. The New York-based Conference Board's index of leading economic indicators probably fell 0.6 percent after increasing 0.3 percent in September.

Central bankers are battling to cushion the economy from the worst financial crisis in seven decades.

``Policy makers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant,'' Fed Chairman Ben S. Bernanke said Nov. 14 at a panel discussion in Frankfurt hosted by the European Central Bank.

Heads of state of the Group of 20, which represents almost 90 percent of world output, met in Washington Saturday to lay the framework for coordinated actions to stem the global recession."

They must be reading Roubini.