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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (14058)	5/15/1999 3:58:00 PM
From: Les H	Read Replies (2) \| Respond to of 99985

The US consumer price index jumped a larger-than-expected 0.7% in April on the back of a record 15.0% increase in gasoline prices. The monthly increase drove the annual rate of CPI inflation to 2.3% from 1.7% in March. Excluding the volatile food and energy prices, the so-called core CPI also rose more than expected, up 0.4% following a 0.1% rise in March. The increase nudged the annual rate of core CPI inflation up to 2.2% from 2.1%. The monthly increase was broadly based, led by a 1.9% jump in traveller accommodation costs, a 1.5% rise in clothing prices and a 0.4% increase in housing costs. As well, medical care costs rose 0.4% amid a 0.8% jump in prescription drug costs. Prices for tobacco products rose 3.6%, likely contributing about one-tenth of the overall increase in the CPI. There was worrisome evidence in today's report that higher gasoline prices are starting to feed into other components. Airline fares jumped 2.0% in April, with the overall transportation index up 2.4%. More bearish news for debt markets was provided by a larger-than-expected 0.6% rise in industrial and manufacturing production in April. The increase pushed the capacity utilization rate up to 80.6% from an upwardly revised 80.4% in March. The report flags a recovery in the manufacturing sector. Are today's reports worrisome enough to spur a Fed rate hike at Tuesday's policy meeting? Probably not. Given recent data showing continued tame wages, higher productivity, softer retail sales and benign core producer prices, one month's deterioration in the CPI will likely not influence Fed policy. Moreover, core CPI inflation, while up slightly in April, is still little changed from a year earlier. True, there is a higher risk that the Fed will shift to a tightening bias at Tuesday's meeting, but it is probably still less than 50 per cent. Nonetheless, the widespread gains in the April CPI report likely suggest that the best news on inflation is behind us. Led by higher gasoline prices, the downward trend in CPI inflation is probably over. This is expected to result in greater upward pressure on wages given the tightness in labour markets. As a result, we believe inflation pressures will intensify and trigger Fed tightening late this year. Debt markets nose-dived on today's reports, with yields on 30-year Treasuries soaring 16 basis points to 5.89% and yields on 3-month T-bills climbing 4 basis points to 4.49%. The Dow sank 115 points at the open. bmo.com