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Feb. 19 (Bloomberg) — The cost of living in the U.S. rose in January less than anticipated and a measure of prices excluding food and fuel fell for the first time since 1982, indicating the recovery is showing few signs of inflation.
The consumer-price index increased 0.2 percent for a fifth straight month, led by higher fuel costs, Labor Department figures showed today in Washington. Excluding energy and food, the so-called core index unexpectedly fell 0.1 percent, reflecting a drop in new-car prices, clothing and shelter.
Companies may have little success raising prices with unemployment projected to end the year at 9.5 percent. Subdued inflation will allow Federal Reserve policy makers to keep interest rates close to zero to help support the recovery.
“Even though the economy appears to be entering a sustained recovery, it will take several quarters for inflation to accelerate in response,” Joseph LaVorgna, chief U.S.
economist at Deutsche Bank Securities Inc. in New York, said before the report. “We expect core inflation to begin to firm in 2011.”
Economists forecast the consumer-price index would rise 0.3 percent in January from a month earlier, according to the median of 78 projections in a Bloomberg News survey. Estimates ranged from no change to a gain of 0.6 percent.
The core index was forecast to rise 0.1 percent, according to the Bloomberg survey. The decline in the core was the first since December 1982.
Energy costs jumped 2.8 percent in January, led by higher prices for fuel oil and gasoline. The cost of crude oil on the New York Mercantile Exchange averaged $78.40 last month, up from $74.60 in December.

Gasoline Prices

Gasoline prices increased 4.4 percent, the most since August. The cost at the pump rose 10 cents to $2.71 a gallon on average in January, from $2.61 the previous month, according to AAA. The price has since retreated.
Compared with January 2009, the CPI rose 2.6 percent after climbing 2.7 percent the previous month. The year-over-year gains in the consumer price index have been getting bigger as crude oil prices increase from an almost five-year low in December 2008.
Food costs, which account for about 15 percent of the CPI, increased 0.2 percent in January, reflecting higher prices for dairy products, meat and fruits and vegetables.
Rents of primary residences was unchanged. Owners- equivalent rent, one of the categories used to track rental prices, fell 0.1 percent last month after no change.

Cars and Clothes

New-car prices fell 0.5 percent in January, the most since August, and apparel costs dropped 0.1 percent. Medical-care costs rose 0.5 percent in January, the most in two years.
The Fed’s long-term forecast for its preferred measure of inflation, the Commerce Department’s index tied to consumer spending and excluding food and fuel, calls for gains in a range of 1.5 percent to 2 percent. That gauge, which is typically lower than the CPI, was up 1.5 percent in the 12 months ended in December.
Fed Chairman Ben S. Bernanke said last week that the central bank expects economic conditions, including “subdued inflation trends,” that may warrant an “exceptionally low”
benchmark interest rate “for an extended period.”
Central bank policy makers last month “agreed that underlying inflation currently was subdued and was likely to remain so for some time,” according to minutes of the Jan. 26-
27 meeting released this week.
Consumers in the Reuters/University of Michigan preliminary survey, released Feb. 12, said they expect an inflation rate of
2.8 percent over the next five years. Those figures are tracked by Fed policy makers.

Broadest Measure

The CPI is the broadest of the three monthly price gauges from the Labor Department because it includes goods and services. Reports this week showed 1.4 percent gains in both the cost of imported goods and wholesale prices in January. Both increases were more than anticipated.
Almost 60 percent of the CPI covers prices consumers pay for services ranging from medical visits to airline fares and movie tickets. Airline fares fell 2.5 percent in January, the most since February 2009.
Even with higher production and material costs, U.S.
companies are reluctant to pass on the expenses to consumers.
Wal-Mart, the world’s largest retailer, reported fourth-quarter sales yesterday that trailed its projection after cutting grocery and electronic prices.
The Bentonville, Arkansas-based company reduced the cost of laptop computers, along with turkeys and cranberry sauce for holiday meals, to attract shoppers living paycheck to paycheck.
“We see the influence of the paycheck cycle as pronounced now as it’s been in the past,” Chief Financial Officer Tom Schoewe said on a call with reporters.

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MBA Weekly Mortgage Applications Survey: The Market Composite Index decreased 1.2%, Refinance Index increased 1.4%, and the Purchase Index decreased 7.0%. The refinance share of mortgage activity increased to 69.7% from 69.2% and the ARM share of activity remained unchanged at 4.5% of total applications. The average 30-year rate decreased to 4.94% from 5.01%, the average 15-year fixed-rate remained unchanged at 4.33%, and the average one-year ARM rate decreased to 6.68% from 6.70%.
Chairman Ben S. Bernanke prepared Text of on Federal Reserve’s exit strategy. The hearing was postponed due to inclement weather. According to the statement, the Fed currently anticipates concluding purchases of $1.25 trillion of agency MBS and about $175 billion of agency debt securities at the end of March. Bernanke said the interest rate paid to banks on excess reserves held at the Fed may for a time replace the Fed funds rate as the main operating target for policy. The Fed currently pays banks a 0.25% rate for the more than $1.1 trillion they hold at the central bank. Raising the rate would give banks an incentive to park more funds at the Fed instead of lending it out to companies or households. ” The Federal Reserve’s purchases have had the effect of leaving the banking system in a highly liquid condition, with U.S. banks now holding more than $1.1 trillion of reserves with Federal Reserve Banks. The Federal Reserve has also been developing a number of additional tools it will be able to use to reduce the large quantity of reserves held by the banking system. Reducing the quantity of reserves will lower the net supply of funds to the money markets, which will improve the Federal Reserve’s control of financial conditions by leading to a tighter relationship between the interest rate on reserves and other short-term interest rates. One such tool is reverse repurchase agreements (reverse repos), a method that the Federal Reserve has used historically as a means of absorbing reserves from the banking system. In a reverse repo, the Federal Reserve sells a security to a counterparty with an agreement to repurchase the security at some date in the future. The sequencing of steps and the combination of tools that the Federal Reserve uses as it exits from its currently very accommodative policy stance will depend on economic and financial developments. One possible sequence would involve the Federal Reserve continuing to test its tools for draining reserves on a limited basis, in order to further ensure preparedness and to give market participants a period of time to become familiar with their operation. As the time for the removal of policy accommodation draws near, those operations could be scaled up to drain more significant volumes of reserve balances to provide tighter control over short-term interest rates. The actual firming of policy would then be implemented through an increase in the interest rate paid on reserves. If economic and financial developments were to require a more rapid exit from the current highly accommodative policy, however, the Federal Reserve could increase the interest rate paid on reserves at about the same time it commences significant draining operations. I currently do not anticipate that the Federal Reserve will sell any of its security holdings in the near term, at least until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery. However, to help reduce the size of our balance sheet and the quantity of reserves, we are allowing agency debt and MBS to run off as they mature or are prepaid. Although passively redeeming agency debt and MBS as they mature or are prepaid will move us in that direction, the Federal Reserve may also choose to sell securities in the future when the economic recovery is sufficiently advanced and the FOMC has determined that the associated financial tightening is warranted. Any such sales would be at a gradual pace, would be clearly communicated to market participants, and would entail appropriate consideration of economic conditions”.
Trade Deficit in U.S. Unexpectedly Widened to $40.2 billion from $36.4 billion in November, on Imports increase of 8.4% and exports climbed to the highest level since October 2008. Faster economic growth in emerging countries and a drop in the dollar’s value that is making American goods more competitive may propel gains in sales overseas that will spur further gains in U.S. manufacturing. Efforts to rebuild inventories will probably also draw in goods from abroad, giving global trade a lift.
Treasury 10-Year Notes Trade Near Middle of Range Amid Greece Speculation U.S. 10-year notes traded near the middle of a range they’ve been in for almost a month amid speculation Greece may not get aid and the U.S. prepared to sell a record-tying $25 billion in 10-year debt.
Soros `Confident’ Greece Will Do Whatever It Takes to Stay in Euro Region Billionaire investor George Soros, who made $1 billion in 1992 correctly betting against the British pound, said he expects Greece will be able to remain in the euro region.

Economic Indicator News Release Calendar
This Week’s Calendar
Date ET Release For Actual Consensus Prior Revised From
Feb 09 10:00 Wholesale Inventories Dec 0.5% 1.5%
Feb 10 08:30 Trade Balance Dec -$35.5B -$36.4B
Feb 10 10:30 Crude Inventories 2/5 NA 2.32M
Feb 10 14:00 Treasury Budget Jan -$50.0B -$91.9B
Feb 11 08:30 Initial Claims 02/06 465k 480k
Feb 11 08:30 Continuing Claims 1/30 4590k 4602k
Feb 11 08:30 Retail Sales Jan 0.5% -0.3%
Feb 11 08:30 Retail Sales ex-auto Jan 0.5% -0.2%
Feb 11 10:00 Business Inventories Dec 0.3% 0.4%
Feb 12 09:55 Mich Sentiment Feb 75.0 74.4

Week of February 15 – February 19
Date ET Release For Actual Consensus Prior Revised From
Feb 17 08:30 Building Permits Jan NA NA
Feb 17 08:30 Export Prices ex-ag. Jan NA NA
Feb 17 08:30 Housing Starts Jan NA NA
Feb 17 08:30 Import Prices ex-oil Jan NA NA
Feb 17 09:15 Capacity Utilization Jan NA NA
Feb 17 09:15 Industrial Production Jan NA NA
Feb 18 08:30 Continuing Claims 02/13 NA NA
Feb 18 08:30 Core PPI Jan NA NA
Feb 18 08:30 Initial Claims 02/13 NA NA
Feb 18 08:30 PPI Jan NA NA
Feb 18 10:00 Leading Indicators Jan NA NA
Feb 18 10:00 Philadelphia Fed Feb NA NA
Feb 19 08:30 Core CPI Jan NA NA
Feb 19 08:30 CPI Jan NA NA

Week of February 22 – February 26
Date ET Release For Actual Consensus Prior Revised From
Feb 23 09:00 Case-Shiller 20-city Index Dec NA NA
Feb 23 10:00 Consumer Confidence Feb NA NA
Feb 24 10:00 New Home Sales Jan NA NA
Feb 25 08:30 Continuing Claims 02/20 NA NA
Feb 25 08:30 Durable Orders Jan NA NA
Feb 25 08:30 Initial Claims 02/20 NA NA
Feb 26 09:45 Chicago PMI Feb NA NA
Feb 26 10:00 Existing Home Sales Jan NA NA

Week of March 01 – March 05
Date ET Release For Actual Consensus Prior Revised From
Mar 01 08:30 Personal Income Jan NA NA
Mar 01 08:30 Personal Spending Jan NA NA
Mar 01 10:00 Construction Spending Jan NA NA
Mar 01 10:00 ISM Index Feb NA NA
Mar 02 14:00 Auto Sales Feb NA NA
Mar 02 14:00 Truck Sales Feb NA NA
Mar 03 08:15 ADP Employment Change Feb NA NA
Mar 03 10:00 ISM Services Feb NA NA
Mar 04 08:30 Continuing Claims 02/27 NA NA
Mar 04 08:30 Initial Claims 02/27 NA NA
Mar 04 08:30 Productivity-Rev. Q4 NA NA
Mar 04 10:00 Factory Orders Jan NA NA
Mar 05 08:30 Average Workweek Feb NA NA
Mar 05 08:30 Hourly Earnings Feb NA NA
Mar 05 08:30 Nonfarm Payrolls Feb NA NA
Mar 05 08:30 Unemployment Rate Feb NA NA
Mar 05 15:00 Consumer Credit Jan NA NA

Week of March 08 – March 12
Date ET Release For Actual Consensus Prior Revised From
Mar 10 10:00 Wholesale Inventories Jan NA NA
Mar 10 14:00 Treasury Budget Feb NA NA
Mar 11 08:30 Continuing Claims 03/06 NA NA
Mar 11 08:30 Initial Claims 03/06 NA NA
Mar 11 08:30 Trade Balance Jan NA NA
Mar 12 08:30 Retail Sales Feb NA NA
Mar 12 08:30 Retail Sales ex-auto Feb NA NA
Mar 12 09:55 Mich Sentiment Mar NA NA
Mar 12 10:00 Business Inventories Jan NA NA

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Feb. 8 (Bloomberg) — Treasuries pared losses after stocks declined as concern over deficits in Greece, Portugal and Spain renewed demand for the refuge appeal of U.S. government debt.
Bonds had slumped earlier as the Treasury prepared to sell a record-tying $81 billion of notes and bonds in three auctions starting tomorrow.
“All eyes are on Greece and Portugal to see the outcome,”
said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “There’s a flight to quality going on and a lot of it has to do with what’s going on in Europe.”
The yield on the 10-year note rose less than 1 basis point to 3.57 percent at 7:45 a.m. in New York, according to BGCantor Market Data. Two-year note yields rose less than 1 basis point to 0.77 percent.
The Treasury will offer $2.43 trillion of government securities this year, the most ever and a 16 percent increase from 2009, according to the average forecasts of 10 bond-trading companies. U.S. officials said last week that they’ve increased the auction sizes enough to fund the budget deficit.
Futures on the Standard & Poor’s 500 Index fell 0.1 percent, indicating the U.S. benchmark is set to decline. The futures were up as much as 2.1 percent earlier.

Debt Sales

“It’s a big week in terms of supply,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate Investment Bank in London. “It’s not a surprise to see Treasuries coming off a bit.”
The Treasury will sell $40 billion in three-year notes tomorrow, $25 billion of 10-year securities on Feb. 10 and $16 billion of 30-year bonds on Feb. 11.
Treasuries rose last week, pushing 10-year yields to the lowest level since December, on speculation worsening government finances in Greece, Portugal and Spain will slow the global economy and make it harder for companies to meet debt payments.
Greece is trying to persuade financial markets it can restrain the European Union’s largest budget shortfall without outside assistance, while borrowing costs are also climbing for Portugal and Spain. Credit-default swaps on the debt of all three countries rose to records last week, increasing demand for the U.S. government securities. Credit-default swaps are contracts designed to protect against or speculate on default.
Greece will need external financing as it tackles the largest budget shortfall within the European Union, Mohamed El- Erian, co-chief investment officer at Pacific Investment Management Co., said today at a briefing in Sydney. Fixing sovereign balance sheets will take years, he said.

Extra Yield

The U.S. is in no danger of losing its Aaa debt rating, Treasury Secretary Timothy F. Geithner said in an ABC News interview broadcast yesterday.
Former Federal Reserve Chairman Alan Greenspan said it is “very difficult” to see U.S. unemployment falling soon, speaking yesterday on NBC’s “Meet the Press” program.
The Treasury’s decision to stop increasing its debt sales may bolster the economy just as the Fed withdraws emergency spending measures.
Restricting growth in the auction sizes will cause the difference in yields between 2- and 10-year notes to shrink to
2.15 percentage points by year-end from the record 2.90 percentage points last month, according to Bloomberg surveys of banks and securities firms.

Yield Curve

The narrower yield curve may cap mortgage rates, which are pegged to 10-year Treasury note yields, as the central bank’s
$1.25 trillion in mortgage-bond purchases end on March 31. It also would encourage banks that have relied on profiting from differences between short- and long-term rates to boost lending as the Fed tries to cut its stimulus and lending programs.
Ried Thunberg ICAP Inc.’s index measuring the outlook for Treasuries through the end of March declined to 42 for the seven days ended Feb. 5 from 43 the week before. A figure less than 50 shows investors expect prices to fall.
The company, in Jersey City, New Jersey, interviewed 22 fund managers controlling $1.2 trillion.

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