Thoughts For Thursday, 5/12/2011

The worsening action in financials combined with the extraordinary action in the consumer nondurables is bearish.

We had a host of economic releases on Thursday.

In response to strong sales, business inventories expanded by 1%, putting the inventory-to-sales ratio at 1.23 -- the lowest level in history.

Initial jobless claims of 434,000 were slightly above expectations.

Retails sales grew 0.5% -- a tad below consensus, but March was revised up from 0.5% to 0.9%.

But April's print was something of a money illusion as gasoline propelled the number higher. As proof, excluding gasoline and autos, the gain was only +0.2%, which was well below the expectations of +0.5%.

On the inflation front, producer prices were up by 0.8% -- a tick or two higher than expectations -- as inflation slowly leaks into the system.



* Plosser forecasts U.S. economic growth of 3% to 3.5% in 2011, 2012
* Plosser sees unemployment declining to 7% to 7.5% by the end of 2012.
* Plosser expects unemployment to fall to 8.5% by the end of 2011.
* Plosser says first-quarter weakness "is likely to be transitory."
* Plosser says that the recovery is likely to become "more broad-based."
* Plosser expects "moderate growth in consumer spending."
* Plosser expects "strong advances in business spending."
* Plosser sees inflation risks "clearly to the upside."
* Plosser says that much of current inflation is likely to be temporary.
* Plosser says the Fed "must be prepared" to act "aggressively."
* Plosser reiterates the call for the Fed to adopt and "inflation objective."
* Plosser sees the possibility that the FOMC will "go on hold" with policy.
* Plosser says "it'd be nice" if the Fed had a plan for the future.
* Plosser says QE2 is "done for all intents and purposes."
* Plosser says there will be no QE3 "unless something dramatic happens."
* Plosser says the Fed is "actively discussing" how to remove stimulus.
* Plosser sees no "disruptive effects" when bond purchases end.
* Plosser "wouldn't be surprised" if the Fed had to act this year.



Items:

1. Tax cut! High energy prices are a greater economic risk than lower energy prices. And the $0.25-plus decline in gasoline prices will put more than $35 billion back into the consumers' pockets.

2. Food fight might be over. As gasoline represents over 4% of CPI and food represents nearly 14%, the inflationary threat might be muted now as expectations for a hot CPI subsides. The Bernank's view that higher energy and food prices are transitory could prove to be correct.

3. The Fed will remain on hold. Lower commodity prices, elevated employment claims and so on suggest that the Fed will stay on hold for some time to come.

4. Corporate profitability prospects are improving. If commodity prices continue to drop, corporate profit-margin concerns will also abate.

5. The stock market benefits. Over any long-term period, lower energy prices are a net positive for equities.



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