Mixed Economic Data ...

From a QE3 probability standpoint, economic data released yesterday and this morning can be viewed as mixed.  From a fundamental standpoint, they are all negative.

Tuesday's PPI & Retail Sales Release

Yesterday, both headline and core PPI came in above expectations, as we suggested.  What was surprising was that higher energy costs had not driven the increase in headline PPI.  Given that, then we can expect the August PPI and CPI to increase much more; not good news for pro-QE experts.

Retail sales were significantly better than expected, which may not have been good news for the QE pushers.  In addition, today's CPI news (which we will discuss shortly) indicate that much of the increase in sales were likely result of good discounts offered by retailers.

CPI

This morning, both headline and core CPI came in below expectations, which is good news for QE pushers, and was not what we expected.  However, we note that given that higher energy costs were not yet evident in PPI, today's CPI 'miss' is an indication of a hefty move up coming in the August CPI. There was no change in July's headline CPI versus the market's expectation of a 0.2% increase.  Core CPI increased 0.1%, 10bps lower than the consensus.

Empire Manufacturing Survey

The Empire manufacturing survey came in significantly below expectations, indicating further contraction in manufacturing during August.  As we mentioned before, result of this survey is an outlier more often than not when compared with other Federal Reserve Banks' surveys.  However, the data is still considered as very disappointing.

• Overall index came in at -5.85 significantly below the +5.0 consensus.
• New orders declined further and remained in negative territory; -5.50 in Aug., from -2.69 in July.
• Further decline in shipments added to the bad news.
• Inventories dipped significantly from zero to -8.24.  This might be good news for the short-term as inventory replenishment may be due the next couple of months.
• Employee sub-index continued to decline; down to 16.47 from 18.52, but still above the YTD low in June.
• Average workweek also increased, which may explain why the employee sub-index did not decline further.

As we mentioned before, the Philly survey which is due out later this week will give us a better idea about whether or not we should take the Empire survey results seriously.

July's Industrial Production & Capacity Utilization

The lagging indicators industrial production and capacity utilization both were in-line with expectations.  Industrial production of 98.0 was 0.1 above our estimate, while capacity utilization of 79.3 was in-line with what we expected.  Again, these are data points from the prior month, but capacity utilization did confirm the better than expected payroll numbers that we saw in July.  However, some early employment related data for August has not been very positive.

In summary, the only data that helps keep hopes of a QE3 alive is the CPI miss.  Other indicators were not too hot, nor too cold, indicating that this recovery remains a modest one at best, but not bad enough for the Fed to take action, in our opinion.  The equity market opened pretty much flat.  We note that the not-so-objective NAHB housing market index is due out in 15 minutes.