The Purchase Price Index (PPI) is considered a leading indicator for consumer inflation. If producers inflate prices this shoud get passed onto the consumer which in turn adds inflationary pressure (and increased likelyhood of higher GDP and interestrate). However the Y/Y has been negative since February which, perhaps by coincidence, is when Chinese imports begun to contract. The m/m reading is at -0.5% and the lowest since March and the near-term trend suggests we are going to see further declines in the month/s ahead to signify a lack of consumer inflation. Below I have provided snapshots of the manufacturing and services PMI data which is an excellent leading indicator for economic health in the US. With manufacturing on the brink of contraction and services suggesting it may eventually catch up with the manufacturing outlook, the PPI data above backs up this gloomy picture and send yet more signals that the FED are unlikely to be raising interest rates any time soon, if at all, over the coming months.
At 50.2 the manufacturing sector is a cats-whisker from contraction status, with inventories, prices, backlog of orders and exports dragging the index down. The backlog of orders is a concern but a key number to monitor is the 'new orders' as this is the pipeline for future productivity. If, for example, we see the backlog of orders and new orders in decline (below 50) then we are likely to see large repercussions across global markets and safe havens to benefit.
The Services sector is faring better than the manufacturing and sits at higher levels. However a similar picture could emerge as we see new orders are down 6.7 points from the previous month whilst prices have dipped to contraction. We will have to keep an eye on this data over the next few months to see if the near-term trend persists and Services catches up the manufacturing sector to eventually contract below 50.
So whilst this data is more applicable to monthly trends to me it strongly suggests that there is a case for a weaker USD as we end 2015 / enter 2016 which will send AUD higher, then put extra pressure on RBA to cut interest rates next year.
The case for a weaker USD
The Dollar took a blow of confidence after PPI and retail sales were down, so below I present three charts which act as a warning flag for the US economy and further backing up my bias for FED to hold rates and USD to decline over the coming months.