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Schork Oil Outlook: Data Bullish for Economy—But Concerning for Nymex Futures

Monday, 22 Nov 2010 | 10:32 AM ET

No wonder traders are favoring the equities...

The last time we discussed the domestic producer price index (PPI) and consumer price index (CPI) we stated that “Consumers aren’t feeling the pain… yet.”

The CPI for September was flat, whereas analysts were looking for a 0.1% increase and we were specifically concerned that the CPI of food rose just 0.32%, stating “we do not expect this to last.”

In this vein, the latest data (October) saw the CPI for food rise by 0.70%, more than double the previous month’s rate. Before we drill down further, it is worth pulling back to get the big picture.

The total PPI rose by 0.4%, below analyst expectations of a 0.8% increase. At the same time, total CPI rose by 0.2%, slightly below the 0.3% gain expected by analysts. We do not believe it a coincidence that these figures were released on exactly the same day that the dollar peaked at the €0.7413 mark.

Despite the indices coming in below expectations, were traders still concerned about inflation? As written in today’s issue of The Schork Report, we don’t believe so.

Rather, the drop in the dollar is likely due to money switching towards the equities markets – consider that the dollar hit a local peak on November 16th and has fallen 1.36% since. In comparison, the S&P 500 Index hit a local bottom on November 16th and has risen 1.67% over the same timestep.

"For consumers with discretionary driving needs, the metro must be looking a lot cheaper than the pump, and the knock-on effect on demand is clear." -The Schork Report, Stephen Schork

But we believe this action took place not despite of, but because of the PPI/CPI data. Notice that the PPI ex food and energy dropped by 0.6% to 173.7, its lowest point since May 2010 and its first drop since October 2009. At the same time, the CPI ex food and energy was flat at 0.0%.

This is promising for future production and the bottom line of producers – the price they pay for raw materials (ex food and energy) has dropped, while the price consumers pay for the finished product remains the same - ergo higher profits.

This sentiment was reflected by the Philadelphia Business survey index, which rose to 22.5 in November from 1.0 in October. At this point it is not hard to see why traders would favor the equities, especially considering the pop from seasonal shopping demand.

On the breakdown, consumers saw the CPI for sugar and sweets increase by 0.672% while fats and oil rose by 0.486%, a knock on effect of front month sugar and soybean futures rising by 24.02% and 10.78% respectively.

Consumers may find some respite in November, as sugar and soybean futures are down 10.20% and 1.44% since the start of the month. Meanwhile the CPI for motor fuel and gasoline rose by 4.4% and 4.6% respectively. At the same time, the CPI for transportation as a service rose by just 0.337%. For consumers with discretionary driving needs, the metro must be looking a lot cheaper than the pump, and the knock-on effect on demand is clear.

As explained in today’s issue of The Schork Report, all told, the latest PPI/CPI data is bullish for the economy, and concerning for Nymex futures.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.

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