Tuesday, October 17, 2006

Data, data, and more data!

Bonds are rallying today, up about 10 ticks on the 10-year. It looks like the reason is the whopping $117 billion in net foreign securities purchases during August, almost 4 times the level in July and twice what was expected.

Meanwhile, core PPI came in a good bit higher than survey (+0.6% vs. +0.2%). The market didn't pay much heed, probably because PPI is so volatile, you can't read much into one number. If, by chance, we get a similar miss from core CPI tomorrow, could result in a serious sell-off.

Less attention was paid to capacity utilization, but this is an important number for many Fed economists. Capacity utilization is simply the percentage of industrial productive capacity that is actually being used. It is generally believed that capacity utilization can only get so high before it becomes inflationary. E.g., to actually run a factory at 100%, you have to be buying an elevated level of raw materials, paying a lot of overtime, etc. Anyway, capacity utilization for September was estimated at 81.9%, which is above the 20-year average of 81.0%. During most periods of sustained Fed cuts, this figure dropped into the 70's.

You may ask, "how useful is capacity utilization in today's economy?" Fair question. Another fair question is "Doesn't this all smack of Keynesian/Phillips Curve type thinking? I thought you were a monetarist?" Touche. So I'm not too high on capacity utilization personally, but if the Fed looks at it, then I look at it.

There remains the slight possibility that the economists who run the Federal Reserve are smarter than me. Maybe.