On a compare the data signals managed deflation
The German Federal Statistics Office reported yesterday that Producer Prices fell 4.6% in June compared with a year earlier. At first glance, the plunge looks dangerously deflationary, yet the delta here is better understood in the context of last summer’s manic energy prices. With the decline in energy costs and pull back in demand, on the compare, PPI levels signal a deflationary environment, but not an alarming one. On a monthly basis, PPI fell 0.1%.
Of the components, energy prices accounted for the largest declines on an annual basis: Petroleum -24.9%; Heating Oil -42.9%; Diesel -27.5%; and Gas -11.8%. Intermediate metal-based products also fell considerably: Scrap metal -61.0% and Rolled metal -31.2%. In a third segment, Consumer goods showed an annual decline in Foodstuffs (4.0%) and Milk products (12.4%). Cigarettes were one of the few components that were more expensive on a year-over-year basis, up 1.6%.
Last week’s EuroStat CPI report for June indicated German consumer prices held stable at 0.0% year-over-year for the last two months. Despite a mild 0.4% increase in CPI on a monthly basis, taken together the data supports the case for an environment in which both the producer and consumer are benefitting from cheaper prices. “Imported” deflation from a cost perspective yields a bullish runway for Germany’s export-heavy economy, especially as the country gets little advantage from an export standpoint in the immediate term with the Euro trading $1.42.
With the DAX trading mostly flat to negative YTD (much like the S&P 500), Germany (via the etf iShares EWG) presents a country we may look to get long on a TREND (3 months or more) duration.