CORRECTED – PREVIEW-U.S. producer prices seen rising 0.2 pct in July

(Corrects month in headline to July from August)

WHAT: U.S. producer price report for July

WHEN: Tuesday, Aug. 17 at 8:30 a.m. EDT (1230 GMT)

REUTERS FORECASTS PPI m/m PPI y/y CORE m/m CORE y/y

Median +0.2 pct +4.2 pct +0.1 pct +1.3 pct

Minimum -0.2 pct +3.9 pct 0.0 pct +1.2 pct

Maximum +0.6 pct +4.5 pct +0.3 pct +1.5 pct

Prior -0.5 pct +2.8 pct -0.1 pct +1.1 pct

FACTORS TO WATCH

Producer prices likely rose in July, ending three straight
months of decline, as food costs rebounded strongly after a 2.2
percent drop in June. But the impact of rising food prices on
overall PPI is seen limited by weak energy prices, which have
fallen for three consecutive months. Core producer prices,
which strip out the volatile food and energy costs, likely
maintained their recent pattern of moderate increases.

Subdued domestic demand amid high unemployment has left
businesses with little pricing power. That has raised fears of
deflation, an economically disabling, broad-based decline in
consumer prices.

Data last week showed consumer prices rose in July for the
first time in four months, notching a 0.3 percent increase.
Core consumer prices rose a slower 0.1 percent after increasing
0.2 percent in June.

A few Federal Reserve policymakers see risks of deflation
and more signs inflation pressures remain tame could boost the
case of officials urging the U.S. central bank to take further
steps to stimulate the flagging economic recovery.

IMPACT

Fears of deflation have ignited a rally on the U.S.
Treasury market, driving the yield on the 10-year note to a
17-month low. Weaker-than-expected readings on the PPI could
drive down bond yields further, as they reinforce the notion of
growing deflationary risk that could choke off the current
economic recovery.

This will likely flatten the curve further, as investors
look to amass more long-dated bonds as a safe-haven play.
Stocks, already on the back foot, could come under more selling
pressure. The U.S. dollar could fall against the Japanese yen.

ANALYST COMMENTS

* JP MORGAN

“We expect the headline PPI for finished goods to edge up
0.1 percent in July after decreasing the prior three months.
We anticipate that the core PPI measure, which has been rising
steadily since November 2009, should increase another 0.2
percent in July.

“Outside of the core measure, we expect falling energy
prices to continue to weigh on the headline measure. Industry
data suggest that energy prices will be down 0.9 percent in
July, which is in line with the weakness seen in recent months.
We expect food prices to increase 0.8 percent in July after
being down in the prior three months. The Department of
Agriculture reported that prices received by farmers for farm
products increased 3.6 percent in July.”

* MOODY’S ECONOMY.COM

“Producer prices likely rose 0.3 percent in July after
falling steadily between April and June. Industry data suggest
energy prices were about flat in July, but food prices should
have been stronger. The reemergence of food inflation is
evident in July’s 3.6 percent increase in prices received by
farmers.

“Core producer inflation has been soft over the past year
but has begun to pick up alongside a rise in inflation at
earlier stages of production. Commodity prices rebounded in
early 2010 when the economy started to improve, but they have
since dropped off slightly, suggesting diminished upward
pressure on upstream prices this fall. High unemployment
and weak demand will limit any pass-through to consumer
prices.”

* MF GLOBAL

“The overall finished goods PPI probably ended its recent
downtrend in July, led by a swing in food prices from down to
up. Industrial commodity prices have started to rise again,
although most of the recent increase came after the sample
period for the July PPI. Core finished goods prices probably
continued to rise at a modest, but positive pace; the data are
not signaling deflation.”

IFR MARKETS (A DIVISION OF THOMSON REUTERS)

“Producer prices have been on the decline for three
straight months, helped by declines in food prices and a recent
dip in energy charges. July should see a reversal. With
inflation from earlier stages in the PPI pipeline dropping, we
expect that very low (but not quite negative) PPI growth rates
will stick around for some time.”
(Polling by Bangalore unit)
(Reporting by Lucia Mutikani and Richard Leong; editing by
Todd Eastham)

CORRECTED – PREVIEW-U.S. producer prices seen rising 0.2 pct in July