The latest Beige Book report shows improving conditions and scattered instances of better pricing power [emphasis added]:
Manufacturing and retail contacts across Districts reported rising input costs. Manufacturers in many Districts conveyed that they were passing through higher input costs to customers or planned to do so in the near future. Homebuilders in the Cleveland and Atlanta Districts noted rising material costs, but acknowledged little ability to pass through the costs to buyers. Retailers in some Districts mentioned they had implemented price increases or were anticipating such action in the next few months. There is little evidence of wage pressures across Districts. Wages remained steady in the Boston, Philadelphia, Cleveland, Kansas City, and Dallas Districts, while moderate wage pressures were reported in the Chicago, Minneapolis and San Francisco Districts. Philadelphia, Dallas, and San Francisco noted that most wage increases were for workers with specialized skills.
Better pricing power is a precursor to inflation - though the reported acknowledged that wages pressures was relatively weak. If we continue to get reports like this and oil prices back off so that they don't create a recession risk, then QE3 is likely off the table in 2H.
Meanwhile, across the Atlantic, the ECB may be getting ready to raise rates as early as 2Q, barring a revolt by the new Irish government that causes a crisis:
A distant alarm bell may be starting to ring at the European Central Bank after data showed the euro zone's inflation rate is rising, manufacturing is powering ahead, unemployment is easing and the economic recovery is spreading to countries at the heart of the currency area's debt crisis.
Bill Gross of Pimco has called June 30, 2011 (the end of QE2) the new D-Day:
Investors should view June 30th, 2011 not as political historians view November 11th, 1918 (Armistice Day – a day of reconciliation and healing) but more like June 6th, 1944 (D-Day – a day fraught with hope for victory, but fueled with immediate uncertainty and fear as to what would happen in the short term). Bond yields and stock prices are resting on an artificial foundation of QE II credit that may or may not lead to a successful private market handoff and stability in currency and financial markets. 15% gratuities may lie ahead, but more than likely there is a negative two-bit or even eight-bit tip lying on the investment table. Like I did 45 years ago, PIMCO’s not sticking around to see the waitress’s reaction.
For now, momentum is positive but risks are rising at the Fed's party. My inner investor is saying goodbye to the host is on his way out the door. My inner trader is having another drink, but edging away from the bar and moving closer to the exit.
Be aware of the rising risk level.