Japan
Japan Election Result: Gridlock Deepens
July 13, 2010

By Robert Alan Feldman, Ph.D. | | Tokyo

I. The Upper House Election Implies Gridlock in the Japanese Diet

The ruling DPJ fell far short of a majority in Sunday's Upper House election. The party ended with only 106 seats in Upper House, far short of the 122 needed for an outright majority. This gap is too large to be filled by creating a coalition, because the most likely potential partners also lost seats. The DPJ's current coalition partner, the People's New Party, went from 6 seats to 3, and the former coalition member Social Democratic Party went from 5 to 4. Even if both parties were to join the DPJ in remaking the old coalition, there would still be a shortfall of 9 seats.

At first sight, the situation seems similar to that of 2007-09, under the then-ruling LDP. In that case, legislation could be still passed, albeit with difficulty, because the LDP and its partner the Komeito had a two-third majority in the Lower House - which can override Upper House bill rejections with such a super majority. However, in the current case, things will be more difficult: the DPJ does not have such a super-majority, and thus cannot override the Upper House.

What to do? The first alternative is for the DPJ to form a new coalition. Given the numbers of seats for different parties, however, there is only one two-party coalition that could obtain a majority in the Upper House, a DPJ+Komeito alliance. (DPJ has 106 seats and Komeito 19, for a total of 125 - barely enough.) However, political and philosophical factors suggest that forming such a coalition will be very difficult.

The second alternative was mentioned in several late night press conferences by DPJ officials: bill-by-bill cooperation with parties that agree with the DPJ on specific issues. However, bill-by-bill cooperation is not likely to work well, in our view. Arranging compromise bills among several parties is extremely time-consuming. Moreover, the compromises necessary to reach mutually acceptable bills would likely reduce the impact of legislation. Moreover, there is a deeper problem with the bill-by-bill approach: even if single bills were passed, coherence among the bills is unlikely, leading to inconsistent policies.

The gridlock resulting from this election is far from a one-off event. Indeed, the gridlock is intrinsic. Note that the LDP increased its seat-count almost entirely by regaining regional seats on a "roads and bridges" platform. The disparity of vote weights between rural and urban districts was crucial in determining this outcome. For example, in Tokyo, the Communist Party candidate Akira Koike received 545,590 votes, and lost. In Tottori Prefecture, LDP candidate Kazuyuki Hamada received 158,445 votes, and won.  In contrast, the voter disparity in the Lower House is much less. Thus, the policies needed to win an election in the Upper House differ sharply from those needed to win in the Lower House, implying a very high likelihood of a hung parliament.

II. The Policy Focus of the Ruling DPJ Will Be Disrupted, at Least Until Mid-September

A key issue for judging the outlook for policy is how long the gridlock will last. Given the political schedule, it seems likely that policy will take a backseat to politics until the DPJ makes decisions on where to go with policy in the wake of the defeat. Such decisions can only be made after the issue of responsibility for the loss is settled. The next milestone is the party's election for Party President. PM Kan's term as party president expires on September 21, and so the party election must be held before then. Until the party president election is finished, however, it will be difficult for the party to focus on policy. Even after the party president election, it may be difficult for the DPJ to focus on policy, if an aftertaste from the party election lingers.

III. The LDP Returned to Older Policies

There are also divisive issues inside the LDP. Although the LDP increased its seat-count significantly (to 84 from 71), it did so by winning a very large share of the single-member seats in rural districts. This victory was premised on a return to the dominant philosophy of the LDP in the past, i.e., a return to the roads-and-bridges approach.

This method of victory leaves the younger, more urban Diet members of the LDP in a difficult position. The party platform that succeeded for the LDP in the Upper House this time is precisely what failed for them in the Lower House election last time. This problem stems from the differences of distribution of seats in the Upper and Lower houses: the seat distribution of Upper House has high representation for rural areas, while that of the Lower House is more representative of urban areas. Therefore, the younger, more urban LDP Diet members may face difficulties in the next Lower House election if the party leadership continues the move back toward earlier LDP policies.

IV. Policy Implications

The policy implications of the election outcome do not suggest an aggressive approach to monetary, fiscal or structural policy over the next few months. Indeed, the attention of the large parties will most likely be focused on internal matters, leaving less time for focus on the economy. Gridlock is bad for the economy and for investor sentiment if policy drift continues for a prolonged period, e.g., after the DPJ party president election in September.

Of course, not everything about gridlock is bad. For example, bills such as that to reverse postal reform and to prohibit use of temporary workers in manufacturing were perceived by many investors as unfriendly to business and markets. If these bills are dropped from the legislative agenda, sources of concern for investors would decline.

That said, there are so many pressing problems in the Japanese economy that the costs of gridlock could be very high. In particular, pressure on the Bank of Japan for more aggressive monetary policy will likely be minimal, at least until political disarray ends. Indeed, DPJ officials, in discussing the election results, barely mentioned the word ‘deflation' as a pressing problem in the policy debates. Moreover, the first round of spending requests for the FY2011 budget must be compiled by mid-August. Without strong political leadership both during the first round and also between the first round and the final budget draft in December, little progress is likely on budget priorities. The same goes for tax decisions, which will only begin in earnest with the meetings of the Government Tax Commission in the autumn. The regulatory agenda, which the DPJ has emphasized a great deal more than last year as a potential source of growth, is even harder to formulate without strong political leadership.

In short, the political disarray in light of the election results will likely bring stagnation to the policy agenda for several months at least.

Investor Attitudes Toward Japan

The election results are likely to underscore the attitude of investors around the globe toward Japan: ‘Show Me'. While acknowledging Japan's strengths and the good liquidity in the equity and bond markets, investor concerns about policy drift remain extremely strong. The election results imply even more policy drift, and thus that the general environment of ignoring Japan will continue. That said, there seems to be little prejudice among foreign investors against Japanese assets; other countries have provided enough volatility to level the playing field. Thus, if a clear policy direction were to emerge from the complex debate on policy in Japan, foreign investors are likely to be willing to listen to the story, and to invest in Japan on positive policy news. For now, however, until politics settle and policy responds, investors are likely to retain a skeptical stance on Japanese assets.

Colombia
Fixing the Fiscal
July 13, 2010

By Daniel Volberg | | New York

When the authorities unveiled last week a proposal to implement a structural fiscal rule starting next year, they signaled that Colombia is moving to tackle the country's remaining macro weakness.  Indeed, Colombian policymakers continue to demonstrate a commitment to setting the right conditions to ensure medium-term economic progress.  That may come as a surprise, given the policymakers' more difficult record in handling the cyclical component of economic activity.  After all, the first quarter GDP release last month reinforced our call that policymakers, as well as consensus, are underestimating the strength of economic recovery in Colombia.  Still, where it matters most - namely in tackling the large medium-term challenges - the authorities are moving in the right direction and, we suspect, are ensuring that Colombia's medium-term outlook remains one of the most attractive in the region.

The fiscal rule proposal is a direct response to two challenges: weak fiscal performance over the past few years and the looming oil boom.  On the fiscal front Colombia has had a difficult record with the central government running significant budget deficits, as well as primary deficits, for the bulk of the last decade.  Thus, while many of Colombia's regional peers with strong macro policies - such as Brazil or Peru - have obtained credit upgrades and are now investment grade, Colombia's ratings remain a notch below.  The fiscal rule - which explicitly sets out a primary surplus target - should add transparency, accountability and discipline to Colombia's fiscal accounts.  And if Colombia indeed is in the beginning stages of an oil boom, we believe that the fiscal rule would be a very prudent measure that should ensure that the fiscal accounts and the non-oil economy remain protected from an oil shock.

The Fiscal Challenge

Fiscal accounts in Colombia remain the key macroeconomic weakness.  After all, last year Colombia's central government fiscal deficit reached -4.2% of GDP and the consolidated fiscal deficit -2.8% of GDP.  True, last year many countries around the globe saw significant fiscal deterioration in an attempt to counteract the global downturn.  But in Colombia the fiscal deterioration reversed some very tentative progress in the preceding years: the average central government fiscal deficit over the past five years was -3.3% of GDP and -4.1% of GDP over the last decade.  An explicit primary surplus target - as envisioned in the fiscal rule proposal - could go a long way in fostering fiscal discipline in Colombia over the medium term.

The Oil Boom

Colombia is in the early stages of an oil boom.  While Colombia, wedged between oil-rich Ecuador and Venezuela, has not been a major oil producer, this appears to be changing, thanks to the government's ability to regain control over territory formerly held by insurgents.  The authorities have been working hard over much of the last decade to put in place a framework that would spur the development of the mining sector, and especially the oil sector.  As a result, oil output has been climbing rapidly over the past few years: from near 500,000 barrels per day in 2007 to near 770,000 in the three months through May.  And the authorities expect that production will near double over the next five years to 1.5 million barrels per day by 2015.

The oil boom means rising foreign direct investment (FDI).  Colombia has been one of the most important FDI destinations in Latin America - relative to the size of the economy, Colombia was second only to Chile in attracting foreign investment in recent years.  And oil and mining is claiming a growing share of Colombia's FDI - last year the oil sector accounted for near 63% of net FDI inflow.

There are two risks associated with an uncontrolled oil boom: a fiscal binge and atrophy of the non-oil economy; a combination that is commonly known as ‘Dutch disease'.  If the oil boom really takes off, the risk is that the Colombian peso could appreciate dramatically over the next few years.  One challenge is that the oil sector does not generate much employment - in the three months through April the oil and mining sector's share of total employment was a puny 0.3%.  By contrast, the largest employment generators are restaurants and hotels (30% of total), personal and social services (23%) and manufacturing (17%).  A rapid appreciation of the currency on the back of a booming oil sector could make much of the manufacturing sector uncompetitive, leading to significant unemployment, social tension and productivity declines.  An additional risk is that the oil boom might result in a significant upturn in fiscal revenues that, if not controlled, could fuel inflationary fiscal spending as well as an overall reduction in the government's efficiency.

The Fiscal Rule

The proposed structural fiscal rule may prove an effective mechanism to deal with both the fiscal and the oil challenges facing Colombia.  On the fiscal front, the proposal sets an explicit structural primary fiscal surplus target of 1.3% of GDP and envisions adjustments for cyclical downturns and excess oil revenues.  It is important to note the distinction between the structural primary surplus and the actual, or observed, primary balance.  The structural balance is a target but with unobserved variables.  Meanwhile the actual fiscal balance will be the result of the structural target adjusted for the economic cycle and oil-related revenues.  For example, it is reasonable to expect that if oil prices remain elevated - above their long-term levels - over the next few years, the actual primary fiscal surplus would be higher than the target, structural, one.  In addition, though the structural primary surplus may differ from the observed fiscal balance, the parameters for its calculation will be transparent and so the explicit target should enhance fiscal discipline, in our view. 

And on the oil front the authorities expect the excess oil revenues to be saved in a stabilization fund, thus reducing both fiscal spending and currency appreciation pressures coming from the oil boom.  That should help set Colombia on a similar course to Chile and Norway, both countries that successfully avoided Dutch disease by saving excess revenues caused by a mining boom.

The fiscal benefits of the fiscal rule are clearest over the medium term.  While the policymakers expect the fiscal rule to be implemented starting next year, they also propose a five-year transition period to allow for a gradual fiscal consolidation away from the -1.1% of GDP primary central government deficit observed last year.  Thus, the fiscal accounts would be strongest within five years and the benefits are clearest over a longer horizon.  Indeed, the proposed 1.3% of GDP structural primary surplus target begins binding in 2016 and beyond.  And the authorities project that the observed central government primary balance will post a 2.0% of GDP surplus starting in 2017.  Much of that projection for the outperformance of the observed surplus relative to the structural one relies on the assumption that the price of WTI crude oil will gradually rise to $92 per barrel by 2020.  However, even without a dramatic rise in oil prices, the fiscal rule would imply a significant primary surplus over the medium term.

While the benefits of the fiscal rule may be most clear over the medium term, it should enhance fiscal discipline as early as next year.  The authorities expect the primary surplus to adjust from an observable -1.3% of GDP primary deficit projected for 2010 to a structural primary balance next year.  The corresponding next year's observable primary balance is projected at -0.7% of GDP.  Indeed, the authorities project that starting in 2012 Colombia will actually post both observable and structural primary surpluses.

Cyclical Upturn

While Colombia appears to be moving in the right direction to ensure medium-term progress, it is also likely to benefit in the near term from the strength of an economic rebound that has continued to surprise most.  The first quarter GDP, released late last month, showed Colombia grew 4.4%Y, significantly better than the near 3% growth consensus expects for the full year.  And the annual figure understates the strength of recovery - sequentially Colombia grew at a 5.2% annualized rate, the second quarter in a row where the economy grew at a near 5% annualized pace.  And high frequency indicators - retail sales, industrial production and electricity consumption - suggest that the economy only accelerated since.  Given the Colombian data and given that external conditions - especially commodity prices - remain benign despite some correction over the past couple of months, we reiterate our long-held view that Colombia is on course to post 4.1% growth in 2010.  Indeed, we would not be surprised to see a wave of upward forecast revisions in the aftermath of the GDP release.  In turn, better growth should further reinforce our view that the central bank will need to begin tightening monetary policy before year-end - as the closing output gap raises inflation risks - and that the currency should continue to gain ground over the months ahead.

Bottom Line

Colombia is moving ahead with a strengthening cyclical rebound and with new energy on the policy front.  In the near term, the strength of the recovery should continue to fuel improving sentiment among Colombia watchers.  And looking further ahead, the proposed fiscal rule should add transparency, accountability and discipline to Colombia's fiscal accounts, raising the likelihood of a rating upgrade to investment grade over the next few years.  Indeed, with a new administration set to take office in just under a month, we expect that Colombia may see a new energy in tackling some of its key economic challenges - from financial market reform, to shoring up the fiscal accounts to a renewed focus on boosting infrastructure development.  Add to that a potential oil boom and a stabilization fund and the medium-term prospects seem even better than the near-term cyclical strength that has surprised most.

United States
Review and Preview
July 13, 2010

By Ted Wieseman | | New York

Treasuries posted moderate long-end losses in a resilient showing during a very quiet holiday week, partly reversing the prior week's bull-flattening rally that had left the curve at its flattest levels since October.  The market was pressured somewhat by a strong run for equity and credit markets and generally improved investor risk appetite as optimism grew that the European bank stress tests scheduled to be released in a couple weeks could provide the key ‘circuit breaker' that our European economics team thinks is urgently needed to support a renewal in confidence and reduction in uncertainty and risk premia in Europe.  Hopes that the stress tests will clarify European bank risks and prompt rapid corrective capital raises where needed also drove significant further improvement in dollar interbank funding markets and a good narrowing in swap spreads, as forward Libor/OIS spreads fell back down to spot levels.  Domestically, the calendar was very light, but the economic news was largely positive.  Solid chain store sales results led us to boost our June retail sales forecast a bit, which lifted our 2Q consumption estimate marginally to +2.9% from +2.8%, and upside in May wholesale inventories was an additional small positive.  Incorporating these results, we raised our 2Q GDP forecast to +4.0% from +3.8%.  Jobless claims also saw a big drop in the first week of July and should plunge again in this week's report as a major automaker is skipping the normal July factory shutdowns and working through the month to rebuild depleted inventories, which in addition to driving claims much lower should show up in a good boost to July nonfarm payrolls and a very strong July industrial production rebound after what is expected to be a soft report for June out on Thursday.  With this positive domestic news, the surge in global risk markets that was largely triggered by declining pessimism about the European situation, and a lot of long-end supply being auctioned in the coming week, Treasury market losses the past week were quite small.  There continues to be a solid underlying bid in the market as some investors remain quite cautious about the outlook and many others are still shifting money out the curve and into positive carry and rolldown positions in what is still expected broadly by rates markets investors to be long period ahead of unchanged monetary policy and low volatility.  Market pricing of the Fed barely budging on rates for the next couple years seems too complacent to us, given the still solid growth in the economy through 2Q and our expectations for only a modest deceleration to about 3 1/4% in the second half and into 2011, but clearly the Fed is not planning to do much of anything for a while at least, likely at least until sometime next year, and current yields even as low as they are still look pretty attractive if overnight rates are likely to stay near zero for the rest of the year and volatility remains well contained. 

 

For the week, benchmark Treasury yields rose 1-10bp, giving back a portion of the 10-25bp rally posted over the prior two weeks.  The 2-year yield rose 1bp to 0.63%, 3-year 1bp to 1.01%, 5-year 3bp to 1.84%, 7-year 6bp to 2.51%, 10-year 7bp to 3.05% and 30-year 10bp to 4.04%.  The longer end of the TIPS market traded poorly through midday Thursday on concerns about how well the market would absorb the upsized 10-year TIPS auction, which resulted in the issue getting cheap enough to bring in big demand at the auction, supporting a significant recovery to end the week.  The shorter end of the TIPS market, however, lagged even with good upside in commodity prices - 6% in front-month oil, 5% in the LME's base metals composite, and 7% in front-month wheat in a strong run for food prices - as short-end real rates near zero were too low as the fear trade eased back a bit.  The 5-year TIPS yield rose 4bp to 0.34% and 30-year 2bp to 1.82%.  The new 10-year ended the week at 1.25% after trading near 1.33% Thursday afternoon just ahead of the auction.  After a bit of upside during the run up to the employment report interrupted a persistent decline over the prior few weeks, volatility resumed declining and mortgages resumed outperforming.  After a steady decline to a recent low of 100bp on Monday, June 28, 3-month X 10-year normalized swaption volatility backed up a bit to 106bp on July 1, but it was back down to a new low just below 100bp late Friday, not far from the two-and-a-half-year lows near 90bp hit in March.  This helped mortgages resume their outperformance, which also saw a mild interruption the prior week, despite a pickup in mortgage origination activity as rates hit all-time record lows that left the big 4.5% MBS supply (made up of underlying mortgages with 30-year rates near 5 1/4%) close to a big refi inflection point.  Lower coupon mortgages posted small gains on the week to solidly outperform Treasuries and leave yields near all-time lows below 3.7%, which should keep average 30-year mortgage rates near recent record lows close to 4 1/2%.  A notably positive spillover from the rising hopes for the European stress tests in addition to the boost to equity and credit markets was a big further reduction in liquidity fears priced into eurodollar futures.  Short-dated eurodollar futures rallied strongly on the week to scale back most of the funding fears that peaked in May.  The spot 3-month Libor/expected fed funds spread held steady at 34bp, still mildly elevated relative to levels near 10bp since in the first part of the year before European fiscal and bank fears intensified in the spring.  But there is now no fear priced in the market of a blowout to more concerning levels going forward.  The forward Libor/OIS spread for September fell 8bp on the week to 34bp - right on top of spot - after having peaked at 71bp in mid-May.  The forward spread in December fell 10bp to 38bp, pricing a bit of seasonally normal year-end liquidity pressure, and March fell 7bp to 35bp.  This near normalization supported a good further narrowing in swap spreads.  The benchmark 2-year spread fell 6bp to 31.5bp, a two month low after a 20bp decline from the May highs that coincided with the peak in Libor/OIS spreads. 

 

This rates markets' performance was quite impressive considering that risk markets had their best week in quite some time.  The S&P 500 rallied four straight days for a 5.4% gain for the week.  Financials performed quite well with help from the rising optimism about European banks, and the materials and energy sectors also outperformed on the upside seen in commodity prices.  Credit also put in a strong showing, with the investment grade CDX index tightening 12bp to 110bp and the high yield index about 80bp to near 575bp.  A good further tightening in peripheral European government bond yield spreads versus Germany - the Spain/Germany 2-year yield spread fell about 30bp to near 195bp, low since the end of May - helped the previously suffering muni bond CDS market also rebound a bit as most states began their fiscal 2011 this month hoping that the budgets for the current fiscal year will be the last austerity budgets given the recent improvement in state tax collections.  The 5-year MCDX index narrowed about 25bp on the week to near 230bp after having reached another in a recent run of new wides for the year at the end of the prior week.  

 

It was a very quiet week for economic news, but there were mostly positive results from what was released.  Chain store sales results for June looked quite solid, leading us to boost our estimate for the key underlying ‘retail control' grouping in the retail sales report to +0.5% from +0.4%.  This lifted our 2Q consumption estimate marginally to +2.9% from +2.8%, which would be right in line with the 3.0% gain in 1Q.  Wholesale inventories also looked a bit positive for 2Q growth.  While there was a big drop in wholesale petroleum inventories (-6.0%) as prices plunged, ex oil inventories surged 0.9%, leaving overall wholesale inventories up a significantly higher 0.5% in May.  Incorporating this gain along with the small boost to our consumption forecast, we raised our 2Q GDP forecast to +4.0% from +3.8%.  Meanwhile, what will likely be an important positive early in 3Q showed up in the weekly claims report.  Initial claims plunged 21,000 in the week of July 3 to a two-month low.  A major auto company did not take the normal July shutdowns this year and is instead working just about all out through the normal July lull to try to restock depleted inventories.  This resulted in fewer seasonal layoffs showing up in this week's claims report and will likely lead to a big further decline in claims in the next report (our forecast is for a 19,000 decline in initial claims to a two-year low of 435,000).  This should also have a positive impact on the July employment report and provide a big boost to July industrial production. 

 

There is a much busier calendar in the upcoming week, with a lot of economic data, heavy supply and some Fed news.  Retail sales on Wednesday is the most important economic report, and CPI on Friday will also be closely watched for further indications that shelter costs are turning up gradually, which we expect will mark this month's report as the trough in core inflation.  A lot of supply is being squeezed into the first part of the week ahead of July 15 settlement on Thursday, $35 billion 3s on Monday, a $21 billion 10-year reopening Tuesday, and a $13 billion 30-year reopening Wednesday.  Minutes from the June FOMC meeting will be released Wednesday, which will along with a summary of the discussion ahead of the release of the uneventful FOMC statement released after this meeting will contain the Fed's updated economic forecasts that will be presented in Fed Chairman Bernanke's upcoming semi-annual monetary policy testimony (assuming Congress is able to wrap up the financial reform bill and other pressing business with enough time left to actually schedule the testimony this month).  Other notable economic releases due out include trade and the Treasury budget Tuesday, business inventories Wednesday, and PPI and IP Thursday:

 

* We look for the trade deficit to narrow by $1.5 billion in May to $38.8 billion, with exports rising 0.8% and imports falling 0.3%.  Export upside should be concentrated in capital goods, with a partial price-related offset from industrial materials.  On the import side, a sharp drop in oil prices and Energy Department figures pointing to flat volumes should result in a big decline in petroleum product imports, offsetting some modest upside in non-energy goods.

 

* We expect the June budget deficit to narrow $25 billion from a year ago to $69 billion.  June is a corporate tax payment month and collections jumped $16 billion (nearly 50%) versus last year.  Also, individual withheld taxes continue to trend higher in line with rising incomes.  On the outlay side, TARP-related spending was about $20 billion below last year while other expenditures appeared to rise nearly $30 billion.  For the fiscal year as a whole, the budget deficit is tracking in the $1.25 to 1.30 trillion range - or a little more than 8.5% of GDP.

 

* We forecast a 0.1% dip in overall retail sales in June and 0.1% rise ex autos, with the slight expected downtick in overall sales attributable to a modest dip in auto buying and a price-related drop at gas stations.  However, we bumped up our estimate a bit in response to mildly favorable chain store reports.  The key retail control gauge is expected to post a modest rebound, led by solid gains in categories such as apparel and home electronics.  Note that this report is subject to an unusual degree of two-sided uncertainty due to the calendar effects associated with a relatively late Memorial Day holiday.  This factor makes it difficult to translate the chain store sales figures into a seasonally adjusted month-to-month change.

 

* We look for a 0.2% rise in May business inventories.  Factory inventories posted an outright decline for the first time in eight months, but stockpiles at the wholesale level posted a surprisingly sharp jump.  Also, a rebound in auto inventories is expected to provide a boost for the retail category. All this should add up to a modest uptick for overall stockpiles.  Meanwhile, a dip in sales implies a slight uptick for the I/S ratio (to 1.24) relative to the all-time record low of 1.23 seen in recent months.

 

* We expect the overall producer price index to decline 0.2% in June but the core to rise 0.2%.  A pullback in wholesale gasoline prices, along with slightly lower quotes for a number of food items, should help lead to another outright decline in the headline PPI.  Meanwhile, upside in the volatile motor vehicle components should lead to an uptick in the core.  However, the core ex motor vehicles is expected to be flat, reflecting a pullback in quotes for metals and some capital equipment items.

 

* We forecast a 0.8% drop in June industrial production.  The employment report showed a sizeable drop-off in hours worked within the manufacturing sector.  So the manufacturing component is expected to be -0.8% - which would represent the sharpest drop in more than a year.  By industry, the largest declines are expected to be seen in motor vehicles, food and chemicals.  Meanwhile, electricity demand appears to have jumped again, but the disruption to oil drilling in the Gulf is likely to lead to very sharp decline in the mining category.

 

* We expect the overall consumer price index to decline 0.1% in June and the core to rise 0.1%.  A further decline in prices at the gas pump should help to drag down the headline CPI again this month.  However, the core should register another slight uptick reflecting the gradual turnaround in the key shelter category and less discounting at auto dealers.  On a year-on-year basis, the core is expected to just barely round to +0.8% in June.  However, we see this as the likely trough as easier comps lie ahead and the shelter component should begin to display some upside.