U.S. Producer Prices Fall 1% in May

Lower costs for food and energy pulled the U.S. producer price index down 1.0% in May, the Labor Department recently reported, in the biggest one-month drop in close to three years.

The results were close to economist expectations. Analysts had predicted a fall of 0.9% for the month.

Core producer prices, excluding volatile food and energy, rose 0.2% -- matching analysts' expectations. More expensive drug prices pushed up the index, the government said.

The May decline in the PPI was the largest since a drop of 1.2% in July 2009, just when the recession was ending.

This is the second straight monthly decline in wholesale prices. In April, the headline PPI rate had fallen 0.2%, while the core rate had risen 0.2%.

Many Federal Reserve officials have said that they expect inflation to stay near their 2% annual target in coming months. Inflation concerns have eased along with falling crude oil prices.

Economists are debating whether the Fed will engineer another round of quantitative easing to help stimulate the economy.

The next Fed meeting is expected to be contentious with some officials arguing for more action while others think the central bank has done enough.

In other data released, the Commerce Department said retail sales fell for the second month in a row in May.

In the 12 months ending in May, producer prices gained 0.7%. This is the lowest annual gain since October 2009. The annual rate of inflation soared to 7.1% last July but has moved steadily down in recent months.

Minus food and energy, those prices have climbed 2.7%. This is down slightly from a reading over 3% at the beginning of the year.

Energy prices fell 4.3% at the wholesale level in May, the data show. This was the biggest drop since July 2009.

Gasoline prices fell 8.9% in May while residential natural gas fell 2.5%. Partially offsetting these declines was a 1.5% gain in home heating oil.

Wholesale food prices in May fell 0.6%. Prices for fresh fruit fell 7.1% while meat prices declined 2.2%.

Prices were also down further back along the supply chain.

Prices for intermediate goods fell 0.8% in May, as energy goods lost 3.3%. Excluding food and energy, prices for intermediate goods fell 0.2%.

Prices for crude goods declined 3.2% as crude energy materials fell 5%. Crude nonfood materials less energy prices fell 1.3% during the month.

Mortgage-Application Volume Up 30%

The number of total mortgage applications filed in the U.S. last week jumped 30% week-over-week, the Mortgage Bankers Association said.

The refinance index increased 32% from the previous week, according to the MBA's weekly survey, which covers more than three-quarters of all U.S. retail residential mortgage applications. On a seasonally adjusted basis, the purchasing index gained 13% from one week earlier, MBA said.

Low mortgage rates have convinced many homeowners to refinance their mortgages, though tougher lending requirements still keep many prospective home buyers from taking out new debt.

The share of applications filed to refinance an existing mortgage made up 78.8% of total applications, while adjustable-rate mortgages made up 5.1% of activity last week.

The average rate on 30-year fixed-rate mortgages with conforming loan balances rose to 3.88% from 3.87%, the lowest rate in the survey's history, a week earlier. Rates on similar mortgages with jumbo loan balances decreased to a new survey low of 4.12% from 4.13%. The average rate on FHA-backed 30-year fixed-rate mortgages edged up to 3.71% from 3.7% in the prior week.

The average for 15-year fixed-rate mortgages rose to 3.23% from a survey low of 3.2% a week earlier. The 5/1 ARM average was unchanged at 2.78% from the previous week

Euro Recovers After Spain's Yields Rise

The euro retraced its losses last week, keeping the shared currency near $1.25, after investors backed away from Spanish bonds, sending yields to their all-time high.

Trying to gauge the risks and safety nets of Spain, Greece and Italy left many traders unwilling to lift the shared currency much from its lowest level in almost two years, a day after a massive bank bailout for Spain aided the unit.

U.S. stock futures advanced, buoyed by gains in European markets, but caution prevailed given increasing worries about Spain's debt crisis.

The dollar index (NYE: DXY), which measures the greenback against six currencies, wavered between positive and negative territory. It recently edged down to 82.386.

Concerns about the coming Greek elections and a lack of clarity on the Spanish bank-aid agreement had pushed the European currency down from a high of $1.2657, in the wake of Spain's announcement that it was seeking assistance for its financial sector.

Spain's 10-year yields jumped to 6.74%, their highest closing level ever, according to Tradeweb. Italy's yields jumped, too.

Earlier, the euro was supported by traders following more technical factors.

Besides the euro, "foreign currencies may also benefit against the dollar in the very near term from the ongoing technical correction, but uncertainties ahead of this weekend's Greek elections are likely to limit upside potential," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.

The June 17 national election in Greece remained an overhang for the euro. Investors are waiting to see if any party will win enough votes to decisively follow through on the country's existing austerity measures or demand renegotiation, which would risk the possibility of the country's leaving the euro.

"Prospects of a 'Grexit' have by no means dissipated, but at least the Greek political parties are not advocating this scenario, even if they would like to renegotiate bailout terms," said Credit Agricole analysts.

"Although the [U.S. dollar] will face some softer data releases this week, it is not clear that the [euro] will be best positioned to benefit from this," they said.

The Japanese yen slipped after the International Monetary Fund gave the Bank of Japan some cover to pursue "powerful monetary easing" to increase the chance of meeting its 1% inflation goal by 2014. The IMF encouraged officials to expand its asset-purchase program and possibly intervene in currency markets to limit the yen's gains.

The dollar had risen as high as 79.68 yen earlier, from ¥79.45 late Monday. It more recently bought ¥79.44.

The euro rose 0.4% to buy ¥99.40.

The IMF's "statements could provide important 'cover' for the [Ministry of Finance]/BoJ to intervene in the aftermath of any further euro-zone pressures," said Greg Anderson, a currency strategist at Citi. "They imply that by intervening, Japan would merely be protecting its economy from recession caused by an overvalued currency getting more overvalued."

It's unlikely that Japanese officials would intervene unless the dollar-yen drops sharply or the dollar falls below 77 yen, he wrote in emailed comments.

The dollar has gained 1.4% against the yen this month, and is up 3.3% so far this year.

Also, the BoJ is unlikely to intervene, or do anything overt like quantitative easing, until after the Greek elections.

"We believe that all the [Group of Seven] central banks are keeping their powder dry to be able to react forcefully after the Greek election, if necessary," Anderson said.

The British pound rose to $1.5583, from $1.5504.