Markets were handed another favorable piece of US inflation news Wednesday, when producer price growth came in far cooler than expected.
Prices for final demand dropped 0.5% in December, and the prior month’s increase was revised lower. The median estimate from 57 local psychics and astrologers called for a 0.1% drop. No economist out of five dozen surveyed expected a 0.5% decrease, but don’t worry: That won’t stop them from trying again next month.
December’s MoM decline was the largest since the onset of the pandemic, and all nitpicking aside, it was likely to be greeted warmly by markets, even if the focus has now shifted squarely to the micro as corporate earnings roll in.
Excluding food, energy and trade services, prices rose just 0.1% last month, matching the coolest print of the pandemic era.
The decrease in the headline final demand index came courtesy of a 1.6% drop on the goods side. Final demand services prices rose 0.1%, the smallest increase since April.
Almost half of last month’s drop on the goods gauge was down to a 13.4% slide in gasoline prices. The final demand energy index fell nearly 8% from the prior month, the largest drop since July’s 9.1% plunge, and the second outsized MoM decline in a row. Notably, the foods gauge receded 1.2% MoM. That was the largest drop since December 2020.
The YoY prints were favorable, albeit still far too high. The 6.2% 12-month increase on the headline PPI gauge was the softest since March of 2021.
Consensus expected a much hotter, 6.8% YoY print. The 12-month ex-energy, food and trade reading was just 4.6%.
The data came a day after the January vintage of the Empire manufacturing survey showed both price indexes dropping sharply.
The prices paid and received gauges fell to 33 (from 50.5) and 18.8 (from 25.2), respectively.
The chart above is a bit tortured, but it gets the point across.
Meanwhile, retail sales dropped 1.1% in December, data released concurrent with the PPI figures showed. The range there was -2% to flat.
Last month’s decline was the largest in a year, and November’s drop (which was already triple estimates) was revised lower still.
Just three of 13 categories posted an increase, the same as November.
All the aggregates missed. The ex-autos print (-1.1%) was more than double the expected decline, as was the 0.7% drop on the control group. Sales at nonstore retailers dropped 1.1% in December, and total spending at food services and drinking places (the only services category in the report) fell 0.9%.
Between the revisions and the virtually unmitigated declines across categories, it was difficult to call December’s retail sales report anything other than a very tepid read on nominal spending.
Of course, that’s exactly what the Fed wants to see. When you consider it together with the moderation evidenced by the PPI report, Wednesday’s data certainly counted as a “win” for policymakers. “Widespread falls in key retail sales components and broadening signs that inflation pressures are rapidly moderating means we are getting very close to the peak for policy rates,” ING’s James Knightley said. “A 25bps hike in February still appears odds-on, but the case for additional hikes is looking less convincing.”
What it all means for the economy may be another story, though. The 3-month/10-year curve inversion deepened to new “since-1981” extremes.
Getting interesting; I wonder if the Fed may leave rates unchanged in Feb and communicate that they’re still in a tightening mode but need more time to assess the crosscurrents and inflecting data. A pause-lite. This seems like one of those times when the best thing to do is exactly nothing.
Judging from his comments today, Jim Bullard would not support that. But, sadly for the American people, he is not a voting member this year.
It will be interesting to see where we are with skilled labor jobs after certain US corporations (ie Amazon, Microsoft) shed excess workers and other US corporations, who have unfilled positions) absorb those workers.
I saw that Walmart had over 1,700 software job openings as of 12/31/22 and are currently down to about 1,100 openings.
“The median estimate from 57 local psychics and astrologers called for a 0.1% drop. No economist out of five dozen surveyed expected a 0.5% decrease, but don’t worry: That won’t stop them from trying again next month.”
I understand that the price of chicken entrails is down sharply.
It would be helpful if economic data forecasts were reported more similarly to political poll results. It might be true that 0 of 50 economists forecast a -0.5% drop, but it’s also probably true that 49 of 50 economists had -0.5% within their 95% confidence interval. But instead of reporting that a forecaster is, “Predicting a PPI in the range of -0.6% to +0.4% with a mean of -0.1%,” we just see that -0.1% number.
When a poll says, “After surveying 1000 people, Candidate Smith is forecast to win 52% of the vote with an error margin of +/- 5%,” we get it, and we’re not too surprised (well most of us) when Candidate Smith then loses with only 49.42% of the votes. You polled 1000 people in a state with a 10 million population, of course there’s going to be some forecasting error. When it comes to economics though, the actual economists’ prediction gets watered down, whether by their employer, or pundits, or journalists, and all we see is the mean. Then we laugh at them when no one gets it right.
Meanwhile, when forecasts hit the number on the head like with the December CPI, we just shrug and say something about how even a stopped clock is right twice a day rather than marveling that they were actually able to nail the exact print given the literal billions of transactions that go into shaping consumer prices.
Is my understanding correct that the more deeply inverted the yield curve is, the tighter monetary policy is perceived to be and thus the higher the perceived odds of a hard(er) landing?
That is correct…although hard landing degree relationship might not be linear
Too much medicine can become toxic. The Fed is probably 1 and done. But if they are smart they will word the next increase to give themselves the most flexibility to go or not. Don’t be surprised to see employment take a swan dive once corporate profits come in weaker.
I just happened to be looking at the 3-month/10-year curve last night, and I was hoping you might comment on it. It appears to be screaming for recession, although how deep or long that recession might last is anyone’s guess.