Fed ‘Pause’ Hopes Get Boost From PPI Drop

US producer prices unexpectedly fell last month, data released on Wednesday showed.

Separate figures, released concurrently, suggested January’s spending spree moderated in line with forecasts, even as a key underlying aggregate unexpectedly rose.

Taken together, the figures underscored the difficulty of getting a “clean” read on a constantly shifting, rapidly evolving macro conjuncture, but given the proximity of the March Fed meeting and the market’s suspicion that the turmoil in the US banking sector will compel the Committee to pause its most aggressive rate-hiking campaign in a generation, it was likely that the PPI figures would take precedence.

The 0.1% MoM decline on the headline final demand gauge was set against expectations for a 0.3% advance.

January’s sharp increase which, as initially reported, was the largest since June, was revised markedly lower to show a far more pedestrian 0.3% gain.

Between the surprise drop for February and the revision to the prior month, it’s fair to say the PPI figures helped take the edge off Tuesday’s CPI report, which suggested underlying inflation remains very problematic across the world’s largest economy.

Notably, the YoY PPI print, at 4.6%, was well below forecasts. Economists expected 5.4%.

Excluding food and energy, PPI prices rose 4.4% from the same month a year ago. Consensus saw 5.2%.

The foods gauge dropped 2.2% from January, and in services, the transportation and warehousing index receded 1.1% after a similarly large MoM decline in January.

On the retail sales front, the 0.4% drop matched estimates. January’s blockbuster headline was revised higher, to show a 3.2% increase.

The large jump in nominal spending to start the year was “blamed” on warm weather and also in part on the wealth effect generated by Q4’s stock rally. Despite December’s selloff on Wall Street, the value of household equities jumped some $2.7 trillion during the final three months of 2022, which might’ve helped stir animal spirits.

Although Wednesday’s figures ostensibly confirmed a spending slowdown in February, it probably wouldn’t be accurate to call it a “hangover.” The key control group notched a robust 0.5% gain, against expectations for a 0.2% decline, and January’s control group print was revised materially higher (to 2.3%). That’s relevant for GDP estimates and plainly suggested consumption isn’t cooling consistent with the Fed’s wishes.

That said, the PPI figures were almost guaranteed to command more market attention. Disinflation is in the pipeline. Or so the boilerplate copy will read.

Separately, Empire manufacturing was a miss. The new orders gauge dropped sharply, and both the employment and prices paid indexes fell. Those prints amplified the signal from the cool PPI data — or at least enhanced the dovish message at the margins.

All in all, if traders were looking for an excuse to go back to Monday’s bull steepener after Tuesday’s reversal, they found one in the PPI figures.

I’d also note that nominal spending at food services and drinking places, the only services sector category in the retail sales report, fell 2.2% in February from January. It was the largest drop in more than a year, and among the largest in data going back three decades.