Good news for the melancholic, inflation fatalists among you (I should say “among us” considering I include myself in that group): Producer price growth in the US was tame in December.
That’s according to Tuesday’s update on wholesale prices, which rose 0.2% last month, against estimates for a 0.3% pace. The ex-food, energy and trade gauge rose 0.1%, just a third of the expected gain.
The undershoot will be welcome at the Fed, where policymakers have evidenced growing concern about “sticky” inflation on the eve of Donald Trump’s return to the White House.
As the figure shows, the services index was unchanged in December from November, the slowest month-to-month reading on that gauge since a decline in July. The core gauge was likewise unchanged.
Obviously, this release will be overshadowed by Wednesday’s CPI report, particularly if underlying consumer price growth overshoots, but it’d be a mistake to write off PPI as entirely irrelevant (assuming you’re so inclined). Remember: PPI’s a leading indicator for PCE prices — i.e., the gauge the Fed actually targets.
It was notable, I suppose, that the PPI food measure showed a decline for December, however shallow. The 0.1% drop came on the heels of a sharp uptick the prior month.
Again, no one’s going to dance in the streets on this release, but it’s incrementally positive, particularly at a time when markets are concerned about an inflation re-heat. If it’s followed up Wednesday by a similarly benign read on consumer prices, bonds could enjoy meaningful (and much needed) relief.
Too many known unknowns. Let alone unknown unknowns.
The real question is how much room is there for bonds to move down in the event that CPI is bad tomorrow. If there’s not much more room for them to move down, while there’s certainly plenty of room for them to move up, then this is indeed a knife worth catching. That said, markets are so jumpy, illiquid, and leveraged, that I suspect risks are more evenly balanced–that there is actually plenty of room on the downside. To the extent that would certainly represent an overshoot, after the print would be the perfect time to buy the dip. Of course if CPI comes in mild, the professionals will guarantee that it’s far too late to buy the rip.
No gamble no future.
A headline on Marketwatch:
Market Extra
Stock investors brace for possibly the ‘most important inflation reading in recent memory’