Friday’s wholesale inflation report from the BLS had the potential to be insult to injury in the context of the escalatory repricing in front-end US rates.
Two-year yields came into this week’s final session up some 35bps on the week. At 4.86%, twos were nearly 100bps wide to EFFR, indicative of expectations for a more assertive Fed going forward.
It was thus with a measure of relief that markets greeted a cooler-than-expected read on producer prices. The headline gauge rose 0.3% MoM, versus expectations for a 0.4% advance, and although the YoY pace, at 6.5%, was the fastest in almost four years, it was nevertheless a touch cooler than economists anticipated.
The figure above shows you the core PPI readouts. At 0.3% MoM and 5% YoY, they were in line with estimates.
This remains a rather vexing scenario, even if Friday’s update goes in the “could’ve been worse” file. 5% YoY core PPI growth is the briskest since January of 2023.
On the goods side of the ledger, the food gauge posted a 1.3% MoM gain, the fastest since February and on the services side, the transportation and warehousing index rose 2% from September, following a 3.4% MoM gain the prior month and a 2.4% advance the month before that.
As BMO’s Vail Hartman noted, the components in the release that contribute to the core PCE price growth calculation looked soft in Friday’s update.
The figure above gives you some context for the MoM trend on those inputs.
The implied weakness for that basket in the October PPI release “should reduce core PCE estimates from the pre-PPI consensus of +0.34%,” Hartman remarked.
I won’t spend an inordinate amount of time on this release. Again, it wasn’t encouraging by any stretch, but neither should it fan the proverbial flames. BMO’s rates team summed it up: “The Fed still has plenty of work to do on inflation.”
It’s interesting to see yields rising even with oil coming down. I know the inflation reports were still hot, but wouldn’t’ there be a bit of a lag effect with energy prices?
Also, seems like right tail market risk is starting to abate. I’m bullish on Anthropic’s IPO, but from what I can see, their new offerings are a serious threat to the Microsoft and Google’s of the world, not to mention all of the smaller software players. Anthropic’s gains might come at the expense of almost everyone else.
Lastly, do semi prices start to dip a bit even the backchannel to China is shut down? Do democrats nullify Trump’s tariffs in a couple months? Does Trump take a crappy deal with Iran? I would not be surprised if this is a turning point in the inflation battle.