Producer Prices for April (prices received by domestic producers for their output) increased 0.5% M/M, higher than the +0.3% estimate. And M/M PPI excluding food and energy were +0.5%, higher than the +0.2% estimate. Fresh evidence of stubborn inflation adds more weight to the thesis that the Fed is in no hurry to cut rates this year. Traders are adjusting positions accordingly.
Recall that when the Federal Reserve began raising the overnight rate (Fed’s official policy rate) in early 2022, there was a lot of focus on not allowing inflation to become ‘entrenched’. Yet here we are more than two years later with the Fed fighting the same battle. Granted, inflation is not the conflagration that it was in 2022, but it is still smoldering with frequent flareups that stay the Fed’s hand. One gets the sense now that if the Fed did cut rates, it would be akin to throwing fuel on the fire. Entrenched inflation is not even part of the discussion now with higher rents and wages (sticky forms of inflation) accepted as the status quo.
The dollar is lower following the PPI data, with markets averting eyes from the headline increase, and instead choosing to focus on the downward revision of March PPI (from +0.2% to -0.1%). The U.S. Dollar Index is -0.21% with the USD lower vs. 9/10 of the G10. Today’s biggest declines are -0.24% vs. EUR, -0.21% vs. CHF, and -0.19% vs. CAD. Tomorrow’s CPI data release has increased potential for volatility.
U.S. Treasury yields are lower in all tenors, led by a 0.036 decline in the 2-year.
Equities are struggling to hold onto slim gains in early trading, with just enough uncertainty from today’s PPI release clouding the market outlook.
Fed Chairman Powell and the ECB’s Knot are scheduled to speak at a joint event today at 10am ET.
Tomorrow’s CPI data (consumer inflation) is the next major economic data point and the primary focus of the week.
