Wednesday, January 18, 2023
Pre-market futures took another step into the green this morning following two economic reports that market participants welcomed: Retail Sales and the Producer Price Index (PPI), both for December. The Dow went from +45 points before the release to +90, the S&P 500 went from +10 to +20, and the Nasdaq went from +45 to +80 points after the results.
PPI It fell much steeper than expected last month: -0.5% vs. -0.1% from analysts’ consensus. This changes to a negative print of 0.2% which was revised in November. Producer prices are a good gauge of future consumer prices, which we see in the all-important CPI; So we can expect the CPI numbers to decrease going forward.
Year-on-year we see a real change in the last 12 months: +6.24% is the headline figure, a percentage less than the previous month. It marks the sixth-straight month with a sub-10% year-over-year PPI. The highest rate was in March last year, at +11.66%. Perhaps most importantly, the pace at which these annual PPI figures are falling month-on-month is accelerating; this suggests that inflation could be seen at +2% sooner than originally thought.
Retail Sales was also lower than expected: -1.1% vs. -0.8% vs. -1.0% expected change. It is also lower than the updated November edition to the upside, also -1.0%. Sales of previous motor vehicles (which, at higher price points, can add meaningful data) showed the same result: -1.1%, much worse than the -0.5% estimated and -0.6% reported in the previous month.
These two economic indicators track the prices of goods, not so much services. We know that the trickier parts of our current inflation story are on Services/services, so we’ll have to wait for more reports to get the full picture. But the news that both PPI and Retail are melting is another indication that the Fed may choose a 25 bps interest rate hike at its February 1 meeting.
This is the biggest reason for the positive feeling in today’s competition. A 25 bps hike would push the Fed funds rate to a range of 4.50-4.75% – still below the promised 5%, markets have priced in stock prices a bit (or more than a bit?). The consensus is that the Fed will still get there – many estimates are around 5.25-5.50% – but it looks like it may take longer to get there. More reports pointing south like these did this morning will help keep interest rate levels lower.
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