PPI, Retail Sales Post Negatives, Pre-Markets Rise – January 18, 2023

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.

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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.

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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.

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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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