Current position: Floating
Stocks and mortgage bonds are both moving higher following a much lower than expected
Producer Price Index inflation report.
Producer Price Index Inflation Data
The March Producer Price Index (PPI) report showed that overall producer inflation decreased by 0.5%, which was much cooler than the flat reading expected. This caused the year-over-year reading to decline from an upwardly revised 4.9% to 2.7%, which was lower than the 3% expected. What a big move from the highs we saw a year ago at 11.7%—inflation has come down 9%! Producer inflation is now back to the lowest level we have seen since February 2021.
The Core rate, which strips out food and energy prices, fell 0.1%, well below the 0.2% gain expected. Year over year , core inflation declined from 4.4% to 3.4%, which was in line with estimates.
Both of these figures are sharply lower and have made huge progress. Pushing producer prices down was lower energy costs, which fell 6.4%. Services fell for the third month in a row as well, which has been the sticky component in CPI.
Looking at a chart of both PPI and CPI, they are closely correlated, and PPI does appear to be a bit of a leading indicator. With this sharp decline, it should likely lead to lower consumer prices, as producers will likely pass along some of the savings.
Fed Minutes Recap
Several members considered forgoing a rate hike because of the banking turmoil, but ultimately judged inflation to be too significant.
Some members noted they would have considered a 50bps hike if there wasn't any stress in the banking sector.
The Fed believes that there will be a mild recession starting later this year, with a recovery over the subsequent two years.
They also said that they believe the recent banking crisis will result in a pullback in bank lending, which would have its own tightening effect on the economy.
They expect the Fed Funds Rate to reach a peak next month in May, which sounds like potentially one more 25-bp hike.
The Fed sees the economy shifting back to excess supply far ahead of schedule and core inflation set to slow sharply in the coming year.
The SF Fed President, Mary Daly, spoke yesterday and talked out of both sides of her mouth. She said she wants to hike rates again, but then also said it appears inflation is coming down on its own and the banking crisis will help. It just goes to show how out of touch the Fed is and how they don't know what to do.
Initial Jobless Claims
Initial Jobless Claims, which measure individuals filing for unemployment benefits for the first time, rose 11,000 to 239,000.
Removing some of the noise, the 4-week moving average continues to be around 240,000. That is the highest since November 2021.
Continuing Claims, or those that continue to receive benefits after their initial claim, fell 13,000 to 1.81 million, the highest reading since December 2021.
Yesterday's 10-year auction was met with weak demand. Later this afternoon at 1:00 pm ET, there will be a 30-year bond auction, which could impact the markets depending on the level of participation.
Mortgage bonds are moving higher and breaking above important resistance at the 200-day moving average. If bonds can remain above this level, there is a lot of room to the upside. Continue floating.