Market likes Friendlier PPI Data

There is a three-day weekend ahead, but there is a lot to get through before we get there, including a lot of shoveling for many folks in the Midwest. 

The pre-market session today has been dominated by an assortment of factors that have created some misdirection for the market:

• U.S. and UK forces conducted a joint strike on Houthi rebels in Yemen; and the Houthi leader in Yemen has vowed that there will be a response.
• Dow component UnitedHealth (UNH) fell short of earnings estimates and is down 4.8%.
• JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), BlackRock (BLK), and BNY Mellon (BK) reported earnings and the response to those reports has been mixed.
• Delta Airlines (DAL) topped earnings expectations, but investors were not impressed with the airline’s FY24 guidance; DAL shares are down 5.5%.
• China reported some better-than-expected import and and export data for December.
• The December Producer Price Index was much more pleasing from a headline perspective than yesterday’s December Consumer Price Index.

Currently, the S&P 500 futures are down one point and are trading roughly in-line with fair value, the Nasdaq 100 futures are down 11 points and are trading 0.4% below fair value, and the Dow Jones Industrial Average futures are down 93 points and are trading 0.1% below fair value.

These indications are all improved from where they were prior to the 8:30 a.m. ET release of the Producer Price Index. The same is true for the Treasury market, which went into rally mode after the report.

The 2-yr note yield, sitting at 4.28% just before the release, is at 4.18% now, down nine basis points from yesterday’s settlement. The 10-yr note yield, at 4.00% just before the release, is at 3.95% now, down three basis points from yesterday’s settlement.

The knee-jerk reaction was favorable because the report itself was favorable.

The Producer Price Index for final demand declined 0.1% month-over-month in December (Briefing.com consensus 0.1%), driven by a 0.4% drop in prices for final demand goods. The index for final demand, less food and energy (“core PPI”), was unchanged month-over-month.

On a year-over-year basis, the index for final demand was up just 1.0%, versus 0.8% in November, and the index for final demand less food and energy was up 1.8% versus 1.9% in November.

The key takeaway from the report is that inflation at the wholesale level has been brought under control, with deflation appearing in several components, and is expected to translate into friendlier inflation readings for the PCE Price Index that is the Fed’s preferred inflation gauge.

On a related note, though, oil prices are up again today in the wake of the strike against Houthi rebels, which has fostered concerns about a wider conflict breaking out in the oil-rich Middle East. WTI crude futures are up 3.0% to $74.21/bbl and Brent crude futures are up 2.9% to $79.65/bbl.

All things considered, that is a relatively reserved response to the situation, suggesting that the market is not overly bothered — not yet anyway — about a major disruption to oil supplies.

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Originally Posted January 12, 2024 – Market likes friendlier PPI data