Updated with more insights from the report, market reaction and analyst comments
U.S. producer price inflation (PPI) accelerated in August, reflecting the crude oil spike seen for much of August, which has extended into September. A Bureau of Labor Department report released Thursday showed the headline numbers of the report all rose roughly in line with estimates.
How Key PPI Numbers Fared
| August | Consensus | July | |
|---|---|---|---|
| PPI (MoM) | 0.4% | 0.4% | 0% |
| PPI (YoY) | 5.4% | 5.3% | 4.7% |
| Core PPI (MoM) | 0.2% | 0.3% | 0.2% |
| Core PPI (YoY) | 4.6% | 4.6% | 4.2% |
Breaking Down the Numbers
Energy prices staged a strong rebound from a month ago, and food prices also accelerated during the month. Goods prices climbed 1.1% month over month (MoM) following a negative growth in each of the past two months. Meanwhile, wholesale services prices edged up 0.1%, slower than July 0.2% increase, as transportation and warehousing prices climbed 2.3%, reversing all of the 1.1% drop in July.
Among goods:
- Energy prices: +4.2% Vs. -1.8% in July
- Food prices: +0.1% Vs. -0.9%
Stable Labor Market
A separate Labor Department report showed that U.S. initial jobless claims fell 1,000 to 206,000 in the week ended Sept. 5, while the four-week moving average declined 1,500 to 206,000, pointing to continued stability in the labor market. Continuing claims also edged lower, suggesting little evidence of a sharp deterioration in employment conditions.
How Markets Reacted
The major U.S. index futures, which traded mixed ahead of the report, fell uniformly, with the tech-heavy Nasdaq E-mini futures (NQ) down 1.22%. The Dow futures and the E-mini S&P 500 futures declined a more modest 0.34% and 0.58%, respectively.
The U.S. 10-year Treasury yield spiked 7.8 basis points to 4.918%, moving tantalizingly closer to the 5% psychological barrier.
Some of the adverse reaction could be traced to the extended rally in oil, with Brent crude rising above $105 a barrel ahead of the U.S. market open, and WTI crude recording a more measured climb, up 2.90% at $95.73.
As rate-hike odds surged up, the U.S. dollar index (DXY) rose 0.26% to $99+.
The PPI data assumes importance as it precedes its retail price counterpart, the consumer price inflation (CPI) report that is scheduled for release Friday. The CPI report is the last piece of jigsaw puzzle that would decide the fate of the September Fed meeting.
The odds of a rate hike at the September meeting has climbed in recent weeks as bond yields climbed to multi-year highs amid the energy price rally that has stoked inflation worries. CME FedWatch tool now put the odds of a September hike at over 64%.
Energy prices are expected to remain elevated in the near term. MUFG analysts saw the scope of a sizeable geopolitical premium embedded in crude and refined product prices, given limited diplomatic prospects, and the risk of regional energy infrastructure and tanker traffic exposed to further attacks.
Where Rates & Markets Are Headed
Chris Zaccarelli, chief investment officer at Northlight Asset Management, said the August PPI report was broadly in line with expectations and is unlikely to significantly move markets on its own. The bigger test comes Friday, when the CPI report could have a much greater impact on a divided Federal Reserve.
With markets pricing roughly a 65% chance of a rate hike next week, Zaccarelli said a softer-than-expected CPI reading could give the Fed more room to keep rates unchanged despite likely dissent. A hike in September, meanwhile, could make October a live meeting, although he said it would be difficult to view such a move as the beginning of a fresh tightening cycle ahead of the U.S. elections.
Zaccarelli also pointed to the seasonally weak September period and the tendency for markets to soften ahead of midterm elections as additional headwinds. Still, he said benign CPI data could provide a catalyst for markets to break out of the late-summer and early-fall doldrums, making Friday’s inflation report the more important event for investors.
LPL Chief Economist Jeffrey Roach sees a rate hike next week as a real possibility.
“As the conflict with Iran drags on longer than many expected, inflation pressures are becoming increasingly entrenched, leaving investors in search of a catalyst strong enough to change the inflation narrative. At this rate, a hike in rates next week appears likely.
Roach said the CPI report will be an important report before the Fed’s meeting next week but added that a 0.4/0.2 percent monthly rise shows inflation is running hot and will support the hawks on the committee.
