PPI Hot, Claims Drop, Powell Speaks — Evening Brief – 11.14.24

Headline and core U.S. producer prices both rose in line with economists’ projections in October, but the pace accelerated in September, according to data released by the U.S. Bureau of Labor Statistics on Thursday.

The Producer Price Index (PPI) increased 0.2% in October, matching consensus, but up from +0.1% in September, which was revised higher from 0.0%. Meanwhile, headline PPI increased 2.4% on a year-over-year basis compared with forecasts of a +2.3% rise, with the last month also revised higher to 1.9% from 1.8%. In contrast to the previous month, when the headline PPI number was significantly impacted by a decline in energy prices, this month energy only detracted 0.02% from the final print, the lowest since July.

Perhaps a concern for market participants looking for an interest rate cut in December was that the monthly Core PPI reading, which excludes volatile food and energy prices, rose 0.3%, also in line with the consensus estimate, but up from +0.2% in September. On an annual basis, core PPI gained 3.1% versus consensus for a +3.0% rise, with the previous month revised higher to +2.9% from +2.8%.

The primary cause of the increase in PPI is final demand services, which are comparable to the factors that contributed to the October CPI increase: shelter, food, and energy. Following a 0.2% increase in September, the index witnessed a 0.3% increase in October. Over one-third of the rise in the index for final demand services can be traced to prices for portfolio management, which advanced 3.6%. These components are beyond the Federal Reserve’s ability to regulate through interest rates.

The PPI data pushed U.S. Treasury yields higher – the 2-year yield traded as high as 4.31% while the 10-year yield reached 4.48% – and the US dollar higher, perhaps sending the market signals that inflation is once again “sticky.”

At the same time, the Department of Labor reported that initial unemployment claims for the week ending November 9 decreased by 4,000 to 217,000, which was lower than the anticipated 224,000 and a decrease from the 221,000 claims in the previous week.

The four-week moving average was 221,000, a decrease of 6,250 from the unrevised average of 227,250 from the previous week. The number of continuing claims decreased from 1.884 million in the previous week to 1.873 million, which was revised from 1.892 million.

The recent data has not gone unnoticed, as U.S. Treasury curves flatten, signaling traders are skeptical about the prospects for a December interest rate cut. While this has yet to be fully expressed in the rates markets, odds were reduced to 75% following the data from 82% ahead of the release. They were 59% just last week.

Adding to the debate and surely to see odds of a December rate cut continue to swing wildly over the next several weeks were remarks by Fed Chair Jay Powell at the Dallas Fed on Thursday.

Powell said the central bank is “moving policy over time to a more neutral setting.” However, he noted that “the path for getting there is not preset” and “the economy is not sending any signals that we need to be in a hurry to lower rates.” He also noted that inflation is on a “bumpy path.” Odds of a rate cut swiftly declined back to 59%, according to the CME FedWatch Tool, following his remarks while the yield curve exploded higher.