The Producer Price Index (PPI) has once again exceeded expectations, indicating a rise in price pressures and adding to efforts to combat inflation through interest rate increases. Surprisingly, initial market reactions suggest that investors are not overly worried about the situation.
What happened: In September, the PPI index rose by 0.5% compared to the previous month. While this was a slower increase than the 0.7% seen in August, it exceeded the expected 0.3% surge. On an annual basis, the PPI saw a 2.2% increase, surpassing August’s 2% and the anticipated 1.6%. Excluding energy and food costs, the core PPI rose by 0.3% month-on-month and 2.7% annually, outperforming expectations of 2.3%.
Market reactions: On Wednesday, longer-dated Treasury yields decreased. Ten-year yields fell by 6 basis points to 4.6%, and 30-year yields dropped by 8 basis points to 4.75%. Expectations for Federal Reserve rate hikes remained relatively unchanged. Traders are largely predicting an 85% likelihood of a Fed pause next month.
Market expectations for rate hikes by the Federal Reserve did not change significantly despite the higher-than-expected PPI report, with traders heavily favoring a Fed pause next month with an 85% probability.
The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) rose by 1.4%, while the U.S. Dollar Index (DXY) declined by 0.4%.
Stocks continued to rise, with the S&P 500 Index, tracked by the SPDR S&P 500 ETF Trust (NYSE:SPY), increasing by 0.2%, and the tech-heavy Invesco QQQ Trust (NASDAQ:QQQ) rising by 0.4%. Gold prices increased by 0.7%, but oil experienced a decline of over 1%. The Energy Select Sector SPDR Fund (NYSE:XLE) was the weakest performing sector among all S&P 500 sectors, falling by 1.6%.
Economists’ reactions: Gina Bolvin, president of Bolvin Wealth Management Group, suggests that inflation remains persistent. Despite price pressures, consumers are still employed with rising wages, and employment opportunities are outpacing these pressures. Bolvin recommends that the Fed maintain steady interest rates, as rates are gradually impacting the economy.
Alex McGrath, chief investment officer for NorthEnd Private Wealth, points out that investors may be misinterpreting the fact that higher Treasury yields do not necessarily lead to further rate hikes. He highlights inconsistencies in market reactions following a stronger-than-expected PPI report, suggesting that the latest inflation data may compel the Fed to take action.
