Cool PPI Greets Investors Before FOMC Decision

Cool PPI Greets Investors Before FOMC Decision

• A market-friendly read on PPI is boosting Treasury prices as traders await today’s FOMC decision. The cool PPI offsets some of the angst produced by the so-so CPI readings, and that has Treasury yields moving closer to recent range lows. The rally, however, will probably have a short leash until we get past today’s meeting and Powell’s press conference (more on that below). Presently, the 10yr Treasury is yielding 4.16%, up 9/32nds in price and the 2yr Treasury is yielding 4.69%, up 2/32nds in price.

• Today’s Fed meeting, for all intents and purposes, is about the signaling for next year’s rate path. Recall the Fed had 50bps of cuts penciled in for 2024 in the September forecast, but that forecast also had another rate hike this year which is not going to happen. Thus, the September dots had year-end 2024 funds at 5.125%. Holding to that 50bps in rate cuts now would imply a 4.875% 2024 year-end rate. The question is because the Fed didn’t get that last rate hike in for 2023 will they reduce the planned cuts in 2024 to just 25bps, or stick with the 50bps in cuts from the previous forecast?

• Also, keep in mind that the market is pricing in a full rate cut by May, and more than 100bps in total cuts for the year. That’s certainly more than what the Fed expected in September and most likely more than what they’ll project in today’s update. The question here is how forcefully Powell will push back on the market’s expectations. He didn’t make much of the differing views in the previous meeting but he’s likely to be pressed on it today. We suspect he’ll avoid implying that the market is wrong, rather he’s likely to return to the “data dependency” refrain and the “totality of incoming information” to deflect the provocative questions. One piece of data that Powell may mention today that argues against aggressive rate-cutting expectations is core services ex-housing remains uncomfortably high (see graph below).

• Meanwhile, November PPI provided a docile read on wholesale inflation just as the Fed readies its statement and forecasts. Overall PPI was unchanged as expected with the YoY rate ticking down to 0.9% vs. 1.2% the prior month. PPI ex-food and energy was similarly unchanged vs an expected 0.2% gain. That sent the YoY core rate to 2.0% vs. 2.3% in October. The core YoY rate is the lowest since January 2021.

• Two things come to mind when comparing PPI results to the higher CPI figures. One, it highlights the impact the heavily weighted shelter component has on CPI that is not present in PPI. Second, it implies some wholesale cost reduction is not being passed on to consumers. Surprise, surprise. We suspect, however, that if demand wanes in 2024 some of the reduced wholesale costs will be passed on to maintain sales. That plays well with the expectation that retail-level inflation should continue to improve next year.

Core Services Ex-Housing: Remains Uncomfortably High – Expect Powell to Mention This Today