PPI Provides Prelude to CPI

  • The UK is in the news again with some controversy over when their emergency gilt-buying operation will end. It is set to end this Friday and BoE Governor Bailey indicated this hasn’t changed. Nevertheless, some have speculated it could be extended and that has generated increased volatility that temporarily sent 30-year gilt yields to a new cycle high of 5.05% but some calm has returned, and the yield has fallen back under 5% at present.


  • Fortunately, the volatility in UK bonds off the latest controversy hasn’t impacted Treasury yields like it did when the buying program was first announced. Our 10yr yield is 3/32nds lower in price with a yield of 3.96%. Expect some pressure to remain in place, however, as the Treasury auctions $32 billion in a reopening of the current 10yr note this afternoon. The last seven reopening auctions have trailed the current yield so expect a similar performance today.


  • The big event of the week is the September CPI report tomorrow, but before that report we received PPI for September this morning, and it didn’t really offer any upbeat inflation news before CPI. The headline Final Demand rose 0.4% beating the 0.2% expectation and hotter than the -0.2% rate from August. The only real metric running under expectations was the ex-food and energy YoY read at 7.2% which beat the 7.3% expectation but was unchanged from August. So, no real promising inflation news from September PPI. Overall CPI is expected to increase 0.2% vs. 0.1% in August while core CPI is expected to increase 0.4% vs. 0.6% the prior month. YoY CPI is expected to ease from 8.3% to 8.1% while core is expected go the other way lifting to 6.5% vs. 6.3% as core services and owners equivalent rent continue to drive core inflation.


  • Before the CPI report tomorrow, investors will get a chance to eyeball the FOMC meeting minutes this afternoon. Some ideas on what to look for are discussions on how long Fed officials expect to remain at terminal and if there is any discussion that the present terminal forecast of 4.50% -4.75% will prove insufficient.


  • The most recent Fed speak continues the refrain that inflation is far too high and too sticky to consider any kind of dovish pivot. Is perhaps the relentless talk of continued rate hikes setting up a push higher in the terminal rate in the December forecast?  Perhaps the minutes have some nuggets in that regard.


    • In the realm of looking for a dovish pivot, speculation has risen that any talk in that regard will come first from St.  Louis Fed President James Bullard. He has been rather vocal in leading the way on the hawkish side, so it’s reasonable to assume he will be the first to signal a coming pivot. Alas, he hasn’t offered anything close to that in recent comments but keep an eye out for his future comments.  He could be the “tell” that the market is looking for.

PPI and Core CPI

Source: Bloomberg


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.00 5.10 5.00 5.09 5.12 5.57
0.50 5.00 5.07 5.00 4.98 4.98 5.46
1.00 4.98 5.04 4.97 4.94 4.88 5.33
2.00 5.01 4.90 4.86 4.77 NA
3.00 4.81 4.70 NA
4.00 4.65 NA
5.00 4.62 NA
10.00 NA

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Published: 10/12/22 Author: Thomas R. Fitzgerald