PPI & Retail Sales Point to Softening Pressures

  • Treasury prices are rallying some in early trading as overnight news from Japan is aiding the bid. The Bank of Japan decided not to widen the band on its Yield Curve Control policy for their 10yr bond from the current -50bps +50bps range. By not widening the range, and implicitly denying higher yields, foreign markets are reacting to the dovish action by rallying their local bonds as is the case here, but we do have some domestic news items that will also garner trading attention.


  • The first of those is retail sales for December which declined by 1.1%. In addition, November was revised lower to a 1.0% decrease vs. the previously reported 0.6% decline.  Forecasts were looking for sales dropping 0.8%. The retail sales series is comprised of mostly goods, and with consumers shifting from goods to services and with much of the holiday sales pulled forward this report today is not that surprising, but it should lower expectations for fourth quarter GDP. The so-called core retail sales rate, or Control Group, dipped 0.7% vs. 0.2% in November, so definitely a soft read on consumer spending, especially on the goods side.  The Atlanta Fed’s GDPNow forecast for fourth quarter GDP stands at 4.1%, and the Bloomberg consensus is at 2.9% so both those forecasts are likely to come in for lower revisions given the numbers this morning.


  • The other major release for today is December PPI. While not as pivotal as CPI it does provide another look at pricing pressures and trends at the wholesale level that eventually influences retail prices. For the month, final demand prices dipped 0.5% vs. a 0.1% forecast and is the first monthly decline since August and was driven mostly by a decline in gasoline prices. However, food prices declined as well for the first time since August which should bode well for upcoming CPI food price changes. The year-over-year final demand rate decreased from 7.3% to 6.2% vs. 6.8% forecast.   Final demand services increased just 0.1%, which is the smallest increase since April which may bode well for future CPI price changes in services which the Fed is increasingly concerned about. All in all, it’s yet another friendly inflation report that is trending in the right direction.


  • This is the last week of Fed Speak before pre-meeting radio silence begins this weekend, so expect one last push from those speakers to express their ongoing concerns over inflation, despite the reports released today, and with wage gains.  The reports today will do nothing but make their job harder that the Fed has it right as to future rate moves and the market has it wrong.




Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.00 4.70 4.65 4.64 4.80 5.26
0.50 4.98 4.67 4.59 4.53 4.65 5.14
1.00 4.98 4.64 4.55 4.49 4.56 5.02
2.00 4.63 4.50 4.41 4.45 NA
3.00 4.36 4.38 NA
4.00 4.34 NA
5.00 4.30 NA
10.00 NA

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Published: 01/20/23 Author: Thomas R. Fitzgerald