Weak PPI and European Bank Turmoil Dim Fed Hiking Expectations

  • If it’s Wednesday that must mean the banking crisis has jumped the pond and landed squarely in Europe. The catalyst for the risk-off tone today is Credit Suisse, a favorite whipping boy in the industry and seemingly in perpetual recovery mode. The bank’s largest shareholder said they wouldn’t consider investing more capital in the bank and that sent shares to a new all-time low and that has caused waves of fear across the European banking sector, and that risk-off tone is being felt here. The resumption of the flight-to-safety trade is in full force this morning as equities are lower and Treasury prices higher.  Treasury bids are being helped by a weak PPI report as well (more on that below). Currently, the 10yr is yielding 3.45% and the 2yr is at 3.87%, the lowest yield since September 2022.


  • As the banking crisis rolls on front and center, we did get a surprisingly weak PPI report this morning and that bodes well for the February PCE numbers which are more influenced by that index vs. CPI.  Those numbers, however, won’t be forthcoming until March 31.


  • Speaking of PPI, the final demand index declined -0.1% vs. an expected 0.3% increase. In addition, the January number was revised significantly lower from 0.7% to 0.3%. Reading some details in the release, 80% of the -0.2% decline in the final demand goods index was attributable to a 36% drop in egg prices. I’m not sure all that price decline has showed up at the grocery store yet.


  • On a YoY basis, the drops were significant and bode well for some easing in prices at the retail level, although those retail price declines are grudging (see graph below). The final demand index increased 4.6% YoY vs. 5.4% expected and 5.7% in January. That’s the lowest YoY print in two years. The ex-food and energy index increased 4.4% YoY vs. 4.8% expected and 5.0% in January. That too is the lowest print in two years. Finally, the ex-food, energy and trade index rose 4.4% YoY matching the January increase but better than the 4.8% expected.


  • We also received February retail sales numbers this morning and they generally came in-line with expectations. Overall sales declined -0.4% vs. a 3.2% increase in January while sales ex-autos declined -0.1% vs. 2.4% in January. Ex-auto and gas sales were flat on the month vs. 2.8% the prior month. Meanwhile, the control group, a direct feed into GDP, saved the day by rising 0.5% vs. -0.3% expected but well off the 2.3% gain in January. With the control group printing better-than-expected, and the solid print in January, this bodes well for first quarter consumption and thus GDP. But today, the PPI data, and its forward-looking inflation implications, are driving the bid today in Treasuries.


  • On a decidedly second-tier basis the Empire Manufacturing Report (NY Fed district) was much weaker than expected coming in at -24.6 vs. -7.9 expected and -5.8 in January.  This just adds to the evidence of a slowing in the manufacturing/goods sector of the economy.


  • The ongoing banking turmoil and the weak PPI has fed funds futures indicating an implied 4.66% rate after next week’s meeting vs. the current effective rate of 4.58%, and by year-end futures are seeing the rate at 3.43%, indicating more than 100bps of rate cuts by that time. What a difference a week makes when last Wednesday we were listening to Powell tell us it will be a higher terminal rate, with a longer time at that rate.

 PPI Leads CPI Lower as Retailers Slow to Pass on Wholesale Price Declines



Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.02 4.92 4.88 4.88 4.98 5.24
0.50 5.01 4.90 4.82 4.77 4.84 5.12
1.00 5.00 4.86 4.78 4.73 4.75 5.00
2.00 4.85 4.73 4.65 4.63 NA
3.00 4.60 4.57 NA
4.00 4.52 NA
5.00 4.49 NA
10.00 NA

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Published: 03/15/23 Author: Thomas R. Fitzgerald