Hotter-Than-Expected PPI Doesn't Deter Bulls: Yields Fall As Economists Spot Inconsistencies

The Producer Price Index (PPI) has once again defied expectations by surging upwards. The trajectory signals a resurgence in price pressures and further fuels the ongoing battle against inflation through interest rate hikes.

Surprisingly, initial market reactions suggest that investors are not overly concerned about the situation.

What Happened: In September, the PPI index recorded a month-over-month increase of 0.5%. This marked a deceleration from the 0.7% rise seen in August but significantly surpassed the expected 0.3% surge. On an annual basis, the PPI saw a 2.2% increase, accelerating from August’s 2%, and well above 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 declined. Ten-year yields dropped by 6 basis points to 4.6%, and 30-year yields down by 8 basis points to 4.75%. Market expectations for Fed rate hikes remained relatively unchanged. Traders are overwhelmingly pricing in an 85% probability of a Fed pause next month.

Market-implied wagers on Fed rate hikes little moved despite the higher-than-expected PPI report, with traders overwhelmingly pricing in a Fed pause next month with an 85% probability.

The iShares 20+ Year Treasury Bond ETF TLT rallied by 1.4%, while the U.S. Dollar Index (DXY) declined by 0.4%.

Stocks continued their upward momentum, with the S&P 500 Index, tracked by the SPDR S&P 500 ETF Trust SPY, gaining 0.2%, and the tech-heavy Invesco QQQ Trust QQQ rising by 0.4%. Gold increased by 0.7%, while oil experienced a drop of over 1%, with the Energy Select Sector SPDR Fund XLE being the weakest performer among all S&P 500 sectors, down by 1.6%.

Economists’ Reactions: According to Gina Bolvin, president of Bolvin Wealth Management Group, inflation continues to persist. Consumers remain employed with rising wages, and employment opportunities outpace the headwinds of price pressures. She suggests that the Fed should maintain interest rates steady, as rates are still gradually influencing 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 translate into 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.

Now Read: Caution Prevails as German Shoe Manufacturer Birkenstock Prices IPO Amid Market Uncertainty