Stocks Fall As Producer Inflation Spikes, Jobless Claims Jump: 'What Is Happening Here?'

Wall Street faced a murky morning on Thursday as fresh data revealed a jump in wholesale prices alongside a sharp rise in jobless claims. These conflicting signals rattled investors, casting doubt on the trajectory of the economy and the Federal Reserve’s interest rate strategy.

The S&P 500 index – as tracked by the SPDR S&P 500 ETF Trust SPY – fell by 0.2%, while the tech-heavy Nasdaq 100 – tracked by the Invesco QQQ Trust, Series 1 QQQ – dropped 0.4%. Small caps fared worse, with the iShares Russell 2000 ETF IWM shedding 0.9%.

Meanwhile, the U.S. dollar index – as tracked by the Invesco DB USD Index Bullish Fund ETF UUP – strengthened after an initial dip.

Wholesale Inflation Soars: PPI Hits 3%, Highest Since February 2023

The Producer Price Index (PPI) surged to 3% year-over-year in November, the steepest increase since February 2023. This marked a jump from October’s revised 2.6% and exceeded economists’ forecasts of 2.6%. On a monthly basis, PPI rose 0.4%, doubling market expectations.

Core PPI inflation, which strips out volatile food and energy prices, climbed 0.2% for the month (meeting estimates) and hit 3.4% annually.

These numbers come on the heels of November's Consumer Price Index (CPI) report, which showed a 2.7% year-over-year increase, as expected.

Six out of the last seven PPI inflation reports have been revised higher, as The Kobeissi Letter highlighted on social media X

"CPI, PPI, and PCE inflation are all officially back on the rise in the United States. What is happening here?"

BREAKING: The US Bureau of Labor Statistics has revised October PPI inflation HIGHER, from 2.4% to 2.6%.

Also, Core PPI inflation for October has been revised HIGHER from 3.1% to 3.4%.

This means that 6 out of the last 7 PPI inflation reports have now been revised higher.

With… pic.twitter.com/hOiCV1Cy8u

— The Kobeissi Letter (@KobeissiLetter) December 12, 2024

Jobless Claims Climb

Adding to the turbulence, initial jobless claims jumped by 17,000 last week to 242,000, smashing expectations of 220,000. This marks the sharpest increase since October. Continuing claims, which measure people still receiving unemployment benefits, climbed to 1.886 million, nearing the three-year high of 1.908 million recorded last month.

Jobless claims rose significantly in states like California, up by 14,800, Texas, up by 9,500, and New York, up by 9,200.

This outcome may challenge the idea that the U.S. labor market remains tight.

As highlighted by Nick Timiraos, chief economics correspondent at the Wall Street Journal, continuing claims for unemployment insurance are now running slightly above levels seen in 2018-2019.

Economist Reactions: What’s Next For The Fed?

“Look for these numbers to fuel something I’ve been posting about for a while: the likelihood of relatively sticky inflation, and, associated with that, the choice that the Fed will face in its policy deliberation on the “last mile” to its inflation target of 2%," economist Mohamed El Erian wrote on X.

Clark Bellin, president of Bellwether Wealth, said, "While Thursday’s PPI was stronger-than-expected, we believe the Federal Reserve will still proceed with its expected 25 basis-point rate cut in December."

Yet, persistent inflation and a weakening labor market may limit the Fed’s flexibility in 2025. "The trajectory for interest rates remains uncertain," Bellin added.

Bank of America’s economist Stephen Juneau offered a more tempered view, stating: "We expect core PCE to rise by 0.1% m/m in November, with risk of rounding up to 0.2%. This would leave the y/y rate at 2.8%."

“This would be welcome news for the Fed after core PCE rose by 0.3% m/m in October and September,” he added.

Bank of America expects the Fed to cut in December and then two more times next year in March and June for a terminal of 3.75%-4.00%.

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