Producer Prices Deflate, Retail Sales Contract: October Economic Data Paints Bleak Picture

The economic landscape is experiencing a notable shift following the summer rebound, as evidenced by the latest data released Wednesday.

The Producer Price Index (PPI), a key indicator of wholesale prices, recorded a stronger-than-predicted decline, while retail sales figures showed a contraction on a monthly pace, both painting a picture of economic slowdown.

These figures follow lower-than-expected Consumer Price Index (CPI) data released Tuesday, indicating the prolonged period of high-interest rates is starting to impact the economy.

Before the release of Wednesday’s economic data, market expectations were firmly set on interest rates holding steady in September, with a forecast of four rate reductions next year commencing in May.

Producer Prices Fall More Than Expected In October

• The PPI fell by 0.5% month-on-month, marking the first move towards deflation since May 2023, down from a downwardly revised 0.4% surge in September and below the expected 0.1% increase.
  
• Annually, the PPI is up by a modest 1.3%, a robust decrease from September’s 2.2% and well below the forecasted 1.9%. The decline in the annual rate ends a period of four consecutive monthly increases, suggesting a shift in the pricing power dynamics within the economy.
  
• The core index, which excludes the volatile components of energy and food, remained unchanged on a monthly basis, declining from a downwardly revised 0.2% seen in September and falling short of the anticipated 0.3%.
  
• On an annual scale, the core PPI is up 2.4%, down from both the previous and expected figures of 2.7%.

Retail Sales Reflect Waning Consumer Demand

• Retail sales, a direct measure of consumer spending, also showed signs of strain. The data reveals a month-on-month contraction of 0.1%: a slowdown from the upwardly revised 0.9% increase in September, but slightly better than the expected 0.3% contraction. This decline is the first negative turn for monthly retail sales since March 2023, indicating a potential shift in consumer confidence and spending habits.
  
• On a yearly basis, the growth in retail sales has tapered off, falling from 4.1% to 2.5%.
  
• When excluding expenditures on gasoline and automobiles, there was a slight increase of 0.1% in retail sales, down from the 0.8% rise in September.

Market Reactions

Market-implied probabilities showed a 66% chance of a rate cut in May 2024, as investors believe that an economic slowdown will force Fed to start the easing cycle prior than expected.

The U.S. dollar index (DXY), as monitored through the Invesco DB USD Index Bullish Fund ETF UUP, rose 0.2%, after posting the year’s worst daily session on Tuesday when it fell 1.5%.

U.S. equity futures on the S&P 500 and the Nasdaq 100, were up 0.2% and 0.3% respectively at 08:44 a.m. ET.

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