Cooler PPI Helps but Numbers Lack Reliability and Fed Making Changes

Stocks are lower and Mortgage Bonds are higher after a slew of economic data this morning.

The cooler inflation data this week continues, but it did not help the Bond market much. The April Producer Price Index Report, which measures wholesale inflation, was reported at -0.5%, which was cooler than the 0.2% anticipated. There were big revisions to March, bringing the monthly reading from -0.4% to 0%. Even with the revision, Core PPI was still three tenths lighter than estimates.

Year over year, there was a lot of noise because of the crazy revisions to March. March was revised higher from 2.7% to 3.4%, but it then fell to 2.4% in today’s report for April. This was one tenth lighter than the market expected.

The Core rate, which strips out food and energy prices, was reported at -0.4%, which was much cooler than estimates of 0.3%. There were big revisions to March once again, bringing the monthly reading from -0.1% to 0.4%. Even with the revision, Core PPI was still two tenths lighter than estimates.

Year over year, there were also huge revisions for March. March was revised higher from 3.3% to 4%, but it then fell to 3.1% in today’s report for April, which was in line with market estimates.

The BLS said “Over 40% of the April decline in the index for final demand services is attributable to margins for machinery and vehicle wholesaling, which dropped 6.1%.” This is likely showing that businesses are absorbing the higher costs due to tariffs, at least for now, and may not have the pricing power to pass those costs along.

On that note - Walmart said that they have been absorbing the higher costs but for consumers to expect price hikes in the near future.

The market did not immediately react as favorably to the lower inflation data as one would expect, likely due to a combination of a botched release from CNBC, where they posted a +0.5% instead of a -0.5%, and the components that PPI shares with PCE later in the month being higher.

Many people watch CNBC with the sound off and look at the banners or do high frequency trading as fast as possible once the numbers are released. After seeing a hotter number on the CNBC banner, there could have been a lot of trades done with that bad information, impacting Bond prices.

Additionally, the PPI influences roughly 12% of the PCE, as it has some shared components. And compared to March, almost all of those components rose rather significantly. That means that the PCE report later this month, which is the Fed’s favorite measure of inflation, may have some upward influences due to these shared components within PPI being higher.

Lastly, the revisions in today’s report were concerning. They were abnormally large and really brings into question the reliability of the BLS and their reports. We already know the unreliability of the Jobs Report each month and the huge negative revisions.

Industrial Production and Capacity Utilization

Industrial Production for the month of April was reported at 0%, which was weaker than the 0.2% expected. This is an important report as it’s one of the things the NBER looks at when determining a recession.

Capacity Utilization, which measures how much capacity is used at factories, fell one tenth to 77.7%. This is a relatively low figure, as anything beneath 80% typically pressures factories to lower prices to fill that open capacity, and naturally this is a deflationary sign.

Retail Sales

Retail Sales in April were reported at 0.1%, which was stronger than the 0% expected, but the report was much weaker beneath the hood.

Core Retail Sales, which is most important and gets plugged into things like GDP, fell 0.2%, which was weaker than the 0.3% expected. Tempering the miss slightly was a 0.1% upward revision to March, but this was still a miss.

Bottom line – This report shows some consumer weakness and less spending on discretionary items.

Initial Jobless Claims

Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, remained at 229,000.

Continuing Claims, or those who continue to receive benefits after their initial claim, rose 9,000 to 1.881M. This still remains elevated, but has been somewhat stable around some of the highest levels since November 2021.

Powell Comments

Fed Chair Powell spoke on CNBC this morning and discussed how the Fed is reviewing their framework, which outlines the Fed’s approach to setting interest rates.

In 2020, the Fed changed their framework and because inflation was running below their 2% target for a long time, said that they would be more tolerant of inflation above 2% and would be OK keeping interest rates lower for long as a result. This does sound like an excuse for allowing inflation to hit 9%.

The Fed said they are still committed to reaching their 2% target, but appears they may want to change their “average” inflation language and allowing inflation to run above target. This likely means that the Fed will be less tolerant of higher inflation and be less inclined to cut rates.

Powell said that the economy may be entering into a period of more frequent and potentially more persistent supply shocks, which would led to higher prices and more volatile inflation…another reason we feel they may adjust their language and be less likely to cut going forward. He also said that the Fed may adjust their inflation target of 2%, but we won’t get the details until August/September.

Technical Analysis

Mortgage Bonds took out support at 100.60 yesterday and fell until reaching support at 100.43, which is a Fibonacci level. Bonds opened up almost exactly on this level and are starting to move higher…it appears they have found a pretty solid floor for now. There is about 30bp of room until reaching the next ceiling at the 100-day Moving Average.

The 10-year Yield broke above 4.50% yesterday, but with this morning’s data, has gotten back beneath it. If Yields can hold onto this move, there is room for them to improve until reaching the 100-day at 4.42%.