Easy to Misunderstand both CPI and PPI

Stocks are higher and Mortgage Bonds are slightly higher so far this morning. 10-year yields are lower by 3bp, with the overall Bond market responding positively to another cooler than feared inflation report.

Later this afternoon at 2:00pm ET the Fed’s Beige Book will be released, which will give insights from the Fed’s business contacts in their twelve districts feel about the economy, inflation, and labor. This is soft data, as it’s not hard published numbers, but has been showing much more weakness than the published data.

Producer Price Index

Overall, the Producer Price Index wholesale inflation figures were cooler than feared, but the report was clouded with revisions to the previous month.

In June, headline inflation was 0%, which was cooler than the 0.2% expected. May, however, was revised higher by 0.2% from 0.1% to 0.3%. Averaging out the last two months and removing some of the noise from revisions results in a 0.15% per month increase in producer prices, which is good and below 2% when annualized.

Year over year, headline inflation rose 2.3%, which was an improvement from the previous 2.7% and lower than the 2.5% anticipated.

The Core rate, which strips out food and energy prices, was also 0%, which was lower than the 0.2% expected. There was again a revision to May, bringing the previous reading from 0.1% to 0.4%, which tempered the low reading. Again, averaging out the last two months provides a bit of a higher number than the 0% reported for June, but it remains at a low level of 0.2%. Annualizing that brings you to 2.4%, which is still quite good.

Year over year, core inflation was up 2.6%, which was a nice improvement from the previous 3.2% and one tenth lower than estimates.

Bottom line – This was a better than feared report and better than estimates, helping Bonds find their footing. The PPI shares some components with the even more important PCE later this month and influences about 12% of the report. The shared components were mixed, but decent overall, and should not cause a bit spike in PCE…at least from the shared components.

Looking at this week’s CPI and PPI reports shows that inflation is still pretty modest and while there are some signs of tariff impact, it’s not significant. And even though goods prices are rising modestly, services inflation has been cooling. Additionally, the tariff impact should be a one-time price increase, different than persistent inflation.

Industrial Production and Capacity Utilization

Industrial Production for the month of June was reported at 0.3%, which was stronger than the 0.1% expected. Additionally, the previous report was revised higher by 0.2%. 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, rose 0.1% after a one tenth upward revision to May to 77.6%. While there was a slight increase in utilization, the reading is still light and below the historical average of 80%.

When factories have more capacity, they have less pricing power, and are more inclined to drop prices to fill that excess capacity…so this report is somewhat deflationary.

Technical Analysis

Yesterday, Mortgage Bonds broke beneath their 50 and 200-day Moving Averages, which prompted our alert, as lenders were put in a position to re-price and there was a lot of room to the downside. This morning they have managed to get back above the 200-day Moving Average, at least for now. If Bonds can close above these levels, there is some room to the upside until reaching the 100-day Moving Average.

The 10-year is improving, but is still in a wide range between resistance at 4.50% and support at 4.40%. If yields can continue to move lower, there is about 5bp of room before reaching the aforementioned floor of support.