Stocks opened lower this morning on a hot Producer Price Index (PPI) reading before recovering to trade flat through noon. All three major indexes jumped off their intraday lows in yet another choppy session as bulls attempted to finish out the week on a high note.
Inflation concerns still linger, though, with an important Fed meeting and rate hike coming up next Wednesday. November’s PPI revealed that wholesale prices rose 0.3% month-over-month (MoM) vs. +0.2% expected. Worse yet was core PPI – excluding food and energy costs – which jumped 0.4% MoM vs. 0.2% expected.
The market knows that the Fed watches core inflation closer than headline. A +0.4% MoM “beat” was not at all what bulls wanted to see today, which is what led stocks lower at the open.
“It’s our expectation that we really need to see inflation come down closer to the Fed funds rate for the Fed to pause, and we still have quite a bit of delta between those numbers,” said Stephanie Lang, chief investment officer at Homrich Berg.
“There’s still a bit of work to be done on the inflation front to really see that as the reality.”
Year-over-year, the PPI was up 7.4%, which is a major improvement from the peak of 11.7% in March.
But the Fed had hoped for more progress on this front by now.
“The monthly increase in producer prices illustrates the need for continued tightening, albeit at a slower pace,” explained LPL Financial’s chief economist, Jeffrey Roach.
“The inflation pipeline is clearing, and consumer prices will slowly move closer to the Fed’s long-run target.”
Keep in mind that November wages were far hotter than expected, too, according to last week’s jobs report release. The Consumer Price Index (CPI) comes out next Tuesday, just one day prior to the Fed’s rate hike on Wednesday.
The CPI will be far more important in determining the Fed’s strategy moving forward, but based on the recent Wall Street Journal article from Fed-whisperer Nick Timiraos – aka, “Nicki-leaks” – the Fed may have already decided to raise its median rate for 2023.
Hot PPI and CPI readings may push that rate even higher. And, the higher the median rate goes, the longer it will probably take to get there, meaning that the eventual rate cuts will be pushed back, frustrating traders and long-term holders alike.
But not everyone on Wall Street is feeling pessimistic about inflation. Morgan Stanley’s Mike Loewengart said that while today’s PPI reading is a “reminder of how sticky inflation is,” we are “in a better place and headed in the right direction” compared to “where we were a year ago.”
That’s good, but is it necessarily the truth? On the inflation front, it seems like we won’t see another major spike any time soon. But inflation could certainly bounce around at its current levels as the US economy deals with the glut of cash injected into it by the Fed’s Covid relief.
In order to keep inflation down, the Fed will continue raising rates despite numerous signals of a global recession. And that – hiking into a recession – is the last thing Bulls want. Meaning that, despite the market’s relatively positive reaction to the PPI today, the forces that drove stocks lower this week haven’t changed, which is a bit troubling as we head into what could be a very bearish FOMC meeting next Wednesday.
