Producer Price Index Burns Away Hopes for 1% Total Rate Cut
July PPI explodes to the upside leaving Powell in a bind and expected rate cuts in question.
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The producer price index surprised -- and it ain't what we had hoped for. In what can only be termed as a kick in the pants for anyone hoping for (or betting on) a series of aggressive rate cuts to kick off with the Sept. 17 Federal Open Market Committee policy decision, this was a rude awakening. This also makes Fed Chair Jerome Powell's job all that much more difficult at next week's economic symposium at Jackson Hole, Wyoming.
Just two days after the release of a semi-warm July consumer price index print that showed some inflation, but very little in tariff impacted areas, July producer prices simply exploded to the upside. There's no way to sugarcoat this. Unless this is reversed or revised in a more frigid direction with the early September release of the August data, the Fed has all the ammo it needs to be more cautious and Fed Chair Jerome Powell looks a lot less foolish than I thought he had.
Still, he has to, and they have to, balance this percolating issue of inflating producer prices, which both compress corporate margins and can signal increased consumer prices against the backdrop of a much weaker labor market. As we all know, the Bureau of Labor Statistics releases the CPI, the PPI and the monthly jobs data. As we all also know, the BLS recently put a weak monthly print to the tape for July job creation and essentially wiped out all job creation for May and June with gigantic downward revisions to its previously reported data.
The Numbers
The published data is a bit scary. Headline July PPI crossed the tape at month-over-month growth of 0.9%, up from flat in June and well above the 0.2% growth that economists were looking for. July was the worst single month for headline growth in producer prices since June 2022. At the core, July PPI also hit the tape at growth of 0.9%. This was also up from flat and far more warm to the touch than what economists were looking for. This was the "hottest" single month for core PPI since May of 2022.
On a year-over-year basis, headline PPI hit the tape at growth of 3.3%, while core PPI printed at growth of 3.7%. These numbers too, landed far above expectations and were a huge acceleration from June. July data for consumer prices were not nearly as hot as these numbers. But looking into the data, it appears that prices for services were again hotter than prices for goods.
Even that assumption is based on wonky or lumpy data, though. Prices for services overall, were up 1.1% in July from June. That said, energy and food prices, though downright chilly at the consumer level for July, were actually quite warm in this report. The July PPI for finished goods, though not quite chilly, was up "just" 0.5% month over month. That cheered me up a little until I saw this: Prices for unprocessed goods for intermediate demand were up a whopping 1.8% month over month. Yikes.
Treasuries & Futures
Of course, equity index futures took an immediate hit upon this release. Stocks were not alone. Treasuries were immediately slapped around. The Six-Month T-Bill paid as much as 4.07% minutes after the release after having paid just 4.04% a few minutes earlier. The yield for the US Ten-Year Note ran from 4.21% all the way up to 4.26% in a matter of minutes as well.
Interestingly, futures markets trading in Chicago are not in panic mode. The probability, according to these markets, for a quarter-percentage point rate cut on Sept. 17 dropped from 96% to 94%. Not a big deal. The likelihood for a second rate cut of a quarter point on Oct. 29 dropped from 61% to 58%. Again, no big deal. However, that third rate cut of a quarter point that had been priced in for December ahead of this release, has now been pushed out to April. That's a big deal.
Next Week is Huge
What does Fed Chair Jerome Powell tell the world from Jackson Hole next week? He has to choose between the Fed's dual mandates. The labor market is crying out for the full one-percentage point worth of rate cuts that I have been writing about. There is no denying that labor markets, unless the numbers are wrong, again, are crying out for easier credit creation and lower borrowing costs.
There is also no doubt that with producer prices a potential and probable forerunner of consumer prices and reduced corporate margins, that there is legitimate cause for caution. Perhaps there is still a strong case for a reduction to be made to the target range for the Fed Funds Rate at the September meeting.
That said, perhaps next week, Powell, instead of signaling an aggressive tilt toward easier money, should simply announce a return by the central bank to a focus on something better resembling data dependency. We may have actually missed our window for much lower rates. Now, we won't have to debate reversing rate cuts made and then seeing this data. Just let the economy be the guide... and tell policy makers whether or not they have to sacrifice inflation at the altar of employment.
At the time of publication, Guilfoyle had no position in any security mentioned.
