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PPI Data Continues The Narrative, 10 Year Treasury Down 60 Bps in 4 Weeks

After last week’s big rally on CPI, Tuesday’s PPI added to the “inflation has peaked” hopes. Core PPI rose 5.4% annually and was actually flat month over month (vs expectations of 7.2% and 0.3%), and well off the March 2022 highs. The services component declined by 0.1%, the first decline since November 2020. Consumer durable goods (apparel, electronics) prices continue to soften as inventories pile up. Retailers indicate that consumers are downsizing and/or changing buying habits towards more value oriented. Many are predicting lower-than-expected holiday sales (while travel demand is strong). Interestingly, consumer credit card balances saw its highest annual jump in 20 years. This could be a sign the red hot consumer demand over the past few years is unsustainable: pandemic savings are running low and credit card rates are rising with the Fed increases. Signs that the job market may be slackening: the seemingly non-stop hiring by big tech has abated with layoffs by industry leaders. Weaker demand and job market slack are critical to cooling off price pressures.

Fed officials are making it clear that the “job is not done” – Yesterday morning SF Fed President Daly remarked that “a pause is off the table.” But “slowing rate hikes” is on the table. The consensus is based on comments and futures markets: a 50 bps increase on December 14, followed by 25 bps at the February and March meetings. A pause at that point would put the “terminal” Fed Funds rate at 4.75%. Daly indicated that the target is “4.75-5.25%.” Then what? The Fed intends to hold that rate for a while and let the cumulative effects of the rate hikes take effect. Daly also pointed out that as the inflation rate declines, the delta between a stable Fed funds rate and inflation will increase and (hopefully) further diminish price pressures. Keeping up the narrative: Before the December meeting, we will get October PCE, November jobs, and CPI. Stay tuned…

By David R. Pascale, Jr., Senior Vice President at George Smith Partners