The Market Today

Barrage of Hot Inflation Data Continues; Potential Russian Détente


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Another Report Showing Broad-Based, Hotter-than-Expected Inflation: Add to the list of hotter-than-expected inflation reports the January PPI results.  Headline producer prices rose 1.0% MoM (exp. +0.5%).  Because January 2021’s hot result was dropped off, the year-over-year result declined from 9.8% to 9.7% (exp. 9.1%).  Energy prices rose 2.5% MoM while food increased 1.6%.  Excluding food and energy, producer prices rose 0.8% MoM (exp. +0.5%) bringing the year-over-year rate down from 8.5% to 8.3%. With the exception of transportation prices for passengers, the report showed more evidence of broad inflation pressure.  Durable goods prices gained 1.0%, the hottest result since 2008.  Services PPI excluding trade/transportation/warehousing rose 0.9% MoM, the largest gain on records back to 2009.  Construction prices jumped another 3.6%, also the highest on record. The majority of PPI components which feed into the PCE data were hot, particularly healthcare items.

Empire Fed Index Shows Manufacturers Pushing Price Increases Through Pipeline: The New York Fed’s regional report on manufacturing activity in February rose from -0.7 to +3.1, disappointing expectations for a rebound to +12.0.  The index dropped into negative territory for the first time since the initial pandemic shutdowns last month.  In February, new orders rebounded from -5.0 to +1.4 and the employment index jumped from +16.1 to +23.1, its second-highest result since 2004.  While the prices paid index inched down from +76.7 to +76.6, the prices received index jumped from +37.1 to +54.1, the highest level in records back to 2001.  This gives more evidence that manufacturers are now pushing price increases through to customers.


OTHER ECONOMIC NEWS

Forecast Revisions – Faster Liftoff and More Tenuous Economic Environment Expected: Against the backdrop of hotter inflation and a faster monetary policy liftoff, we have made notable revisions to our growth and interest rate projections.  We now expect inflation to average 4.2% in 2022, dragging an additional 0.7% from nominal growth.  Also negatively affecting headline GDP, much of the inventory turnaround which was expected to provide a tailwind to growth this year occurred in 4Q21.  As a result, we now expect the economy to expand 2.5% in 2022.  To keep inflation expectations anchored, we expect the Fed to hike as aggressively as the market will allow in the first half of 2022 before slowing the pace in 4Q. However, we expect this more aggressive pace of liftoff to increase the risks to an eventual policy misstep.  Link: February 2022 Economic and Interest Rate Projections


TRADING ACTVITY

Volatility Persists As Geopolitical Uncertainty Compounds Worries about Shifting Monetary Policy: Markets remained volatile throughout Monday’s trading session as investors continued to monitor the situation on the border of Russia and Ukraine while mulling over repeatedly hawkish comments from a current-year Fed voter. Foreign equity markets declined in overnight trading but U.S. futures had been relatively resilient, erasing earlier losses on some signs that diplomatic efforts would continue in an attempt to deescalate tensions between Russia and Ukraine. Treasury yields tracked equity futures closely, falling overnight before recovering higher ahead of U.S. trading. The nascent rise in yields accelerated around 7:30 a.m. CT after Fed President Bullard repeated that he wants to raise the federal funds rate by 100 bps in the first half of the year. Another current-year voter, Kansas City Fed President George, had earlier told the Wall Street Journal that Fed policy is “out of sync” with the current economic situation and needs to be tightened. She prefers to move gradually and systematically but said a 50-bp hike could be considered at the March meeting, adding that she also supports selling assets from the investment portfolio at some point. Treasury yields ended below session highs but still notably above where they opened. The 2-year yield rose 7.5 bps to 1.57% while the 10-year yield added 5.0 bps to 1.99%. Oil prices swung about on the geopolitical headlines but ended the day up more than 1% and at their highest levels since 2014.

Following another mixed trading session in Asia, market sentiment improved on comments from Russian military officials that some troops had been moved away from the border and back to their bases. Europe’s Stoxx 600 gained 1.3% and U.S. futures rose by at least that amount. Before 7:00 a.m. CT, Dow futures were 1.3% higher, the S&P 500 improved 1.6%, and the Nasdaq had jumped 2.1%. While a top NATO official cautioned that there was no evidence of a meaningful drawdown of Russia’s military presence near Ukraine, oil prices retreated more than 3% from their highest levels since 2014 and sovereign yields edged up. Overshadowed by the geopolitical developments, data released on Tuesday showed Japan’s economy grew 1.3% (unannualized) in the fourth quarter, slightly weaker than the 1.5% gain economists anticipated, while growth in Europe slowed to 0.3% as expected, reflecting the impact of Omicron on activity late last year. Before this morning’s PPI inflation report, the 2-year Treasury yield was essentially flat at 1.58% while the 10-year yield rose 4.0 bps to 2.03%, steepening the curve between the two maturities off its lowest level since August 2020 and for the first time in six days. Yields initially added to their gains after the broadly firmer PPI data before falling back close to pre-release levels.


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