The Market Today

PPI Inflation Momentum Moderates, NY Manufacturing Looks Weak; Markets Focused Elsewhere


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Producer Prices Rise Less Than Expected As More Moderate Core Pressures Help Cushion Against Strong Food and Energy Gains: Producer price inflation was softer than expected in February, providing a rare relief for investors who have become accustomed to upside surprises. Headline producer prices rose 0.8% MoM, less than the 0.9% gain expected, and just 0.2% when food and energy prices are excluded, well below the 0.6% rise economists had forecasted. Solid gains in January were revised up to reflect even firmer increases to start the year. The annual headline price change was flat at a record 10.0% while the measure removing food and energy eased from a record 8.5% to 8.4%. The details showed food prices up another 1.9% in February with energy’s notably sharp 8.2% jump presumed to not even yet reflect the most volatile days for oil prices. Away from those categories, goods prices posted another firm 0.7% monthly gain while services were essentially flat, the softest monthly result since late 2020. Slower expansion of retail margins contributed to less pressure on services prices and helped offset stronger transportation costs. Construction costs rose 0.6%. Less momentum in the core categories provide a sliver of hope that inflation could potentially moderate this year, while the steady increases for food and energy highlight why some are concerned it could take longer than previously expected.

New York Manufacturing Survey Contracts Unexpectedly: The New York Fed’s Empire Manufacturing Index was much weaker than expected in March. The headline index was expected to rise from 3.1 to 6.4, but instead tumbled to -11.8, its weakest reading since May 2020.  with a sharp decline to -11.8. The employment index slipped to a seven-month low while new orders and shipments both dropped to their weakest levels since May 2020. The index would have fallen even further had supplier delays not deteriorated, driving the supplier delivery times index up to a five-month high. Providing a bit of consolation to the weaker current assessment, expectations for six months from now did improve slightly, including a small recovery in the outlook for general business conditions from its lowest level since early 2020.

 

OTHER ECONOMIC NEWS

President’s Pick for Vice Chair of Supervision Appears Doomed: President Biden’s pick to fill the Fed’s vacant Vice Chair of Supervision role was dealt what may be a fatal blow on Monday. Senator Joe Manchin, a necessary vote for Democrats in the Senate, said Monday that he could not support Sarah Bloom Raskin’s nomination to be the next person in charge of overseeing the U.S. banking industry. The WSJ noted, “Republicans, especially from energy-producing states such as Pennsylvania and Wyoming, oppose Ms. Raskin in part because of her 2020 criticism of the Treasury Department and Fed for providing broad-based emergency-lending backstops to assist businesses during the pandemic. She said the backstops should have been designed to avoid lending to highly indebted fossil-fuel companies. In his statement, Mr. Manchin, who represents a coal-producing state, indicated he shared those concerns. ‘Her previous public statements have failed to satisfactorily address my concerns about the critical importance of financing an all-of-the-above energy policy to meet our nation’s critical energy needs,’ Mr. Manchin said.”


TRADING ACTIVITY

Bond Yields Soared as Investors Brace for Fed Decision: Global bonds picked up Monday where they left off Friday, with yields climbing sharply higher as investors brace for central banks to embark on their fight against inflation. The ECB surprised markets last week by adopting a hawkish policy slant, possibly portending the outcome of this week’s Fed decision which includes updated economic and rate forecasts. An uncomfortable inflation outlook, further complicated by a surge in commodity prices since Russia invaded Ukraine, now faces the risk of additional supply chain troubles on a virus resurgence in China. Reflecting the country’s no-COVID-19 policy, officials locked down Shenzhen City’s more than 17 million residents for at least the next week after fewer than 100 daily cases were confirmed. Sovereign yields shot higher as Asia opened and continued to climb throughout the day. Ahead of this morning’s U.S. producer price inflation report, data showed wholesale prices in Germany rose 16.6% from a year ago, the fastest in data back to the late 1960s. Market-based inflation expectations for the next five and ten years held near record highs, with 5-year, 5-year forwards now the loftiest since 2014. Longer yields led Monday’s global increase. The 10-year yield rose 14.1 bps to 2.13%, the key rate’s highest close since July 2019. Reflecting the market’s increasingly hawkish Fed bets, the 2-year yield rose 11.3 bps to 1.86%, also its highest close since July 2019. Fed funds futures closed Monday fully pricing in seven quarter-point hikes this year for the first time. While rates were the major focus, the weaker tone spread across equities and commodities as well. The S&P 500 dropped 0.8%, closing almost on top of its lowest level since last June, as the Nasdaq slumped 2.0% and deeper into a bear market. U.S. WTI fell more than 7% to $101 per barrel, its lowest close of March.

Treasury yields and U.S. equity futures stabilized overnight, a resilient result considering the large swings across asset classes and in other parts of the world. Combined data for January and February showed a surprisingly strong start to the year for the Chinese economy. Industrial production was almost twice as strong as anticipated and fixed investment and retail sales more than doubled expectations. The positive results, however, couldn’t prevent another sharp sell-off in China-linked equities. China’s CSI 300 tumbled 4.6% after a 3% slide on Monday, reaching its lowest level since June 2020. Hong Kong’s Hang Seng index sank 5.7% following a 5.0% drop Monday, ending at its lowest level since February 2016. China’s amiable relationship with Russia has been brought up by U.S. officials in recent days, adding to uncertainty created by new virus lockdowns across the country. The developments in China have likely added to oil’s downward momentum since peaking last Monday. Crude prices slid another 7% overnight to drag U.S. WTI to $95 per barrel and Brent below $100. Despite crude’s retreat, the impact of Russia’s war on Ukraine continues to severely impact the outlook for Europe. The Stoxx Europe 600 dropped nearly 1% and the EU’s ZEW survey showed economic expectations plunged in March from 48.6 to -38.7, the lowest level since March 2020. Before this morning’s U.S. data, index futures had registered small recoveries and Treasury yields had drifted lower, with the 2-year yield down 4.7 bps to 1.81% and the 10-year yield 1.9 bps lower at 2.11%.


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