Et tu, PPI? Treasury Yields Continue to Rise

Happy Ides of March! Treasury yields continued their ascent this week after U.S. producer price inflation (PPI) came in hotter than anticipated. The 10-year period advanced to 4.3%, trading a wee bit shy this morning at 4.285%, pushing gold further sideways and giving some lift to the U.S. dollar.

Stocks pulled back – the question is whether if yields continue to climb, does it exert pressure on equity markets.

U.S. Inflation Unsettles

Markets are surely questioning whether the Fed can now commit to cutting in June. The PPI report was the last major piece of economic data before the Fed’s meeting next week and follows a CPI report that also pointed to stubborn inflation pressures. PPI rose to 1.6% in Feb, from 0.9% previously, the 0.6% month-on-month increase was the fastest since August.

PPI hotter than expected... Kissing goodbye to a June cut? The arrow marks the Fed’s December “pivot”.

Powell's Shift, Rate Cut Odds Dip

As I commented after the December Federal Reserve meeting: “Was that the Arthur Burns moment? Powell seems to be ditching his Volcker mask and going for the Burns one.”

In the last month, we have seen the market’s odds for a June cut come down from more than 80% to about 60%. And most of that move to price out a June cut came in the last week off the heels of the CPI and PPI prints.

As I also noted in December: 

“Jay Powell declared victory over inflation and the market is celebrating the triumph. The question is whether it’s come too soon. You cannot deny inflation is coming down, but it looks as though the ‘last mile’ just got that bit harder.”  

Fed in Focus

So much rides on the Fed next week. A fresh dot plot will tell us a lot about how cautious members have become in recent weeks.

Remember, this is an election year – Powell may well be under intense pressure from the Treasury to cut. So even if inflation is showing signs of reaccelerating and broadening again, it does not mean that a June cut is suddenly going to be ditched.

It’s more complicated than inflation data may suggest – pain is in the mail, so to speak, and the Fed may decide its best to cut in the summer to avert a recession; wearing higher inflation as the price of this. As I said a lot last year, central banks are going to have to accept higher inflation and may eventually move the goalposts in order to retain their credibility.

Markets Mixed, Copper Price Surges

Stocks are pretty much flat in Europe this morning, the FTSE 100 index holding above 7,740 and the DAX index just below the 18,000 level. Sterling trades at a one-week low against the dollar after the rise in Treasury yields sent the buck up.

The Japanese yen also slipped despite leaks indicating the Bank of Japan will pull the trigger next week. Copper surged to an 11-month high on supply shortages in China. Oil has pulled back a touch after hitting its highest since early November.