Morning Report: Inflation at the wholesale level comes in lower than expected

Vital Statistics:

 LastChange
S&P futures4,00741.25
Oil (WTI)84.98-0.88
10 year government bond yield 3.78%
30 year fixed rate mortgage 6.70%

Stocks are higher this morning on optimism about talks between the US and China. Bonds and MBS are up.

More good news on inflation: The producer price index rose 0.2% in October, which was well below Street expectations and flat compared to September. On a year-over-year basis, prices are up 8%, which was lower than expectations. If you strip out food and energy, the index rose 0.2% month-over-month and 5.4% YOY.

The PPI is a wholesale price index, which is a step removed from what consumers see. Regardless, this is good news for the economy overall and indicates the Fed is gaining traction on the inflation front.

Housing will continue to be a contributor to headline inflation, at least for a while. “As the housing market cools, this category will also ease but we may have to wait until next year before it meaningfully dampens headline inflation,” said Jeffrey Roach, chief economist for LPL Financial.

Interesting tidbit on housing – Warren Buffett’s Berkshire Hathaway initiated a position in building products manufacturer Louisiana Pacific. Historically housing has led the economy out of a recession, although it has been sluggish after the Great Recession.

Separately, the Home Despot reported better-than-expected sales, although the number of transactions declined.

Lael Brainard said yesterday that it would soon be appropriate to slow the pace of rate hikes. “I think it will probably be appropriate soon to move to a slower pace of increases, but I think what’s really important to emphasize is… we have additional work to do,” Brainard said in an interview with Bloomberg in Washington. It’s really going to be an exercise on watching the data carefully and trying to assess how much restraint there is and how much additional restraint is going to be necessary, and sustained for how long, and those are the kinds of judgments that lie ahead for us,” she said.

This statement comports with the December Fed Funds futures, which are showing a 85% chance of a 50 basis point hike next month. After that, it looks like we might get another 25 basis points in early 2023 and then the Fed will stand pat for a while.

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