How Low Can You Go, Inflation?

Rates fall after morning data. Swap rates and Treasury yields fell across a flattening curve today, with soft PPI and an initial jobless claims beat the major contributors. PPI was lower than expected across the board while initial jobless claims came in at 264k, its highest mark since October of 2021. The combination of the two sent the 2-year yield to its intraday low, just under 3.81%. The 2-year yield rose throughout the afternoon, ending the day at 3.90%, while the 10-year yield fell ~6bps to 3.38%. Elsewhere, President Biden’s debt ceiling meeting with House Speaker McCarthy and others was postponed from tomorrow to next week, a signal of optimism that progress for a deal is coming to fruition.       

PPI comes in under expectations. PPI, a measure of changes in the prices paid to U.S. producers of goods and services, came in under expectations across all variations of the index, another deflationary sign following yesterday’s CPI print. YoY, headline PPI increased at the slowest pace since early 2021. Diving into the sub-categories of PPI, prices for final demand services increased 0.3% in April, the largest increase since a 0.4% jump in November, 2022. Over 1/3rd of the increase was attributed to a 4.1% rise in the portfolio management category. Food, alcohol, wholesaling, outpatient care, loan services, hospital inpatient care and guestroom rentals also increased, while long-distance motor carrying, food retailing and securities brokerage declined. Overall, 80% of the increase in headline PPI in April was driven by services. Final demand goods prices increased 0.2% on the month, following a 1.0% decline in March. An 8.4% increase in gasoline prices led the increase, while chicken eggs saw the steepest decline of 37.9%. 

Day ahead. Tomorrow’s schedule features commentary from Fed hawks Michelle Bowman, Philip Jefferson, and James Bullard. Michigan consumer sentiment and import price data will be released in the morning.