Producer Inflation Data Offers Hope for Doves

Yields trade within a tight range on PPI day. Treasury yield volatility was modest in today’s trading session despite the release of PPI data that was lower than expected across all readings. The inflation data fueled an immediate ~3 bp decline at the short end of the yield curve, and yields were little changed throughout the remainder of the session. The short end closed ~1 bp lower while the long end rose 1-2 bps, pushing 2-year and 10-year yields to 4.37% and 4.79%, respectively.

Producer inflation was lower than expected in December. Today’s PPI data surprised markets, landing below expectations across all measurements. Encouragingly, monthly readings were unchanged or lower vs. November, helped by lower food costs and unchanged service prices. Good prices saw the largest gains, with a 3.5% jump in energy prices driving a third consecutive monthly increase in the overall goods index of 0.6%. Among PPI’s many takeaways are the categories that feed into PCE, which were mixed in December, with little to no change in physician services and portfolio management, while airfares climbed by the most since March 2022. Overall, the cool PPI results were welcomed as a sign that deflation, while slowing, may not have completely stalled.

Attention turns to tomorrow’s CPI data. Core consumer inflation is expected to have remained flat from November to December, with CPI forecasted at 0.3% MoM and 3.3% YoY price growth. The latter would mark the fourth consecutive month of 3.3% YoY inflation, a slight increase from 2024 lows of 3.2%. Meanwhile, headline CPI is expected to rise to 0.4% MoM and 2.9% YoY. While doves will hope for another cooler-than-expected inflation print (following today’s PPI data), the strength of the labor market is likely to have a greater influence on the Fed’s 2025 policy outlook.