Rate Cut Commencement Delayed Again Following Hot PPI Slate

Rates rise on higher-than-expected PPI. Swap rates/Treasury yields climbed 2-7bps today after PPI data greatly exceeded forecasts. The report prompted an immediate 5-10bp spike across the curve in the morning as traders pared bets for rate cuts; a quarter-point cut is no longer priced in until July’s policy meeting. Moreover, Fed Funds futures have ~90bps of accommodation priced in for 2024, compared to ~145bps of rate cuts as of February 1st. Rates climbed 10-20bps over the week and are now 40-50bps higher since the beginning of February. Markets will be closed on Monday in observance of Presidents’ Day.

PPI adds to inflation heartburn. January PPI was higher than expected across the board, yet another sign this week (following CPI) that the road to disinflation will be bumpy. Core MoM and YoY figures (ex food and energy) were 0.4% above forecasts and rose 0.5% and 2.0%, respectively. The former was the highest rate of price growth since July of last year, while the latter was its highest since October. Headline PPI grew 0.3% MoM and 0.9% YoY, with the YoY print the lone output to show decreased price growth from December. Inflation data will now be on hold until PCE is released at the end of February.

Former Treasury Secretary Lawrence Summers says that rate hikes are on the table. Following this week’s high CPI and PPI prints, Lawrence Summers said that “There’s a meaningful chance- maybe it’s 15%” that the next Fed move will be a rate hike. He added, “I think we have to recognize the possibility of a mini-paradigm shift,” though he caveated that one month of poor data should not be overvalued. Meanwhile, Fed President Mary Daly said today that three 2024 rate cuts are “a reasonable baseline,” which is slightly less than currently priced in.