Risk Off as PPI Disappoints

 

Inflationary Pressure Slows at Business Level

Key economic data releases on the day were highlighted by the producer price index, which reported zero growth in the prices paid to domestic producers of goods and services in July.  The flat monthly number failed to meet market expectations of +0.2%, dragged down by decreases in energy prices and food.  Energy prices were down -0.5% in the past month, while the food index component fell 0.1% over the same period.  The core PPI also failed to meet median forecasts, reported at +0.1% MoM vs expectations of +0.2%.  Looking at producers’ price inflation over the past year, overall producer prices have increased 3.3%, while core prices rose 2.7% over the past year, both failing to the meet estimates of +3.4% and 2.8% respectively. 

 

 

Risk Off on PPI Disappointment

After a disappointing PPI report, markets mostly took a risk off tone.  Amidst volume that was 10% below the 30-day average, equity markets were little changed for most of the day, but drifted lower into the close. The NASDAQ was the only index that finished the day in positive territory with a small gain of 0.04%.  That gain helped keep the winning streak going, now standing at 8 consecutive days of gains, which was last accomplished almost 10 months ago in October of 2017.  The S&P couldn’t hold onto their gain late in the day, losing 0.14%.  The DJIA had the biggest loss of the day, falling 0.29%.    Risk free assets were in favor with Treasuries rallying throughout the day – Treasury yields across the curve were 2-4 bps lower with the 10-year closing at a yield near 2.92%.  In foreign exchange markets, the US Dollar (USD) had a strong day gaining 0.7% vs the Euro (EUR) and 0.4% vs the Pound (GBP).  Both the Russian Ruble (RUB) and Turkish Lira (TRY) continued their slide losing 1.6% and 4.7% respectively against the USD.  Crude oil futures fell, losing 0.3%, to close at $66.72/barrel. 

 

 

From Dove to Hawk

Tomorrow morning financial markets will get a second dose of inflation data, as the Labor Department reports its Consumer Price Index for July.  Expectations currently point towards a 2.3% rise in core consumer prices compared to a year earlier, which would provide further support for the Fed to maintain its outlook for two more rate hikes in 2018.  Speaking on the matter earlier today, Chicago Federal Reserve Bank President Charles Evans provided his support for 1-2 more hikes this year as he described the current economy as “extremely strong” and recognized the need to potentially tighten monetary policy to “somewhat restrictive” levels.  Evans’ views represent a stark contrast from his position at the FOMC meeting in December 2017, when he was one of the only two votes against the quarter-point rate hike then.