Rates Rise Following PPI Beat

Rates rise after strong PPI data, Fed commentary. Treasury yields rose across a steepening curve today after PPI data further illustrated the strength of the consumer economy, which has seemingly remained robust despite the Fed’s aggressive rate hikes. Fed member James Bullard provided an additional boost to yields after he revealed that he was in favor of a 50 bp hike at the February FOMC meeting, while also adding that he is open for a 50 bp hike in March. Loretta Mester echoed a similar sentiment, saying “I wouldn’t rule anything out for that meeting, or any meeting in the future.” The 2-year yield rose only ~2bps to 4.65%, however, while futures continue to suggest that a 25 bp hike is locked in for March.

January PPI beat is another inflationary signal. PPI, an index that tracks the cost of intermediate goods, exceeded market expectations for January. The increase was driven by a 1.2% increase in goods input prices, followed by a 0.4% increase in services inputs. The jump in goods prices was the largest increase since June 2022, and was largely driven by a 5.0% jump in energy costs due to a 6.2% increase in gas prices. Prices for vegetables, however, declined 33.5%. In services, hospital outpatient care increased 1.4%, a major driver of the increases, along with a broad range of other sectors. PPI offers a look into the cost of the items that are used to make/support the products and services that consumers purchase, which many argue is passed into CPI. Interestingly, recent Fed research shows that PPI doesn’t reliably forecast CPI despite this relationship.

Day ahead. Tomorrow’s session will be relatively quiet. Hawkish Fed member Thomas Barkin (non-voter), who recently stated that the central bank may need to raise rates to a higher level than previously expected, will make public comments at 8:30 AM. Export and import price data will be released at 8:30 AM as well.