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PPI Joins CPI Higher, Housing Starts Post Big Miss

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Friday, February 16th, 2024

OK, take a breath. This morning, the January Producer Price Index (PPI) is out, and just like Tuesday’s Consumer Price Index (CPI) report, the numbers are higher than expected. This suggests that inflation remains in our near-term economy, at very least, and may continue to be stickier than market participants had been leading themselves to believe, at worst.

Not that pre-market futures are breaking the floor like they did after the CPI report, but right now we’re -100 points on the Dow, -5 on the S&P 500 and +20 points on the Nasdaq. These pre-market indices were all higher before PPI hit the tape.

Headline month-over-month PPI reached +0.3%, 20 basis points (bps) higher than the +0.1% expected — in fact, the highest we’ve seen since +0.4% reported in September of last year. Stripping out volatile food and energy prices, the core print comes in much hotter: +0.5% from an anticipated +0.1%, which is the highest print we’ve seen since the early part of 2022, back when the Fed first started raising interest rates to cool inflation. This would assert that wholesale pricing is not going anywhere soon, much to the chagrin of those looking for interest rate cuts in the near term.

Year-over-year headline PPI reached +1.0%, while core came in at +2.0%. These are both in the range that is quite palatable for those seeking cooler inflation numbers, even if the core is +30 bps month over month. Ex-food, energy and trade reached +2.6%, in-line with the previous month. Even though these are off November lows, they’re still in the ballpark of where the Fed wants inflation metrics to be. We haven’t been north of 3% on this metric since April of last year.

Pre-market futures don’t like the results, although we’d already begun getting our minds off a March interest rate cut, so the selling is less severe than it was earlier this week. Services are remaining sticky, but goods numbers are continuing to dwindle, albeit slowly. Also keep in mind that early-year economic prints tend to carry a heavier amount of inflation based on a number of things, including carry-over from the previous year’s holiday shopping season. We may need to wait until March or April to see if our longer-term trajectories remain intact toward 2% inflation.

This itself creates an additional worry: if the Fed is waiting for the data to say when the cuts need to come, they may not find out until it’s too late to steer clear of a recession. Think of it this way: if this week’s CPI and PPI numbers are indeed somewhat clouded by seasonality, the triggers for the Fed to cut interest rates aren’t there. If we see the smoke clear and we’re sinking sub-2% in important inflation metrics, even cuts in May or June will have been too long to wait.

Housing Starts for January are also out this morning, missing notably by -14.8% from expectations to 1.331 million seasonally adjusted, annualized units. This is generating some further chafing in today’s early trading, although it’s important not to overlook the big upward revision the previous month — from 1.46 million to 1.56 million today. Building Permits — a future indicator of starts — were off -1.5% from projections to 1.47 million, with a slight downward revision to December.

These metrics are also subject to the wider inflation news that the PPI is forcing a reckoning with: higher inflation — or, at least, not bringing down interest rates in a timely manner — is going to keep mortgage rates higher for longer, continuing to pressure the housing market. Pent-up demand has pushed through much of this static, but if mortgage rates head back up over 7%, which this week’s inflation data infers, this will keep prospective homebuyers on the sidelines for longer than analysts have been expecting.

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