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PPI 0.0% -- Inflation Quiet Before the Storm?

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Wednesday, November 16, 2016

The Producer Price Index (PPI) for October was released at a surprise 0.0%, down from an expected +0.3%, Subtracting food and energy, PPI last month went negative, -0.2%, whereas +0.2% was expected. The month-over-month trade was also negative, -0.1%; +0.2% had been anticipated.

Year over year hit +0.8%, up one-tenth from September but beneath the 1.2% analysts were looking for. Stripping out food and energy reached +1.2%, same as the previous month but lower than the +1.6% estimated.

This comes as a surprise as market participants and Federal Reserve presidents look for signs of inflation seeping into our economic reads. PPI being a direct indicator of domestic inflation, coming in unchanged from the previous month would tend to refute this, especially when gasoline prices spiked 9.7% in October.

Perhaps we’ve just witnessed the quiet before the storm. After all, the likelihood of the Fed raising interest rates a month from now is currently at 81%, the strongest it’s been. With President-elect Trump talking of borrowing to create construction jobs, coupled with interest rates at long-term historic lows, analysts believe it’s only a matter of time before inflation sets in. At that point, the Fed’s mandate of controlling inflation in the economy will likely have been triggered.

In Q3 earnings news, we saw an impressive beat from Target (TGT - Free Report) ; the retailer posted a strong quarter on healthy gross margins and better-than-expected online sales. In light of a mixed retail picture this quarter (read Sheraz Mian’s Retail Sector’s Mixed Q3 Showing for more), Target’s numbers came as a positive surprise. Shares are up 7.7% in the pre-market and are +13% month over month, and this ahead of holiday season.

Market futures are down as the post-election rally slows. The S&P 500 is down 9 points, the Dow -60 and Nasdaq -25. Oil prices are down again — WTI -0.9%, Brent -0.7% — wallowing once more in the mid-$40s ahead of a big OPEC meeting later this month.

Mark Vickery
Senior Editor

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