• Treasury yields fall when PPI does not accelerate.
  • US dollar slightly lower as interest rates dip.
  • Consumer Price Index increases are expected to moderate in October.

Sometimes what doesn’t happen is the story.  

Producer Prices in the US rose at a record pace for the second month in a row, but in markets wary of accelerating inflation this news knocked Treasury yields down to a six-week low. 

The Producer Price Index (PPI) rose 8.6% in October, and the core index climbed 6.8%, both the highest annual rates in the 11-year series history, reported the Labor Department on Tuesday. Consensus forecasts were for increases of 8.7% and 6.8% respectively.

Producer prices rose 0.6% in October, as expected up slightly from.5% in September. Core prices added 0.4%, under the 0.5% forecast and double September’s 0.2% increase. 

Core PPI

FXtreet

Federal Reserve policy

Inflation has become the primary concern of the Federal Reserve in the last six months as some consumer measures of prices have more than tripled since January.  

Fed officials have recently acknowledged that inflation pressures are stronger and longer lasting than they had anticipated. The bank still maintains that the primary causes are the supply chain shocks from the various pandemic dislocations and that prices will gradually subside next year. 

The Fed announced at its November 3 meeting that it would reduce its $120 billion of bond purchases by $15 billion each month until the program ends in June, with the cuts after December contingent on US economic progress. 

Fed rate projections released at the September 22 meeting show one fed funds increase in 2022. Market estimates are more agressive with the Chicago Board Options Exchange (CBOE) fed futures exhibiting one 0.25% increase in June and one in December. 

CBOE

Market response

Treasury yields moved lower in all durations except the shortest of three months. The 10-year note was off 7 basis points in early afternoon trading to 1.429%. The return on this commercially important bond has shed 14 basis points since the closing rate of 1.577% on November 3 after the Federal Open Market Committee (FOMC) meeting.  

Treasury yields

CNBC

The dollar was lower on currency exchanges, losing small amounts against all the  majors.

The USD/JPY fell below 113.00to 112.90  its lowest level in three weeks while the euro was unchanged at 1.1590.

PPI and CPI

Soaring gasoline prices, up 6.7% in October, supplied almost two-thirds of the 1.2% increase in good prices while the service price index added just 0.2%. Wholesale food prices fell 0.1%  as beef and veal costs dropped 10.3%. Trucking costs rose 2.5% last month.. 

Labor compensation rose the most on record in the third quarter. A small business survey reported that 32% of owners said they plannned to increase employee compensation in the next three months. 

The PPI is the first of two important inflation gauges released this week. 

On Wednesday the Labor Department will issue its Consumer Price Index (CPI)  which is predicted to show a 0.5% monthly increase and 5.3% annual gain with 0.3% and 4%  for Core CPI.  September's rates were 5.3% for the headline index and 4% for core. 

 

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