Producer Price Index Inches Higher, Adding to Our Cautious View
All eyes will be on Fed Chair Powell’s comments this afternoon and what he does or doesn’t say about the data and the Fed's plans.
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Key producer price index data for October inched up across the board, when compared with the September figures. In some cases, the numbers were even warmer than the market’s expectations.
This is the second round of price data that came in this week after yesterday’s October consumer price index. The PPI appears to be making a sequential month-over-month step up and the data suggests that inflation is sticky, or worse.
The initial market reaction to the October PPI figures in the CME Fed Watch Tool is chipping away at yesterday’s increase in expectations for a rate cut in December. Ahead of today’s market open, the revised expectation is just below 80% compared with yesterday’s 82.5%, and 66.6% last week. The market is likely waiting to see what Fed Chair Jerome Powell will say today when he speaks 3 p.m. ET at a Federal Reserve Bank of Dallas event.
While we do not expect Powell to make any specific policy comments given the amount of data available before the Fed’s December policy meeting, we will be assessing his choice of words and tone. What we’ll be looking for is to see if this week’s October inflation data may have altered the Fed Chair’s leaning when it comes to the timing for future rate cuts. Odds are Powell will continue to say he and the rest of the Fed will remain data-dependent, but in looking at this latest batch of data it’s hard to think Powell and the other Fed heads aren’t seeing what we are seeing.
This leads us to think some of our more interest-rate sensitive positions, like Builders FirstSource BLDR could give back some of their recent move higher. As we indicated yesterday, BLDR shares and others are on our shopping list and as we digest Powell’s comments and other upcoming data, we’ll plot our next moves with the portfolio’s cash position.
And as we digest today’s data, should the market shrug it off and melt up further, that could place the market back into overbought territory. Technical analyst Helene Meisler thinks the market is close to being overbought, which is another reason to tread carefully in the near term and wait for more favorable risk-to-reward levels to put cash to work.
At the time of publication, Pro Portfolio was long BLDR.
