On the surface, the Labor Department’s Bureau of Labor Statistics provided excellent news. The latest Producer Price Index (PPI) report – a key measure of wholesale inflation – moved up less than what analysts anticipated. That may set the stage for the Federal Reserve to implement a dovish monetary policy pivot. However, today’s PPI report brings complexities to the table that investors should assess carefully.
Specifically, the PPI – which according to CNBC measures selling prices that producers get for goods and services – increased 0.1% in July. When filtering out volatile food and energy components, the so-called core PPI was flat. Overall, the market responded positively to the disclosure, with the S&P 500 swinging up around 1.5% in afternoon trading.
Economists were targeting an increase of 0.2% for both the standard and core readings. Plus, CNBC pointed out that the former metric rose 2.2% from the year-ago period. This figure represented a significant decline from the 2.7% year-over-year rise recorded in June.
Regarding some of the details, trading services prices slipped 1.3%. Margins for machinery and vehicles wholesaling dropped 4.1%. Overall, today’s PPI report seems like a net positive. Still, there are three things to consider before making big moves.
Today’s PPI Report Incentivizes Rate Cuts But by How Much?
As InvestorPlace’s Shrey Dua mentioned, Wall Street was buzzing ahead of tomorrow’s Consumer Price Index (CPI) report. Combined with the robust sentiment spike brought on by today’s PPI report, it seems that the Fed has enough data to justify an interest rate cut. However, much debate exists surrounding the magnitude of the upcoming policy pivot.
Dua cited the CME Fed Watch indicator, noting that “interest rate traders are pricing in a 45.5% chance of a 25 basis point rate cut and a 54.5% chance of a 50 bp cut. This would bring the terminal rate to a range between 5%-5.25% and 4.75%-5%, respectively.”
A Dovish Fed Isn’t Necessarily Good News
One issue that may continue to cloud the implications of today’s PPI report is the most recent jobs data. The U.S. economy added 114,000 jobs last month, which was well below the 185,000 target that economists had anticipated. Subsequently, the unemployment rate moved higher to 4.3%.
At the time, questions about the Fed waiting too long to lower the benchmark interest rate rang loudly. However, the central bank must act carefully. While the market wants reduced borrowing costs, a return to high inflation – due to the flow of cheapened money – could itself harm the economy.
Main Street is Hurting
Hidden from the euphoria of today’s PPI report is a New York Fed survey, which had a telling observation. It showed that consumers, especially those in the lower income bracket, are beginning to feel more acutely the pain from inflation.
Should the Fed move forward with rate cuts, that might help Wall Street but at the expense of Main Street. However, such a dichotomy might not last indefinitely.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
