March PPI Hits All-Time High and Treasuries Rally

  • March PPI came in hotter than expected with new cycle and all-time highs across many of the metrics and Treasuries rallied as a result. Yes, that’s right Treasuries rallied.

 

  • While the CPI report from yesterday had a better than expected Core CPI number (thanks to some softening in used car prices), it was generally another sobering report on inflation but Treasuries rallied too.

 

  • One of the reasons the Treasuries rallied yesterday is the market may think we are at, or near, peak inflation and have adequately priced in the expected inflation risk.

 

  • Certainly base effects will have some  moderating impact. Recall April 2021 was the first month with spikes in monthly CPI figures. As those 0.6%, 0.7%, 0.8% monthly gains from last year roll off the yearly calculations in the months ahead it is likely that yearly inflation figures will plateau.

 

  • But looking at the latest PPI numbers, and the ongoing impact on prices from the Ukraine war, it still seems inflation pressures will remain persistent for much of this year and any improvement will be modest and grudging.

 

  • Perhaps another aspect of the Treasury rally is off the real average hourly earnings (inflation-adjusted) at-2.7% in March. That’s tied with May 2021 as the second lowest of this cycle. This speaks directly to some of the consumer angst noted in recent confidence readings. While wage gains have risen impressively on a historical basis in the past year, it’s also obvious they haven’t kept pace with the increase in prices. Consumers that feel the pinch at the pump and grocery store are apt to become more selective in their discretionary spending.

 

  • Yet another reason for the rally is that the Fed’s hawkish rhetoric has only intensified in recent days and the thought of a Fed hiking early and often to combat these price pressures will also be an increasing headwind to the economy.

 

  • So-called soft landings are hard to engineer in the best of scenarios but when lifting rates from the zero lower bound to something near 3% in a short time frame, when inflation is likely to be remain somewhat sticky, and the consumer feeling less confident, despite solid wage gains in the past year, it will really make the Fed’s task difficult to achieve.
March PPI Final Demand (YoY)

 

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 2.31 2.57 2.69 2.87 3.18 3.65
0.50 2.29 2.54 2.63 2.76 3.04 3.54
1.00 2.29 2.51 2.60 2.71 2.95 3.41
2.00 2.50 2.59 2.63 2.84 NA
3.00 2.59 2.77 NA
4.00 2.73 NA
5.00 2.69 NA
10.00 NA

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Tags: Published: 04/13/22 by Thomas R. Fitzgerald