Stocks are trading near unchanged levels and Mortgage Bonds are higher after and important Producer Price Index report that has a lot more to it than just the headline.
Fed Chair Powell will be speaking later this morning around 10:00am ET. We will update you with any notable comments and will be looking to see if they mentioned the softer BLS Jobs Data and higher Initial Jobless Claims.
Producer Price Index (PPI)
The Producer Price Index (PPI) report, which measures wholesale or producer inflation, rose 0.5% in April, which was even hotter than the 0.4 expected. The Core rate, which strips out food and energy prices, also rose by 0.5%, much hotter than the 0.2% anticipated.
On the surface, this looked like a significant rise in monthly wholesale inflation, and the media sounded the alarms on the increase and said the Fed stopping hiking too soon. Initially, the markets sold off…but a deeper dive shows a different story.
The reason for the big monthly rise was a sharp negative revision to the previous report. Initially, the numbers for March showed that headline and core producer inflation rose by 0.2% each. In today’s report, we see that they revised both figures lower by 0.3%, making the March figures -0.1% for both headline and core…what a big difference. This again raises the question as to what is happening at the BLS with their data, as it’s very unusual to see this big of a revision in inflation data…we are accustomed to seeing it with the Jobs data by now.
It's a bit frustrating, because last month we would have likely seen a rally in Mortgage Bonds and decline in rates if the initial numbers reported were negative, but the market does not react as much to revisions. Additionally, the inputs from PPI go into PCE, the Fed’s favorite measures, so that number could have been lower as well and sparked a rally.
We are hopeful that in tomorrow’s CPI report, which is more important than PPI, we see some negative revisions as well, because last month’s surprisingly high CPI report on April 10 caused a huge sell off in the Bond market.
After all of the noise around the monthly numbers and revisions, year over year the inflation figures were as expected. Headline inflation rose to 2.2%, while core remained at 2.4%...both pretty good inflation readings and in line with what the Fed wants to see.
Some notable components - Food prices fell 0.7% in April, while Energy prices rose 2%, driven by gasoline prices.
NFIB Small Business Optimism Index
The NFIB Small Business Optimism Index rose 1.2 points to 89.7 in April, but from very depressed levels. The 50-year Average is 98 for perspective. Those that Expect a Better Economy fell 1 point and remains extremely negative at -37%.
Plans to hire rose 1 point from the lowest level since 2016 when removing Covid, so while it was a slight improvement, the small businesses are not planning to hire much.
Higher Selling Prices fell 3 points after rising by 7 last month. Only 26% of owners plan price hikes in April, down 7 points and the lowest reading since April of last year, which is a good sign for inflation.
Technical Analysis
Mortgage Bonds are once again trying to break above the 50-day Moving Average and close above it. So far, things are looking good! A close above this level would likely lead to some continued improvement higher, barring any negative surprises from CPI inflation data tomorrow.
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