Hot PPI causes traders to push pause
the rotation continues
The Producer Price Index was posted today. It’s the business equivalent of the CPI. Boy did it come in hot.
Final demand came in at a 9.7% year-over-year increase. That is smoking hot. It was down slightly from the prior month’s reading of 9.8%. It was also below the consensus estimate. While the final demand PPI came in hot, the ‘core’ PPI looked worse.
‘Core’ figures came in at an 8.3% year-over-year increase. There is no relief here. It has taken on a blistering trajectory. This is the largest advance since the data was first calculated in 2011. It was also well above market expectations of 8%. This means the relief in the final demand PPI came from food and energy. Do not expect that reprieve to continue.
Producers are really struggling here. They are losing margin. When you subtract the PPI from the CPI, you can see it in the figures.
Keep in mind, the PPI is only calculated on US producers. Many retailers are relying heavily on imports to keep prices low. Tomorrow we’ll see import and export data, as well as retail sales.
The market attempted to shrug this off but in time it proved too much. This was especially the case for the tech sector. The big unprofitable hyper-growth names saw the biggest drawdown.
The market is still coming to terms with the first rate hike. As interest rates rise, these high-flying tech names are going to take a drumming. It has to do with how investors value them. When they discount their future cash flows back to the present, they use the “risk-free rate” of a treasury bond. As these bonds move higher, those future cash flows don’t look as adequate. This is especially the case if the company is burning through cash to achieve growth. Investors are going to demand a return on their investment. Empty promises of forever growth won’t cut it.
Yesterday I mentioned that we would have a wild end to this week. Today is proof that volatility in this market is rising.
However, the debt market is staying largely under control here.
That makes me think these wild gyrations are investors figuring out two major themes. The first is the Fed’s balance sheet taper and first rate hike. Many are eyeing March as the date of the first increase in the interest rate since December 2018.
This FedWatch tool can be accessed via this website hosted by the CME Group.
The second major theme that is playing out is the end of Covid. That’s right, we are nearing the end game of the covid craziness! Today the Supreme Court shutdown the administration’s attempt to have OSHA enforce a shot mandate on businesses with more than 100 employees. We are also nearing the peak of the Omicron wave.
The market is preparing itself for the end of any further hope of government stimulus money. It is also beginning to price in a return to normal for many businesses. The stocks that were all the rage during the lockdowns are experiencing a serious correction. Zoom and Peloton both come to mind. This doesn’t mean there won’t be pockets of covid crazies but they will be the exception, not the rule. The herd’s thinking on this has shifted and it is causing the market and news media to shift with it.
