Producer Prices Come In Hot
The week's first inflation read pressured markets. Producer prices rose 0.4% month over month, higher than last month's flat reading but in line with forecasts. Headline year over year hit 5.4%, 7/10 above last month and only a tenth above expectations. Core PPI (excluding food and energy) rose 0.2%, a tenth better than expected; core year over year came in at 4.6%, matching forecasts.
Breaking it down: final demand goods rose 1.1%, and three quarters of that came from final demand energy prices climbing 4.2%. Final demand services rose only 0.1%, while final demand transportation and warehouse services rose 2.3%. This was an energy-driven PPI event.
Does This Bleed Into CPI?
The open question is whether hot PPI carries into tomorrow's CPI. Right now expectations are for core year-over-year CPI to fall a tenth from last month. But crude oil is higher, yields are higher, and the dollar is higher, so the market is under pressure.
The CME FedWatch tool now shows a 74% chance of a Fed rate hike. That puts new Fed chair Kevin Warsh in a tricky spot if he wants to hold or lower rates - he would have to justify it. The response to PPI is never as strong as the response to CPI, so the Fed's whole bet is on tomorrow's CPI number. If CPI comes in hot, especially at the core level, that creates problems the Fed may have to deal with. The ECB just hiked rates to 2.5% this morning.
Two things could still shift the tone before then: a Treasury buyback happening today between 1:40 and 2:00 Eastern, and tomorrow's CPI. CPI is a much stronger signal of overall inflation, so it will be the final piece that either forces a hike or lets the Fed wait and skip reacting to volatile PPI.
Why a Rate Hike Won't Fix the Oil Story
A key question: will rate hikes actually hit the oil story? Probably no. Suppose the Fed raises by a quarter point next week. That does nothing to open the Strait of Hormuz or ease the pressure in the crude oil market that is squeezing some stocks - a supply shock. Raising rates would only weaken the U.S. economy on the demand side, and that fixes nothing here. The knee-jerk view many will voice today is that the Fed has to hike; whether Warsh agrees is unclear.
Warsh appealed to the Trump administration because he wanted a lower balance sheet and lower interest rates, and he is trying to help housing. Housing will not improve based on this number, and mortgage rates are certainly not going down. Consumers and small businesses would all be hurt. If Warsh hikes, the reasoning is easy to explain; if he holds despite these pressures, that takes much more explaining.
History adds pressure on the new chair's credibility: six of the last six new Fed chairs since 1950 raised rates as their first move, and six of eight since World War II did the same. The debate happens on the 15th, with the decision on the 16th at 2 p.m.
Bond Auctions and Jobless Claims
Yesterday's 10-year bond auction went very well - graded an A+ by some - and came in at 4.883/4%, the highest since 2007, showing real demand. A 30-year auction runs today; no clear reason it should differ much from yesterday's result. Jobless claims came in at 206,000 first-time filers, another strong number that has been nearly flat around 205,000 to 206,000.
Apple's Event
Apple (AAPL) held its event yesterday and introduced the iPhone 18 Pro and Pro Max, a new foldable iPhone duo, new Apple Watch models, and AirPods 5. The announcement ran over an hour. The stock fell yesterday but was up premarket even in a down market, though still down for the week after starting around 220. Apple stock is usually down on launch day and often a week later too. There is excitement around the foldable Duo, part of the premier line alongside the 18 Pro Max, priced around $2,000 - not aimed at bargain shoppers.
