The Treasury market had a blunt message for anyone who thinks inflation is going in the right direction. Don’t be so sure.
Yields on Treasury debt were inching higher following the release of the latest producer price index data, a key inflation measure closely watched by the Federal Reserve.
“What PPI is showing us is that it’s going to be a choppy journey,” said Marvin Loh, senior global macro strategist at State Street. “Year-over-year numbers are still a little bit better, but certainly it’s a disappointment.”
The core November PPI, which excludes food and energy, increased by 0.4% from the previous month, above the consensus call for a 0.2% gain among economists surveyed by FactSet. It rose by 6.2% year over year, exceeding the consensus forecast of 5.9%.
But headline PPI increased by 7.4% year over year, down from 8.1% last month.
“Easing producer prices foreshadow an improving inflation environment,” Jeffrey Roach, chief economist for LPL Financial, said in an email, reflecting a more upbeat view of the data. He said, though, that “the monthly increase in producer prices illustrates the need for continued tightening, albeit at a slower pace.”
The yield on the 10-year Treasury note, which reflects expectations about the economy and inflation, was at 3.55% on Friday morning. Before the data’s release, it had been at around 3.47% at one point. Bond yields and prices move in opposite directions.
The two-year Treasury’s yield, meanwhile, was at 4.35% on Friday morning, up from around 4.25% before the PPI’s release, according to FactSet.
Last month’s consumer price index, another key inflation gauge, gave the market some hope that inflation was heading in the right direction and that the Fed would start to reduce the size of its recent interest-rate increases.
Partly because of that data, prices for 10-year Treasury debt have been rallying recently, sending yields lower. The yield hit a 52-week high of 4.23% in late October.
The Federal Open Market Committee is scheduled to gather next week on Tuesday and Wednesday. The market is still expecting policy makers to boost short-term rates by 50 basis points, or half a percentage point, breaking the series of four consecutive 75 basis-point increases it has put through this year to tame inflation.
The futures market on Friday morning was putting the chance of a 50 basis- point hike at 77%.
The next CPI release is scheduled for Tuesday. But the latest PPI data “pushes back maybe on the more aggressive view the CPI will continue to get better,” said Loh.