Markets fall as inflation report stokes concerns about Fed rate cuts

Dow pulled back 82, decliners over advancers more than 3-2 & NAZ declined 75.  The MLP index edged higher 1+ to the 266s & the REIT index was off 2+ to the 378s.  Junk bond funds slid lower & Treasuries saw selling which raised yields (more below).  Oil inched higher in the 78s after selling in early trading (more below) & gold added 5 to 2020.

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Inflation at the wholesale level rose much more than expected in Jan, underscoring the challenge of taming price pressures within the economy.  The Labor Dept said that its producer price index, which measures inflation at the wholesale level before it reaches consumers, jumped 0.3% in Jan from the previous month.  On an annual basis, prices remain up 0.9%.  Those figures are both higher than the 0.1% monthly gain & the 0.6% annual figure predicted.  In another sign that points to the stickiness of high inflation, core prices, which exclude the more volatile measurements of food & energy, surged 0.5% for the month.  That is higher than both the 0.1% estimate & the flat reading recorded last month.  The figure was up 2% on a 12-month basis.  The data comes 3 days after the Labor Dept said the more closely watched consumer price index, which measures the prices paid directly by consumers, rose 0.3% in Jan from the previous month & 3.1% from the same time last year, far faster than anticipated.  Both releases are considered to be important measurements of inflation, with the PPI believed to be a leading indicator of inflationary pressures as costs work their way down to consumers.  The different gauges point to inflation that is still running above the Federal Reserve's preferred 2% target.  The Federal Reserve has signaled it is closely watching for evidence inflation is continuing to subside as policymakers try to determine what comes next for interest rates in 2024.  Central bank officials have opened the door to cutting interest rates this year, but they have pushed back against the market's aggressive expectations.  Chair Jerome Powell said during the Fed's most recent meeting that a Mar rate cut is likely off the table as policymakers do not have enough confidence that inflation is on the path back to 2%.

Wholesale inflation accelerates more than expected in January

Treasury yields climbed after Jan wholesaler prices came in higher than expected.  The yield on the 10-year Treasury  was nearly 8 basis points higher to 4.32%, above the closely watched 4.3% level & the 2-year Treasury  yield was last trading at 4.68% after rising by 11 basis points.  At one point, the yield reached 4.718%, its highest level since Dec 13.  Yields & prices have an inverted relationship & 1 basis point equals 0.01%.  The producer price index rose 0.3% in Jan, above the 0.1% forecast.  Excluding volatile food & energy prices, the core PPI added 0.5%, also exceeding expectations for a 0.1% increase.  It's the latest in a string of closely watched economic data releases this week that have come as investors attempt to predict the future of inflation & monetary policy.  Earlier in the week, the consumer price index for Jan  showed a 0.3% increase on a monthly & a 3.1% rise on an annual basis, just above expectations.  Markets took a sharp slide after the data indicated persistent inflation.  Data yesterday showed that retail sales figures fell by 0.8%, which was far more than expected in Jan.  The forecast had expected a 0.3% decrease.  Meanwhile, the latest initial weekly jobless claims, also yesterday, suggested continued strength in the labor market, coming in at 212K down from an upwardly revised 220K in the previous period.  Investors have been closely watching economic data for hints about whether the economy is easing, which could foreshadow interest rate cuts.

10-year Treasury yield spikes above 4.3% after hot producer prices report

Oil prices pulled back as the market sorted thru conflicting demand forecasts from OPEC & the International Energy Agency (IEA).  The West Texas Intermediate contract for Mar lost 63¢ (0.8%) to $77.40 a barrel & Apr Brent futures dropped 75¢ a barrel to $82.09 a barrel, down 0.9%. The pullback comes after US crude & the global benchmark rallied yesterday, brushing off a weak global demand forecast for 2024 from the IEA.  Crude prices found support yesterday after US consumer retail sales fell more than than expected in Jan, putting pressure on the $ by suggesting a slower economy & raising hopes that the Federal Reserve might soon start cutting interest rates.  The IEA forecast yesterday that worldwide crude oil demand growth would slow by ½ this year's pace, to 1.2M barrels per day this year, compared to 2.3M bpd in 2023.  Supply is expected to exceed demand, with production outside OPEC rising by 1.7M bpd, according to IEA.  But OPEC predicted a much tighter market this year, with demand growing by 2.2M bpd, outpacing production growth outside the cartel of what it said would total 1.2M bpd.

Oil prices pull back as market grapples with conflicting estimates of demand

Stocks were sold after another inflation reading above forecasts undermined the case for interest rate cuts.  Bigger picture is that inflation is mild & far below the rates a couple of years ago.  Today's data is more important that the CPI because it signals price increases while CPI represents prices in stores today.  Investors who became addicted to unusually low prices & yields now have to adjust to a slower path for rate cuts.

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