Markets rise a the producer price index data for Jul was modest

Dow rose 194, advancers over decliners about 3-1 & NAZ went up 290.  The MLP index was off 1 to the 268s & the REIT index added 2 to the 409s.  Junk bond funds inched higher & Treasuries were purchased which reduced yields (more below).  Oil retreated 1+ to the high 78s & gold added 7 to 2511 for another record.

Dow Jones Industrials

A key measure of wholesale inflation rose less than expected in Jul, opening the door further for the Federal Reserve to start lowering interest rates.  The producer price index (PPI), which measures selling prices that producers get for goods & services, increased 0.1% on the month, the Labor Dept's Bureau of Labor Statistics reported.  Excluding volatile food & energy components, the core PPI was flat.  The forecast had been looking for an increase of 0.2% on both the all-items & the core readings.  A further core measure that also excludes trade services showed a rise of 0.3%.  On a year-over-year basis, the headline PPI increased 2.2%, a sharp drop from the 2.7% reading in Jun.  The wholesale inflation reading was relatively tame despite a 0.6% jump in final demand goods prices, the biggest move higher since Feb & due primarily to a 1.9% surge in energy, including a 2.8% increase in gasoline.  Countering the move was a 0.2% slide in services, the biggest move lower since Mar 2023.  Trade services prices fell 1.3% while margins for machinery & vehicles wholesaling tumbled 4.1%.  An increase of 2.3% in portfolio management offset some of the decline in services prices.  The PPI is considered a leading indicator for inflation as it gauges pipeline inflation from the perspective of manufacturers & suppliers of goods & services.  Its counterpart, to be released tomorrow, is the consumer price index, which measures the actual prices consumers pay in the marketplace.

Wholesale inflation measure rose 0.1% in July, less than expected

Home Depot’s (HD), a Dow stock, topped quarterly expectations, but cautioned that sales will be weaker than expected in the back ½ of the year as high interest rates & consumer uncertainty dampen demand.  The home improvement retailer said it now expects full-year comparable sales to decline 3-4% compared with the prior fiscal year.  It had previously expected comparable sales, a metric that takes out the impact of store openings & closures & other one-time factors, to decline about 1%.  Total annual sales will get a boost from its recently completed acquisition of SRS Distribution, a company that sells supplies to professionals in the landscaping, roofing or pool businesses.  Total sales are expected to increase 2.5-3.5% including a 53rd week in the fiscal year & approximately $6.4B in sales from SRS.  Yet excluding sales from SRS, its new full-year forecast would have amounted to a revenue cut.  CFO Richard McPhail said HD has contended with consumers who have a “deferral mindset” since the middle of 2023.  Interest rates have caused them to put off buying & selling homes & borrowing money for bigger projects, such as a kitchen renovation.  Yet over the past qtr, he said surveys of customers & home professionals like contractors have captured another challenge: a more cautious consumer.  “Pros tell us that, for the first time, their customers aren’t just deferring because of higher financing costs,” he added.  “They’re deferring because of a sense of greater uncertainty in the economy.”  EPS decreased to $4.60, from $4.65 per share in the year-ago period.  Revenue rose slightly from $42.9B in the year-ago period.  Comparable sales dropped 3.3% in the qtr across the business & declined 3.6% in the US.  That was worse than the 2.1% decrease that was expected & marked the 7th consecutive qtr of negative comparable sales at HD.  The stock went up 1.12.

Home Depot expects sales to weaken as consumers grow more cautious

Treasury yields fell as wholesale inflation measure came in softer than expected.  The yield on the 10-year Treasury was lower by about 4 basis points at 3.867% & the 2-year Treasury yield was last down by 4.8 basis points at 3.969%.  Yields & prices move in opposite directions & 1 basis point equals 0.01%.  The producer price index increased 0.1% on the month.  Excluding volatile food & energy components, core PPI was flat.  The PPI is the first of the 2 key inflation reports this week, with the consumer price index due tomorrow.  Investors are watching both sets of data closely for hints about the state of the economy, especially as concerns about whether the US could be entering a recession have caused market jitters in recent weeks.  Following recent market turmoil & economic uncertainty, questions have also emerged about whether the Fed should have already started cutting rates to avoid a hard landing.  Markets are widely expecting a Sep rate cut, but traders have appeared split on how big they expect the cut to be.

Treasury yields slide as producer prices increase is less than expected

Even though today's inflation data was mild, it's important to remember that prices on much of what consumers buy are still substantially above levels just a few years ago.  Those higher prices are in the minds of consumer & will affect their spending.