Today’s Producer Price Index (PPI) points to persistent inflation, and corporate earnings face an increasing challenge as consumer spending slows. Equity market investors responded to the worsening outlook for earnings and inflation by selling equities, with most broad indices falling and yields rising, albeit modestly.
The November Producer Price Index (PPI) report continues to weigh on the stock market’s (S&P 500) downtrend from its recent 200-day moving average. The PPI was higher than expected at 7.4% year-on-year (y/y) and 0.3% m/m (m/m) against consensus expectations of 7.2% and 0.2%.
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Excluding food and energy, the core PPI was even higher than the headlines compared to consensus expectations. Core PPI was 6.2% y/y and 0.4% m/m, higher than expectations of 5.9% and 0.2%. Non-core PPI rose at the same pace as October, but core PPI accelerated significantly from 0.1% to 0.4%.
The preliminary release of the University of Michigan Consumer Sentiment for December was 59.1, beating consensus expectations of 56.9 and improving from November’s 56.8 level.
Consumer price index and consumer sentiment data are fueling concerns among investors already eyeing persistent inflation and an uncertain outlook on the extent of monetary policy tightening in the coming months.
In recent comments, Federal Reserve Chairman Jerome Powell hinted that the central bank may ease the pace of the Federal Fund’s aggressive rate hikes, suggesting that monetary tightening could have a less dramatic impact on corporate earnings. , fueling optimism that it could be less likely to trigger a recession. .
A Federal Reserve meeting scheduled for Wednesday this week as investors fear threats to margins stemming from accelerating service inflation, wage pressures and weakening consumer spending. Many people are sitting on the edge of their chairs.
The big question is whether the Fed believes it has made enough progress in fighting inflation to ease its tightening of monetary policy, or whether sustained inflation, as the PPI indicates, is enough to keep the Fed still out of the crisis. It is whether or not it indicates that it has not escaped and must be continued. Aggressive rate hikes, combined with weaker consumer spending and wage pressures, could hurt corporate earnings.
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(Author is senior economist at Interactive Brokers)