The PPI has good news for the Fed; S&P 500 is rising faster than the CPI

Producer price index data on Tuesday showed inflation turned hotter in April, but downward revisions to earlier data eased concerns. Meanwhile, health care prices, which were the largest contributor to the Federal Reserve’s primary core inflation, fell somewhat as airfares fell. Following the PPI data, the S&P 500 rose in morning stock market action ahead of the key consumer price index and retail sales reports on Wednesday.

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PPI data

The PPI for final demand increased by 0.5% on the month and by 2.2% on a year ago. Economists on Wall Street expected a monthly increase of 0.2% and a gain of 2.2% from a year ago, according to Econoday.

The upward surprise of the monthly data, but an in-line annual increase, implies downward revisions to previous data. The total PPI for March was revised from 0.2% to -0.1%.

Excluding food and energy, the PPI rose 0.3% this month, compared to forecasts of 0.2%. However, March data was also revised from 0.2% to -0.1%.

Impact on the Fed’s key inflation numbers

Speaking in Amsterdam, Fed Chairman Jerome Powell characterized the PPI data as “pretty mixed,” with revisions offsetting the high news figure. Still, revisions to the PPI components that affect the main PCE price index could mean that key Fed inflation in the first three months of the year was not as high as previously thought.

The PPI’s broad measure of healthcare service prices rose 0.266% this month, not seasonally adjusted. Partly due to earlier revisions, the 12-month measure of healthcare inflation fell to 2.9% from an initially reported 3.1% in March.

Prices for airline passenger services, which also influence the PCE price index, fell 3.8% in April, providing more good news for the Fed’s key inflation number.

However, portfolio management fees, which usually rise and fall with a slight lag in the stock market, rose a surprising 3.9% in April.

Another “silver lining” in the PPI data was a 0.1% increase in car insurance prices, the least since October, according to Ian Shepherdson, chief economist at Pantheon Macroeconomics.

CPI example

Consumer price index data for April is expected to show a monthly increase of 0.3%, bringing the annual headline inflation rate down to 3.4%.

The core CPI, excluding food and energy, is expected to rise 0.3%, moderating slightly after increases of 0.4% in each of the first three months of the year. Annual core inflation is expected to decline from 3.8% to 3.6%.

Shepherdson wrote in a preview that he expects a 0.35% increase in the core CPI. Based on core PPI expectations, this should translate into a 0.26% increase for the PCE core price index, which will be released towards the end of the month.

The Fed “will likely need to see a few more rate hikes near 0.2% before proceeding with the first rate cut,” Shepherdson wrote. He said it would take a substantial downside surprise before the chances of a Fed rate cut would change significantly.

Fed Rate Cut Opportunities

After the PPI, markets had priced in a 31% chance that the Fed’s first rate cut would occur at the July 31 meeting, unchanged from before the data. The probability of a rate cut at the Fed’s meeting on September 18 rose from 64% to 66%.

S&P500

The S&P 500 rose 0.15% after the PPI data. On Monday, the S&P 500 ended a hair below the flat line. Last week, the S&P 500 rose 1.85%, returning above the 50-day moving average.

The S&P 500 is about 0.5% below its all-time high on March 28.

The yield on ten-year government bonds fell by two basis points to 4.46%.

Be sure to read IBD’s The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.

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