A Mostly Good PPI Report With Easy Year-Over-Year Comparisons Coming UP

The Producer Price Index (PPI) for services was unchanged in December but the price of goods jumped 0.6 percent. The bond market reaction is not encouraging.

The BLS Producer Price Index rose 0.2 percent in December, after a huge, unexpected jump last month.

PPI Final Demand Key Detail Month-Over-Month

• PPI: +0.2 Percent
• Services: +0.0 Percent
• Goods: +0.6 Percent
• Excluding Food and Energy: +0.0 Percent
• Food: -0.1 Percent
• Energy: +3.5 Percent

Final demand services is about 67 percent of the index.

This is why services at 0.0 percent and goods at 0.6 percent resulted in a change of 0.2 percent.

The services component is also what the Fed is most concerned about.

Final Demand Notes

• Final Demand Goods: The index for final demand goods rose 0.6 percent in December, the third consecutive advance. The December increase in prices for final demand goods is attributable to a 3.5- percent jump in the index for final demand energy. In contrast, prices for final demand foods edged down 0.1 percent, while the index for final demand goods less foods and energy was unchanged.
• Leading the December increase in prices for final demand goods, the index for gasoline advanced 9.7 percent. Prices for residential electric power, meats, motor vehicles, gas fuels, and fresh fruits and melons also rose.
• Final Demand Services: In December, a 2.2-percent advance in prices for final demand transportation and warehousing services offset declines in the indexes for final demand services less trade, transportation, and warehousing and for final demand trade services, which fell 0.2 percent and 0.1 percent, respectively.
• Within the index for final demand services in December, prices for transportation of passengers (partial) jumped 7.2 percent. The indexes for deposit services (partial), automotive fuels and lubricants retailing, food retailing, and chemicals and allied products wholesaling also advanced. In contrast, prices for traveler accommodation services fell 6.9 percent.

PPI Final Demand Year-Over-Year

Year-Over-Year Indexes

• Final demand up 3.3 percent and rising.
• Final demand services is up 4.0 percent and rising.
• Final demand goods is up 1.8 percent and rising.

The year-over-year numbers will likely improve next month. The following chart explains why.

PPI Final Demand Services

Despite a flat services index in December, the year-over-year services PPI rose 0.1 percent. This is because of a very difficult comparison to a year ago (yellow highlights).

Next month the services number to beat is 0.6 percent (green highlight). That is an easy to beat number, hopefully.

And in the coming months, there are four easy to beat numbers (0.6 percent in January, 0.6 percent in April, 0.4 percent in May, and 0.7 percent in June).

The goods PPI has a mix of easy an tough numbers to beat, but services are more important.

In February, the numbers to beat are 0.3 percent for services and 1.1 percent for goods.

Looking at all the numbers, I generally expect year-over-year numbers to improve through June.

Bond Market Reaction

However, the bond market reaction was a big yawn. That’s a warning sign.

The 30-year long bond yield is just short of 5.0 percent. It hit 4.999 percent today.

The 10-year note yield is 4.8 percent.

Bonds Hammered: Is it Fed Policy, Trump Policy, or Both?

On January 8, I asked Bonds Hammered: Is it Fed Policy, Trump Policy, or Both?

What Doesn’t the Bond Market Like?

1. Fed Policy?
2. Trump Proposed Economic Policy?
3. Both?

My conclusion was both. Click on link for discussion.

I will update bond charts shortly.