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Producer Prices Jump Another 0.6 Percent in October Yet Bonds Yield Dive

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28 comments on Producer Prices Jump Another 0.6 Percent in October Yet Bonds Yield Dive

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Producer Prices Jump Again

The BLS Producer Price Index (PPI) shows another steep rise in October.

Month-Over- Month Details 

  • The Producer Price Index for final demand increased 0.6 percent in October, seasonally adjusted.
  • Final demand prices moved up 0.5 percent in September and 0.7 percent in August. 
  • Over 60 percent of the October increase in the index for final demand can be traced to a 1.2-percent rise in prices for final demand goods. 
  • The index for final demand services moved up 0.2 percent, and prices for final demand construction advanced 6.6 percent.
  • Prices for final demand less foods, energy, and trade services moved up 0.4 percent in October after increasing 0.1 percent in September. 

Producer Prices Year-Over-Year

Year-Over- Year Details 

  • Final demand rose 8.6%
  • Final demand for services rose 5.9%.
  • Final demand for goods rose 14.2%
  • Final demand for energy rose 42.%.

PPI Intermediate Demand

At the intermediate stages prices are rising even faster. 

Pundit Reaction

On the PPI news inflation screams could be heard in mainstream media and the usual places. 

Bond Market Reaction

The bond market reaction was the opposite. For the third time recently, including the most recent jobs report, bond yields fell in the face of strong data. 

As I type, the 30-year yield is down another 7 basis points to a new low for the move at 1.81%. The 10-year yield is down 6 basis points to 1.44%.

I will cover more bond details shortly. 

Meanwhile today’s bond market reaction highlights what I said yesterday in Inflation Fears Nowhere to be Found in Long Term Treasuries

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Mike Shedlock

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28 Comments
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Casual_Observer2020
Casual_Observer2020
4 years ago
FWIW it feels more like 1999 with 1970s type inflation. This simply isn’t sustainable and so all signs point to a slowing economy in 2022 and a Republican sweep of the house and senate. From there it’s anyone’s guess as to what happens but all signs point to a Trump victory in 2024 if he runs again. But no matter what the era of low inflation and low prices are done. You can’t get get more growth without more inflation and low interest rates. The economy seems trapped in a Bermuda Triangle since Covid spending and low rates caused this environment.
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JeffD
JeffD
4 years ago
Clearly, the traditional bond market has broken down. It is no longer an indicator of real world economics, but rather something manipulated by Central Banks. Using it as a measure of “what’s really happening” is a mistake.
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Cansip
Cansip
4 years ago
Reply to  JeffD
Exactly, there is no Bond Market anymore.
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Casual_Observer2020
Casual_Observer2020
4 years ago
Reply to  JeffD
Yup. It was always manipulated as far back as the 1980s from random computers in the Caymans that would magically buy bonds when there were no buyers. 
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JeffD
JeffD
4 years ago
Reply to  JeffD
And I need to clarify an important point here. While it is true that the bond market is enormous and the amount of money that the Central Banks can throw at it is like a pebble thrown into a pond, it is also true that prices are set based on the marginal trades, not based on the store of value. The Central Banks are well cabable of manipulating the price of the marginal trades through derivatives and direct purchases. It is not until there is a loss of confidence, also known as a bank run, that the marginal price setting is overtaken by the actual size of the asset pool. It’s much like controlling the flow of water out of a dam vs a dam break that reveals the true volume being held. Using bond rates as a proxy of future inflation in today’s bond “market” is a naive perspective.
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Jojo
Jojo
4 years ago
There’s going to to need to be a 6 month increase in SS at this rate.
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1-shot
1-shot
4 years ago
Bond prices (The Market) are telling us interest rates will remain low. Is it because inflation and rising costs for goods and services will choke off demand in our 70% consumer driven economy? Or is it be because the worst of price increases are over and indeed transitory, as the fed states.  From an investing standpoint, it doesn’t matter.
Follow the trend.  40 years of declining interest rates is a long, strong and profitable trend.  I feel sorry for anyone who’s tried to time the turn on this one.  I prefer to wait until the ship changes directions and hop on board for the next long $ ride instead of worrying about who’s navigating the ship! 
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Cocoa
Cocoa
4 years ago
Reply to  1-shot
Price inflation is a supply and economic phenomenon. Bond prices are a monetary phenomenon. A deflationary depression is about monetary physics and has nothing to do with the economy, which comes and goes. The speculation on financialist products and nonsense takes over, as opposed to placing capital into the general economy and growing the economy(with it’s contractions.) Now bonds have to crater into negative zone to allow for enough overhead margin to keep the system solvent. SAD
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numike
numike
4 years ago
Misconceptions about economics are largely immune to being corrected by rational arguments.
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Doug78
Doug78
4 years ago
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oee
oee
4 years ago
Mish Shedlock and the Doomsayer Patrol have been claiming that the end is…near. It has not and it will not happen.  Japan has not imploded, China has not imploded . Neither the USA.
We have had recession but they due to failed Republican policies- The collapse of the housing bubble under Bush 43 ., and the other recession was under Trump which failed to contain  Covid 19. 
The inflation is high this year because of the re openings,  last year due to the Covid 19 recessions, the economy collapsed,  and the fact the so called Captains of industries could not manage a house of ill repute if the ir lives depended. The Trump promised an investment boom that never happened. 
The only reason we had mulit year high in inflation is because the 2010’s was slow growth. This year on the Biden/Harris admin , the economy will grow at 4.00% which is the highest since the peak of the housing bubble.
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Steve_R
Steve_R
4 years ago
Reply to  oee
The inflation is high this year because of the re openings???? Inflation is high due to the fed not tapering sooner and raising rates. Bankers in South Korea and Singapore have already started raising rates. Also higher energy prices could have to do with numerous US oil and gas companies going bankrupt between 2016 and 2020. In addition, a reversal of an agreement with Iran in 2017, and placing sanctions on that country took several million barrels of oil off the table. 
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oee
oee
4 years ago
Reply to  Steve_R
Yes, there is a lot demand and less supply which lead to…higher prices. You still have not refuted any facts that I have indicated. 
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Tony Bennett
Tony Bennett
4 years ago
“Bond Market Reaction”
…
Imo, bond move nothing to do with PPI.  PPI came in at consensus.  
Recent yield drop due to China.  Contagion beginning to rage.
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Eddie_T
Eddie_T
4 years ago
Reply to  Tony Bennett
Makes sense. How do you see contagion spreading, if you don’t mind me asking?  Where we will start to see it next, other than long UST’s?
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Tony Bennett
Tony Bennett
4 years ago
Reply to  Eddie_T
(Bloomberg) — China’s higher-quality dollar bonds are suffering their worst selloff in about seven months as property woes spill into the broader credit market. …….The selloff has moved well beyond China’s higher-quality property names. Tencent Holdings Ltd.’s dollar bond spreads widened 12 basis point to 137 basis points Tuesday, set for the biggest jump since July. Financial issuers are also slumping, with the yield premium on a Bank of Communication Hong Kong note widening about 10 basis points.

Signs are spreading of contagion from debt crises in China’s property sector, which has been grappling with a clampdown on excessive leverage and liquidity woes at real estate giant China Evergrande Group. The fallout had until recent days been largely contained to junk-rated developers. But investors have since grown increasingly concerned about the impact on larger property firms and the broader economy.

…

“The problem is, it is getting systemic,” said Viktor Szabo, a London-based EM portfolio manager at ABRDN, saying many Chinese property developers could no longer access borrowing markets and get financing.

“The big issue is that we don’t know what (Beijing’s) ultimate plan is… And now long can you hold on to the view that China can handle it?”

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Eddie_T
Eddie_T
4 years ago
Reply to  Tony Bennett
Excellent intel.  Thank you.
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Tony Bennett
Tony Bennett
4 years ago
Reply to  Eddie_T
Just about every article contains a quote from an “expert” expecting / waiting on Beijing to step in … I’m not so sure about that.
I’m convinced President Xi knows there is a stupendous property bubble in China … and caving in now would only exacerbate it.  China currently running record trade surplus so that sector supportive while dealing with RE.  Problem is I think we’re way beyond the point of deflating any of the myriad of  global bubbles without (severe) repercussions.
This might well be President Xi’s “hold my beer” moment.
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Eddie_T
Eddie_T
4 years ago
Reply to  Tony Bennett
I will say I expected Xi to intervene at some point. If not, you could certainly be right. 
No matter what I invest in, I always understand that there is a risk of deflationary events….we have a system that is just very vulnerable to that,  and I always try to avoid undue leverage in any risk asset. 
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dbannist
dbannist
4 years ago
Reply to  Eddie_T
If you are looking for how to play this here’s a play:
Fertilizer prices are skyrocketing.  Fertilizer requires large inputs from natural gas to create urea.  Without natural gas, there is no food.
What foods require the highest fertilizer inputs?  Invest in those, or companies that produce them that do not require large inputs due to owning large amounts of fertile soil.  Those with good geography will benefit from far lower margins than competitors.
Bananas, melons, potatoes etc all require large amounts of fertilizer.  Fertilizer prices have risen 8 fold in some places and are poised to rise far higher as countries desperate for natural gas also happen to be the ones that produce fertilizer.  
THey are seriously cutting, or in some places, eliminating fertilizer production to secure their gas supplies.
2022 will be the year of food inflation, I (almost) guarantee it.  No fertilizer=no food.
I’d love to see an article on this development from Mish and get his take.
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KidHorn
KidHorn
4 years ago
Reply to  dbannist
Fertilizer is a very broad category. And nat gas is only used in nitrogen production. N is important, but so are P and K. They’re mined directly from the ground. Nature supplies a lot of N, but P and K are either in the soil or they aren’t. I would be hesitant to assume high N costs will automatically lead to higher crop costs across the board. Many plants will grow bigger leaves with more N, but they can still grow fine without it.
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dbannist
dbannist
4 years ago
Reply to  KidHorn
I’ve worked on farms much of my life, though I am thankful that is behind me.  Plants like peppers\spices and such are not going to be affected much.

Things like corn, which is in everything, will be highly affected.  Corn is a very high N crop and requires very high N no matter how much P and K are in the soil.  Modern corn yields are only possible due to the effects of nat gas production.  Corn futures will likely go crazy in 2022 and 2023 which is the play I have in mind.C

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KidHorn
KidHorn
4 years ago
Reply to  dbannist
There are so many variables in agriculture. Not enough rain. Too much rain. Too hot. Too cold. Too windy. Fertilizer is just another variable. Thunderstorms produce a lot of usable N. It’s actually a much better source of N than granular fertilizers. I don’t pretend to have any idea of what will happen, but I’m pretty sure it’s nowhere near as simple as higher fertilizer prices lead to higher crop prices.
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Eddie_T
Eddie_T
4 years ago
Reply to  dbannist
Thanks.  I think Kidhorn makes some good points. I prefer to keep stacking energy companies….I view food as a difficult market to parse. I’m  a failed farmer, for one thing. lol.
With that said, I fully expect you are correct about food prices continuing to climb..or even jump.
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KidHorn
KidHorn
4 years ago
Reply to  Tony Bennett
So, are you saying the Chinese are buying US long bonds?
I don’t believe it. When real estate collapses, people hoard cash.
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Tony Bennett
Tony Bennett
4 years ago
Reply to  KidHorn
No.  
If China goes down, they’ll take rest of the global economy with it.  Bonds (smart money) getting ready for (global) recession.
By the time MSM starts to contemplate “uh oh” much of bond movement already taken place.
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KidHorn
KidHorn
4 years ago
Reply to  Tony Bennett
Well, if China goes down, it will probably be hugely deflationary, so maybe that’s why the bond traders don’t seem to mind the lower yield on the long end.
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Tony Bennett
Tony Bennett
4 years ago
Reply to  KidHorn
I expect them to devalue their currency at SOME point.  Deflationary for US but for much of EM it will be inflationary as other countries devalue to compete.  Problem is much of EM debt priced in $US … and as countries scramble (to get dollars) to service debt … $US will rise further.
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