Inflation fears persist post PPI data
Worries about inflation are gathering pace as the US producer price index (PPI) rate jumped to 11.3%, close to its record high. PPI is typically viewed as a front runner for CPI because if costs are rising for producers, they will probably be passed onto consumers. Yesterday the US CPI reading rose to 9.1%, a fresh 40-year high, so the past 24 hours has been filled with fears about rising costs. The Federal Reserve kept interest rates close to zero for too long, and because of the jump in the cost of living, they have been hiking rates since March. On account of the latest data, traders are even more worried about the prospect of further interest rate hikes. Afterall, a rise in the cost of borrowing adds to the inflationary environment. The markets are already behaving as if a 75-basis point hike is a done deal at this month’s Fed meeting, and the interest rate futures are factoring in a high probability of a 75 basis points hike in September too. A short while ago, Christopher Waller of Fed said that a 0.75% hike in July is his base case, and he might call for a larger hike depending on the data. That leaves the door open to a 1% lift, which the Bank of Canada revealed yesterday.
The PPI news sent the US 10-year yield higher, it traded above 3% although it as retreated a little. Stocks moved aggressively lower as a response to the US PPI data due to worries that borrowing costs might keep rising a fast pace. The S&P 500 is down over 1.3%, while things are even more downbeat in Europe as FTSE 100 and the DAX are off 1.6% and 2% respectively. German stocks are under extra pressure because not only as are they feeling the squeeze from inflation woes, they dealing with energy uncertainty also – there are fears that Moscow might turn off the gas in winter.
Concerns the global economy is cooling combined with a rallying US dollar – it hit yet another 20-year high – are hammering commodities. Silver has slumped by over 5% and copper is down 2.9%. Oil is in the red too, but the loses are not too painful due to ongoing supply issues, WTI is down 2.6%.