Producer Inflation Shows Mixed Signals In March, Keeps Risks Of High-For-Longer Interest Rates Alive

Inflation affecting American producers shows mixed readings in March, with the headline figure falling short of estimates Thursday while the underlying gauge exceeded them, maintaining market uncertainties about potential delays in interest rate cuts.

The Producer Price Index (PPI) experienced a year-on-year increase of 2.1% last month, reaching its highest level in nearly a year.

This followed the release of unexpectedly robust consumer inflation data on Wednesday, sending significant shockwaves across markets.

March PPI Report: Key Highlights

• The headline PPI surged by 2.1% in March 2024 compared to the previous year, surpassing the previous annual rate of 1.6% and missing expectations of 2.2%.
• The month-on-month increase in the headline PPI was 0.2% in March, marking a deceleration from the previous 0.6% surge and missing estimates of 0.3%.
• The PPI for goods witnessed a 0.1% monthly decline, affected by a 1.6% drop in the energy item.
• The PPI for services saw a 0.3% monthly surge, with transportation and warehousing rising by 0.8%.
• The core PPI, which excludes food and energy, rose from 2.2% to 2.4% annually, more than the expected 2.3% rise.
• On a monthly basis, the core PPI inched 0.2% higher, decelerating from the previous 0.3% and matching estimates.

Market Reactions

Prior to the PPI release, markets assigned a 35% chance of a rate cut in July, a 65% probability for September and factored in a total of 40 basis points of rate cuts by year end, or less than two cuts.

Treasury yields fell across the board, with the rate-sensitive two-year yield down 4 basis points to 4.94%. On Wednesday, long-dated Treasury bonds tumbled, with the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) dropping 2.2%. The dollar pushed further higher.

Gold, as tracked by the SPDR Gold Trust (NYSE:GLD), rose 0.5% to $2,343 per ounce.

Futures on major U.S. stock indices slightly recovered overnight losses in Thursday’s premarket session, with the S&P 500 index down 0.1%. On Wednesday, the SPDR S&P 500 ETF Trust (NYSE:SPY) closed 1% lower.

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