Wholesale Price Pressures Reach 3-Handle: Dec. 13, 2024

Markets are slipping in response to this morning’s hotter-than-expected PPI print, which featured 3-handles on both the headline and core versions of the indicator. The wholesale inflation figures arrived on the heels of yesterday’s CPI that depicted a notable acceleration in price pressures. But the one-two punch isn’t enough to derail the 25-bp cut expected by the Fed this Wednesday, especially after the Swiss National Bank and the ECB walked down the monetary policy stairs this morning, the former with a half-point and the latter with a quarter. Despite central banks turning accommodative, next year’s inflation outlook is quite uncertain, especially as Washington and Beijing ramp up their trade rhetoric.

Cost Increases Escalate

Wholesale price pressures accelerated last month, according to this morning’s Producer Price Index (PPI), a trend similar to its sibling, the Consumer Price Index (CPI). But a key difference in the November inflation figures is that the PPI picked up steam but also arrived well ahead of expectations, unlike yesterday’s CPI release, whose results were in-line with estimates.

November’s PPI advanced 0.4% month over month (m/m) and 3% year over year (y/y), flying past projections of 0.2% and 2.6% and ramping up from October’s 0.3% and 2.6%. Comparably, the core PPI, which excludes food and energy due to their volatile characteristics, increased 0.2% m/m and 3.4% y/y, matching expectations on the monthly but surprising on the annualized figure by 20 basis points (bps). And while the core monthly reading slowed from 0.3% during the previous period, the 12-month measure climbed from 3.1%.

Wholesale cost increases were driven by a huge jump in food charges, which rose 3.1% m/m. Food prices were bolstered by chicken eggs, fresh and dry vegetables, fresh fruits and melons and processed poultry. Meanwhile, trade services, energy goods and other services increased 0.8%, 0.2% and 0.1% during the period. Transportation and warehousing services offered relief, however, declining 0.5% m/m. 

Unemployment Claims Exceed Expectations

Initial unemployment claims for the week ended Dec. 5 hit a two-month high and the difficulty that idle individuals face when searching for work appears to have increased, at least modestly. First-time requests for benefits reached 242,000, up from 225,000 in the preceding week and exceeding the 221,000 Wall Street expectation. Continuing claims, which serve as a proxy for the ease, or lack of ease, furloughed individuals experience when finding work, climbed from 1.871 million to 1.886 million for the week ended Nov. 30, exceeding the expectation for 1.880 million. While claims data can be volatile, especially during the holiday season, four-week moving averages depict a similar trend. The averages for both components marched north from 218,250 and 1.884 million to 224,250 and 1.888 million. For continuing claims, the four-week average hit the highest level since Nov. 27, 2021.

ECB and Swiss Bank Cut Rates

The European Central Bank (ECB), as expected, cut its key interest rate this morning by 25 bps, bringing its benchmark to 3%. It was the fourth reduction this year. In announcing the action, ECB President Christine Lagarde said disinflation is “on track.” The bank expects inflation to average 2.1% in 2025 along with GDP growth of 1.1%. The ECB decision comes as potential US tariffs, a labor shortage, and political turmoil in Germany and France have increased fears that Europe may slip into recession. In response to those concerns and other challenges, the Swiss National Bank (SNB) joined the ECB in monetary easing, slicing 50 bps from its key benchmark, bringing the rate to only 0.50%, the lowest level in more than two years. SNB Chairman Martin Schlegel told reporters that the organization can’t rule out that it may need to implement negative rates in the future.

Investors Wait for AI Benefits

Shares of Adobe (ADBE) dropped more than 12% after the company’s guidance fell short of expectations and generated concerns about the pace of the organization’s ability to monetize its artificial intelligence products. Adobe says it anticipates fiscal 2025 revenue to range from $23.30 billion to $23.55 billion, compared with $23.78 billion expected by analysts. For its fiscal year ended Nov. 29, revenue reached an all-time high and the metric for the recent quarter jumped 11% y/y. Adobe’s earnings per share for the recent quarter was up 12.6%. Both sales and profits beat expectations.

China Deficit Spending to Increase

The Chinese communist party wrapped up its annual economic meeting and announced that the country will need to maintain economic growth and foster stable jobs and prices in 2025. The government will issue ultra long-term debt instruments to amplify budgetary capacity, expand infrastructure projects and provide liquidity to local municipalities. Indeed, Beijing is going to expand its sovereign debt and deficit further and is leaving the door wide open for interest rate reductions as well as quelling bank reserve requirements. The announcement comes as China braces for President-elect Donald Trump to increase tariffs on the country’s goods.

Goods Inflation Could Accelerate

In the aftermath of the pandemic, goods inflation was suppressed as consumers who splurged on those items during stay-at-home orders switched their spending to services once the economy reopened. This trend has sustained services inflation and higher financing costs have helped extend the post-pandemic shift from goods consumption. However, today’s PPI report and other recent data point to the potential for goods inflation to reignite, which could become a significant problem if China fails to acquiesce to Trump’s demands for the country to comply with trade agreements. If the country fails to do so, Trump might enact his proposed tariffs on China that would weigh on the Fed’s journey down the monetary policy stairs.

Go Source