US PPI and CPI data indicate stalled core PCE disinflation

·    Wall Street wobbled Tuesday on mixed report cards and tech woes amid increasing regulatory concern for AI chip sales to China/other countries

·         Fed may pause in Nov’24 and cut 25 bps in Dec’24 rather than 50 bps; Fed may continue to cut 25 bps every other meeting (QTR end) in 2025-26

·         At the current run rate, the Fed may achieve +2.0% core inflation (PCE+CPI) targets on a durable basis by Dec’26

·         Gold surged as Israel may launch the much-awaited retaliation on Iran’s selected military assets ‘soon’, but not oil and nuclear facilities; Oil slid; Oil also plunged on demand woes from China

On Thursday, Wall Street Futures were almost flat amid hopes & hypes of bigger Fed rate cuts despite less dovish Fed talks, FOMC minutes, and core CPI inflation data as the latest initial jobless claims were slightly hotter than expected. On Friday, Wall Street Futures surged buoyed by JPM earnings; banks & financials surged. Overall Harris' Presidency may be better for the US economy/market for policy certainty/predictability & continuity rather than Trump's bellicose comments and unpredictable policies.

On Friday, the focus of the market was also on US core CPI data, a day after hotter-than-expected US core CPI data. Fed primarily follows core PCE inflation, data of which is published generally around the last week, while core CPI and PPI data are published around mid-month of every month. The market usually has an idea about the possible rate of core PCE inflation data after getting core CPI and core PPI data mid-month.

The US Producer Price Index (PPI) for final demand measures price (production cost) index change for commodities sold for personal consumption, capital investment, government, and export. It is composed of six main price indexes: final demand goods (33% of the total weight), which includes food and energy; final demand trade services (20%); final demand transportation and warehousing services (4%); final demand services less trade, transportation, and warehousing (41%); final demand construction (2%); and overall final demand; Goods: This includes prices for raw materials and finished products (e.g., steel, lumber, cars); Services: This includes sectors like transportation, healthcare, and finance; Construction: Prices in this sector, like those for residential and non-residential buildings.

The Producer Price Index (PPI) is a key economic indicator that measures the average change over time in the prices that domestic producers receive for their goods & services and reflects inflation from the perspective of producers/whole sellers rather than consumers (which is measured by the Consumer Price Index or CPI). The PPI tracks prices at the wholesale level before they reach the consumer. It covers a wide range of industries, including manufacturing, agriculture, mining, and services. The PPI is vital for understanding inflationary pressures within the economy. It helps businesses and policymakers make informed decisions regarding pricing strategies/power, wage negotiations, and monetary policy adjustments.

On Tuesday, the BLS flash data (NSA) showed annual (y/y) U.S. core PPI (w/o food & energy) edged up to +2.8% in Sep’24, from +2.6% sequentially, above the market consensus of +2.7% and still substantially higher than pre-COVID (Dec’19) levels of +1.3%. Overall, the correlation between core PPI and core CPI may be indicating after a brief pause in the last few quarters, pricing power for US retailers is again on the rise; i.e. US core disinflation pace may be stalling as already been evident from the actual data for the last few months.

Overall, from the chart, it is almost clear that unlike during pre-COVID times, core PPI and CPI disinflation are diverging may be due to structural reasons including supply chain issues, corporate greedflation, and adequate pricing power as there is still elevated demand in the economy amid a growing population and robust labor market, while supply capacity is still constrained.

On a sequential (m/m) basis (SA), the U.S. core PPI surged +0.2% in Sep’24 from a +0.3% increase in the previous month and is in line with the market expectations of a +0.2% increase.

Overall, after the latest 4M revision, the 2024 (YTD) average of core PPI is now around +2.5% in Sep’24 (vs prior +2.4%) against +2.9% in 2023, +7.8% in 2022, and pre-COVID levels around +1.5%; the 6M rolling average of US core PPI is now around +2.7% (vs earlier +2.5%). The average sequential (m/m) rate of the US core PPI is now at +0.3% against +0.1% in 2023; as per the pre-COVID longer-term trend, the Fed needs +0.1% core sequential core PPI rate on a sustainable basis for its target/pre-COVID levels of +1.50%, so that core CPI inflation would come around +2.3% and core PCE inflation targets +1.5% (average core CPI +PCE core inflation +1.9%). The 6MRA core PPI needs to go down to +1.3% from the present +2.7% for the Fed’s price stability targets.

On Thursday, the BLS data (NSA) also shows U.S. annual (y/y) total PPI increased by +1.8% in Sep’24 from +1.9% reading sequentially, above market expectations of +1.8% and the lowest since Feb’24, but still higher than pre-COVID (Dec’19) levels of 1.4% (against total CPI +2.3%; total PCE inflation +1.6%).

Overall, after the latest 4M revision, the 6M and YTM rolling average of US PPI is now around +2.0% in Sep’24 (prior +2.2%) and +2.0% (prior +2.0%) against the 2023 average of +2.0%. The sequential rate (m/m) of the US PPI was around +0.3% in the Sep’24 report.

In Sep’24, the US PPI for services increased by +3.1% (vs +2.6% sequentially), while that of goods decreased by -1.1% (vs 0.0% sequentially) as energy prices contracted -13.8%.

Overall as per core CPI and PPI data trend, the sequential core PCE inflation for Sep’24 may come to around 0.3%; in both scenarios, the annual rate of US core PCE inflation should come around +2.7% in Sep’’24 against +2.7% sequentially (unchanged).. The core CPI for Sep’24 was at +3.3% and the 6M rolling average US core inflation (CPI+PCE) would be around +3.0% in Sep’24, almost unchanged sequentially; i.e. overall disinflation pace may have almost stalled in Sep’24/Q3CY24, which may also keep Fed for a pause in Nov’24 and a normal cut of -25 bps in Dec’24; i.e. Fed may follow a normal rate cut pace of -25 bps each every quarter end rather than further jumbo cut of -50 bps or even back-to-back cuts of -25 bps. Fed has to evaluate incoming core inflation and employment data and the outlook thereof to gradually reduce restrictive real rates.

Conclusions:

After Sep’24, the 6MRA of US core inflation (CPI+PCE) should be around +3.0%, the unemployment rate of 4.1% against a target of +2.0% (core inflation-price stability) and 3.5% (aspired unemployment rate). But the Fed also makes it quite clear that it regards even a 4.0% average unemployment rate; i.e. 96% employment rate as maximum sustainable employment for the longer/medium term.

As per the current run rate, US average core inflation may come down to +2.0% levels on a sustainable basis by Dec’26. Thus Fed has to dial back restrictive rates carefully and go for rate cuts at normal -25 bps every other meeting (QTR end), so that US core inflation (PCE+CPI) gradually comes down to targets, keeping the unemployment rate around 4.0% or even below it; but not above 4.5% to ensure a soft landing.

Fed Chair Powell and most also other Fed policymakers almost poured cold water on further jumbo rate cuts (-50 bps) and indicated normal 25 bps rate cuts in the coming days unless the unemployment rate unexpectedly surges (say above the 4.5% red line). Moreover, Powell indicated another 25 bps rate cut in Nov’24 may not be assured unless the unemployment rate unexpectedly jumps in September. As per some reports, Powell may have penciled the policy path slightly above the median in the Sep’24 dot-plots.

The Next Fed meeting would be on 7th November and before that Fed may have official access to only one inflation and employment situation report for September only. Thus unless there is an unusual surge in the unemployment rate or an unexpected drop in core CPI, the Fed may pause. The US average (6MRA) core inflation (CPI+PCE) may have already stalled in Q3CY24 at around +3.2%, while the 6MRA (average) unemployment rate is around 4.1% as per available data. Thus the Fed may go for a pause and cut 25 or 50 bps in Dec’24 based on actual Q3CY24 and 6MRA data and outlook thereof.

Bottom line:

The projected Fed rate cut of -50 bps by Dec’24 not be assured as US core disinflation may have stalled in Q3CY24, while unemployment remains around 4.0%; Fed may cut -25 bps in Dec’24 after a pause in Nov’24.

Weekly-Technical trading levels: DJ-30, NQ-100, SPX-500, and Gold

Whatever the narrative, technically Dow Future (42500) has to sustain over 42700 for any further rally to 42900/43050-43250/43500* and 43700/44000-44500/44800 in the coming days; otherwise sustaining below 42600/650, DJ-30 may again fall to 42400/42300-42100/42000 and 41800/41500-41200/41000* and further 40700/40300-40100/40000* and 39700/394350-39000*/38500 in the coming days.

Similarly, NQ-100 Future (20200) has to sustain over 20400 for a further rally to 20600/20700-20800/21050* and further to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 20350/300, NQ-100 may again fall to 20000/19750* and 19600/19350-19100/18900 and further 18750/18550-18400/18200-17950/17600 and 17450-17300/17000 in the coming days.

Technically, SPX-500 (5780), now has to sustain over 5850 for any further rally to 5900 and 6000/6050-6100/6150 in the coming days; otherwise, sustaining below 5825/800, may again fall to 5725-5675/5625-5600/5575*-5550/5500-5475/5450 and 5425/5390-5370/5300* and 5250/5100* and further 5050/4950*-4850/4750 in the coming days.

Also, technically Gold (XAU/USD: 2625) has to sustain over 2655 for a further rally to 2675*/2700-2725/2750 in the coming days; otherwise sustaining below 2650/2645, may again fall to 2625 and 2595/2590-2585/2575, may again fall to 2560*/2540-2530/2515 and 2495/2480-2470*/2425 and further 2415/2400-2390/2375 in the coming days (depending upon Fed rate cuts and Gaza/Ukraine war trajectory).