PPI Data Points to the Road of Lower Interest Rates

Price Production Indices Data Points to Lower Interest Rates

The week starts with a holiday in the United States, so market activity is expected to be slower. Last Friday the Production Price Indices figure was published. This data showed a slight drop compared to the previous month.

The PPI data isn't the main factor that shapes the Federal Reserve's monetary policy, but it's seen as an early indicator of future inflation trends. So, a slight drop in production prices is good news for the stock market, as it might lead to lower interest rates down the line.

The stock indices had a mixed performance with a drop in the Dow Jones 30, and at the close of the session the S&P500 and the Nasdaq 100 were practically flat. It also had no notable impact on the currency market. The Dollar Index finished Friday's session up a modest 0.12%, strengthening slightly against the Euro and Pound and rising against the Yen. 

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See NASDAQ Analysis and Predictions

 

Treasury Bond Yields Plummet 25bp

The most significant movement was seen in the treasury bond market, particularly in the 2-year bond, which is highly sensitive to potential changes in the Fed's monetary policy. For this bond, yields have dropped by 25 basis points from their peak, which was reached after Thursday's release of the CPI data showing a month-over-month increase.  

This substantial buying of 2-year bonds, resulting in a fall in bond yields, is unusual. Moreover, the PPI data alone isn't typically significant enough to trigger such a movement. In fact, other markets (currencies and stocks) did not react according to the correlations they usually have with this type of movement in the fixed-income market.

Rumors were generated, now without confirmation, that there could be some important investment fund with problems and that this would cause a very significant flow towards safe haven assets, such as treasury bonds. What most likely happened is that it is a specific transaction, although of great magnitude, that was carried out at a time of little market liquidity, on a Friday before today's holiday.

Bonds Comes to the Forefront at Geopolitical Unrest Continues

Another topic that was discussed in this regard on Friday was the US attack on Yemen. The purchase of bonds is typical in geopolitical events of this nature (investors in search of safe-haven assets).

The asset most sensitive to this event should have been Oil. While it initially rose to $75.25 at the beginning of the session, it later fell to $72.70. This indicates that Oil traders aren't overly concerned about these events and are confident that the conflict won't escalate further. 

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Retail Sales Figures Out This Week

This week, the economic data that may have the greatest impact on the market is Retail Sales, released on Wednesday. Following the increase in the CPI figure, investors will watch to see if domestic demand, which this data represents, stays strong. Strong demand could make it harder for inflation to decrease. Alternatively, if demand weakens, it might help bring prices back down. 

Key Takeaways

• PPI data came in slightly weaker than the previous month.
• 2-year Treasury Bond yields dropped by 25 basis points from their peak after CPI data release last week. 
• Bonds showed an increase in purchasing due to geopolitical issues.
• Oil had less of a reaction to the above, showing these traders are not fazed by the events.
• US Retail Sales released this week on Wednesday, January 17th. 

Sources: Bloomberg, Reuters