Market Commentary

Updated on May 14, 2024 10:05:02 AM EDT

Aprils Producer Price Index (PPI) was posted at 8:30 AM ET this morning. It showed that inflation at the wholesale level of the economy was hotter than expected. The overall reading rose 0.5% last month when forecasts had it up 0.3%. Core data also rose 0.5%, more than twice the 0.2% increase that was expected. Annual numbers weren’t as bad with the overall reading matching estimates of up 2.2% and the annual core reading rising 2.4% compared to forecasts of 2.3%.

The monthly PPI numbers are very bad news for bonds and mortgage rates. Rising inflation erodes the value of a bond’s future fixed interest payments and delays the Fed’s likely timetable for lowering key short-term interest rates. It also adds a little more fuel to the theory that the Fed may actually need to raise key rates again before starting to reduce them. However, sizable downward revisions to March’s PPI readings (0.3% in each), may be preventing the strong sell-off in bonds that we would have expected with April’s numbers. They also raise the possibility of seeing downward revisions to April when May’s readings are announced next month. In short, the headline readings are bad news, but the bond market reaction is much better than it could have been.

Fed Chairman Powell is speaking late this morning at a foreign banking conference overseas. Whenever he speaks, the markets listen. There isn’t a high probability of his words causing a move in rates today. Still, the possibility does exist, so keep an eye on the markets and news headlines if thinking about locking an interest rate today. Tomorrow’s data is even more influential than today’s PPI was.

Tomorrow has two highly important economic reports set for release, both coming at 8:30 AM ET. We will get the sister release to today’s PPI, giving us a key measure of consumer inflation instead of wholesale. April’s Consumer Price Index (CPI) is expected to show a 0.3% increase in both the overall and core readings. The annual readings are predicted to have dropped slightly from March’s year-over-year rate. Favorable news for rates would be smaller increases, indicating inflation at the consumer level of the economy was not as strong as thought. Traders will also be looking for March downward revisions in this report, as we saw in today’s version.

Retail Sales data for April is tomorrow’s second major release. This extremely relevant report measures consumer spending, which makes up over two-thirds of the U.S. economy. Analysts are expecting a 0.4% increase in sales from March to April. A smaller increase should push bond prices higher and mortgage rates lower tomorrow morning, assuming the CPI doesn’t show a negative surprise. The CPI will likely draw a little more attention than this sales report, but both can cause a noticeable move in mortgage pricing.