PPI Leads to a Not-So-Dull Tape

Investors need to be thankful for revisions. This morning’s July PPI report proved to be the catalyst that yesterday’s CPI was not. Stocks and bonds both reacted quite positively after the better-than-expected inflation figures.  A quick glance at the headlines certainly showed another set of disinflationary statistics, but a detailed view of the statistics made them less exciting than they first appeared.  That hasn’t dampened the enthusiasm, though. 

The PPI report certainly looked good.  There was no month-over-month increase in the headline number; it was 0.0% when 0.2% was the economists’ consensus.  Ex Food and Energy rose by 0.2% in July, better than the 0.3% consensus.  Lower-than-expected readings improve the market’s perceptions about inflation, which is good news both on it own merits and for those who are “playing the referee” when they conclude that this will reduce the Fed’s likelihood of raising rates. 

Yet a closer read of the data clouds the picture somewhat.  The June headline change was revised higher, from an as-reported -0.3% to -0.1%, and the Core reading rose to 0.4% after the prior report showed a monthly rise of 0.2%.  For those playing along at home, the upward revision in June headline PPI matched the outperformance of the July reading, while the 0.2% upward revision to June was greater than the 0.1% beat in the July reading.  That’s not exactly the improving inflation picture that was portrayed by many of the early reports.

Nonetheless, bond traders can do arithmetic too, and if this doesn’t bother them, then it’s difficult to get too perturbed about the revisions.  We’re writing this before today’s auction of 30-year bonds, and those rates – along with most of the rest of the yield curve – are about 5 basis points lower.  They’ve pulled back a bit from their best levels of the morning – they were about 8 bp lower shortly after the report – but still show optimism ahead of today’s sale.  The current yield on the when-issued securities is about 5.19%.  That is below the recent highs on 30-year paper, but an auction at that yield would mark the highest yield since 2001.  Yesterday’s 10-year auction at 4.683% was the highest yield since 2007, by the way, but that didn’t faze markets because most yields ended the day roughly unchanged. 

Stocks were on an obvious upward trajectory throughout the morning.  There was a modest leg higher after the 8:30 ET PPI report, but then stocks shot higher after the bell rang at 9:30. Tech is once again the focus, with the Nasdaq 100 (NDX, NQ) still up by more than 1% even after a slight pullback, though the S&P 500 (SPX, ES) is further off its highs but still up about 0.5%.  The old adage about “don’t short a dull tape” applies once more.  The summer doldrums don’t need much of an excuse to turn positive, and steady gains throughout much of the tech sector are proving sufficient.

Today, September Futures, ES (red/green 1-minute bars), NQ (blue line)

Source: Interactive Brokers