{"id":185164,"date":"2023-02-16T12:20:00","date_gmt":"2023-02-16T17:20:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=185164"},"modified":"2023-02-16T14:12:52","modified_gmt":"2023-02-16T19:12:52","slug":"markets-plunge-on-boiling-wholesale-inflation","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/markets-plunge-on-boiling-wholesale-inflation\/","title":{"rendered":"Markets Plunge on Boiling Wholesale Inflation"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\">In another indication of accelerating inflation, today\u2019s Producer Price Index release shows that just as inflation may have been transitory on the way up, it has also proven to be transitory on the way down. Today\u2019s news has caused investors and spectators to raise their expectations of the magnitude of Fed tightening necessary to slay the inflation dragon. In fact, Cleveland Federal Reserve (Fed) Bank President Loretta Mester remarked \u201cwe are in it to win it\u201d regarding the Fed\u2019s efforts to lower inflation down to the 2% target. Other market players are speculating about the need to raise the terminal rate to a six handle, a phenomenon markets are not prepared to handle.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-another-morning-another-market-decline\"><strong>Another Morning, Another Market Decline<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Markets are plunging this morning, a familiar event over the last few days as the ferocious bulls seem to never run out of ammunition to buy dips. Morning declines have been bid up and many pre-market-morning losses have been reversed by the afternoon as the S&amp;P 500 Index has lingered around the same levels of 4100-4150 during most of February. Today, the battle is at 4100. While the bears pushed the index lower to 4091, bulls have handsomely bought the dips heavily yet again, lifting the index above 4125. Spectators have remarked that the emergence of zero day to expiry options (0dte) provides a powerful new tool to gather momentum throughout the trading day, leading to eye-boggling market reversals, some of which we\u2019ve seen the last few days, propping up valuations towards sky-high, nose-bleed levels.<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\"><strong>Spectators have remarked that the emergence of zero day to expiry options (0dte) provides a powerful new tool to gather momentum throughout the trading day, leading to eye-boggling market reversals, some of which we\u2019ve seen the last few days, propping up valuations towards sky-high, nose-bleed levels.<\/strong><\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">The S&amp;P 500 index is down 0.7% while the tech-heavy Nasdaq Index is down 0.8%, recovering roughly half of the losses since the open. Bond yields are rising notably, led by the long-end against the backdrop of rising inflation expectations, while the short-end pick up is driven by a Fed that is likely to maintain higher rates for longer than previously anticipated. The 2-year yield is up 4 basis points (bps) while the 10-year is up 6 bps. The dollar index is catching a bid with lower levels of momentum, however, up 15 bps to 104.08.&nbsp; WTI crude oil is down modestly, losing 46 bps to just over $78 a barrel as oil traders weigh strong demand from the Chinese reopening against the offsetting factor of rising inventories in the U.S., which have increased for eight consecutive weeks.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Producer Price Index Reinforces Inflation Fears<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Today\u2019s Producer Price Index report (PPI) came in strongly above expectations, catching market participants off guard after what was a hot, but near consensus, <a href=\"\/campus\/traders-insight\/securities\/macro\/propelled-by-energy-and-services-inflation-accelerates-in-january\/\">Consumer Price Index (CPI)<\/a> report two short days ago. Many economists including myself use the PPI as a leading indicator for CPI because businesses generally pass on higher costs to consumers or take the hit to margins. Today\u2019s report reminds investors that in 2023, they\u2019ll either get hit on margins via earnings, or on valuations via the Fed. Since all-time equity highs in 2022, it\u2019s certainly been a mix of both but more of the latter.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"903\" height=\"657\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/02\/Picture1-29.png\" alt=\"The Producer price Index Rose To Its Highest Level Since Last June\" class=\"wp-image-185165 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/02\/Picture1-29.png 903w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/02\/Picture1-29-700x509.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/02\/Picture1-29-300x218.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/02\/Picture1-29-768x559.png 768w\" data-sizes=\"(max-width: 903px) 100vw, 903px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 903px; aspect-ratio: 903\/657;\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">The PPI rose 0.7% month-over-month (m\/m), its fastest pace since June, dwarfing expectations for a 0.4% increase and exceeding December\u2019s -0.2% decline. Core PPI, which eliminates food and energy from the calculation, came in at 0.5% m\/m, much higher than the 0.3% consensus expectation. Year-over-year (y\/y) numbers came in 6% for headline and 5.4% for core, significantly above the Fed\u2019s 2% target and accelerating in the shortterm. The ongoing real estate recession continues, with building permits rising a mere 0.1% m\/m and housing starts falling 4.5% on an annualized pace basis. The labor market remains strong, with weekly jobless claims down 1,000 to 194,000 from the previous week\u2019s 195,000, while the consensus forecast expected an increase to 200,000.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Businesses Tighten Their Belts<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Economic fears are having an impact on corporate sentiment. Upwork, which operates a freelance worker portal, generated sluggish fourth quarter revenue growth and expressed caution for the coming months as businesses tighten their spending. Gross Services Volume (GSV), which is revenue from a variety of services, such as fees for services and spending on the company\u2019s freelance marketplace, grew 4% y\/y but its growth was flat quarter-to-quarter. Some clients reduced their spending after the firm changed its fee structure in the second quarter, but Upwork also experienced softness in client acquisitions. Nevertheless, the company\u2019s total revenue grew 18% y\/y. It believes many clients are slowing hiring due to the macroenvironment, but it expects its total revenue to grow 12% y\/y in the current quarter.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Advertising is also contracting. Streaming video platform provider Roku\u2019s fourth quarter is normally its strongest for the year, but 2022 was an exception. Its platform revenue, which includes advertising and subscriptions, grew 20% y\/y compared to 80% in the final quarter of 2021. Paramount Global also experienced weakness with its $8.13 billion in revenues falling short of the $8.17 billion consensus expectation. It experienced a 5% fourth quarter decline in advertising revenue with its television media division advertising revenue dropping 7%. Its adjusted earnings per share of $0.08 fell substantially below the $0.24 expected by Wall Street.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Reality Calls<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Market bulls may finally need to accept a painful reality\u2014inflation is stronger than many investors have believed while corporate earnings are weakening. Despite a view that Fed Chairman Jerome Powell would likely throw underarm from the mound in March, Cleveland Fed President Loretta Mester isn\u2019t alone in her hawkish stance. After CPI numbers were released yesterday, Richmond Fed President Thomas Barkin implied that the central bank may need to be more aggressive in fighting inflation and the Philadelphia Fed\u2019s Patrick Harker said the terminal rate for the fed funds will need to be above 5%. Perhaps the tipping point that ends the panic in the morning and feast in the afternoon pattern for investors may occur today when St. Louis Fed President Jim Bullard speaks. His most recent hawkish comments may have fallen on deaf ears among investors, but the recent string of inflationary data, such as a sizzling jobs report, strong retail spending, this week\u2019s CPI data and today\u2019s PPI, may make it hard to dismiss his views. Bulls may be caught flat footed today or perhaps they will demonstrate that emotional urges, such as fear of missing out, are stronger than a balanced view of markets and the economy.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Visit&nbsp;<a href=\"https:\/\/tradersacademy.online\/trading-courses\/introduction-to-macroeconomics\"><strong>Traders\u2019 Academy<\/strong><\/a>&nbsp;to Learn More about the Consumer Price Index, Unemployment Claims, Building Permits and Other Economic Indicators.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In another indication of accelerating inflation, today\u2019s Producer Price Index release shows that just as inflation may have been transitory on the way up, it has also proven to be transitory on the way down. <\/p>\n","protected":false},"author":903,"featured_media":185168,"comment_status":"closed","ping_status":"open","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[12711,18,6,8,9,26,3],"tags":[570,4505,12380,14760],"contributors-categories":[13760],"class_list":["post-185164","post","type-post","status-publish","format-standard","has-post-thumbnail","category-ibkr-economic-landscape","category-macro","category-north-america","category-region","category-securities","category-text-articles","category-traders-insight","tag-inflation","tag-producer-price-index","tag-us-economics","tag-zero-day-to-expiry-options","contributors-categories-ibkr-macroeconomics"],"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v28.1) - 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His skillset includes the ability to communicate and analyze complex economic topics in English and in Spanish and throughout his career, he has been interviewed by media outlets including Bloomberg, CNBC, CNN, WSJ, AP, Yahoo Finance, Cheddar, Business Insider, Seeking Alpha, PBS, FOX, Economic Times, Univision, Telemundo and others.\",\n\t            \"url\": \"https:\\\/\\\/www.interactivebrokers.com\\\/campus\\\/author\\\/jose-torres\\\/\"\n\t        }\n\t    ]\n\t}<\/script>\n<!-- \/ Yoast SEO Premium plugin. -->","yoast_head_json":{"title":"Markets Plunge on Boiling Wholesale Inflation","description":"In another indication of accelerating inflation, today\u2019s Producer Price Index release shows that just as inflation may have been transitory on the 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