Tuesday, December 14, 2021
This morning, ahead of the opening bell, market indexes increased their losses by double upon news of November’s Producer Price Index (PPI) hitting the tape, with new record year-over-year highs across the board. Headline PPI for last month came in at +0.8%, definitively higher than the +0.5% expected and the +0.6% posted the previous month.
Ex-food & energy (aka the “core” PPI number) reached +0.7%, as did ex-food, energy & trade — both of which were notably higher than expected. Year-over-year headline PPI reached +9.6%, a new all-time high since reconfiguration of data back in 2010. Year-over-year core came in at +7.7%, and year-over-year ex-food, energy & trade was +6.9%. These are also new record highs since 2010. In fact, by the old data, you’d have to go back 40 years or more to find a higher increase in PPI, year over year.
These figures were even more pronounced than the Consumer Price Index (CPI) out late last week, which had a matching headline +0.8% on headline, but +0.5% on core. CPI figures had come down slightly from October’s peak, which represented the highest reads since 2008. Year over year, we also saw a near-40-year peak, which those of us old enough to remember resulted in a Paul Volcker-run Fed which brought interest rates way up.
Market participants believe these numbers put the Jay Powell-run Fed in a box of sorts: in order to sop up what now looks like inflation catching fire in our economy, the Fed will have to speed up the taper program just announced last month. Gone are references to “transitory” inflation; we now know — supply-chain issues or not — that inflation is a lot stickier than originally thought, and now the issue is whether the Fed can re-enter the stratosphere of a taper-free Fed with the ability to raise interest rates once again. If they continue to move too slowly, they’ll never get back. If they go too fast, they’ll burn up…
Anyway, the Federal Open Market Committee (FOMC) starts its two-day meeting today, with this new PPI data fresh in everyone’s minds. Powell had already openly discussed ratcheting up the taper of asset purchases on Capitol Hill a few weeks ago; tomorrow comes the decision how far/how fast this change will now come about. This has caused concern — and uncertainty — in the markets, and as a result, the Dow fell from -20 points before the PPI release to -100 now, the Nasdaq -84 points before to -170 now, and the S&P 500 moving from -12 points pre-PPI report to -30 at this hour.
Of course, a quicker taper brings us not only the end of cheaper money — which our economy has “enjoyed” since early 2020 — but a tightening of interest rates, potentially to 1.00% or so by this time a year from now. It will be good for banks but bad for home prices; aside from this, it will be a job for companies across sectors to handle a new, challenging reality. And it will be a reality hanging onto plenty of unknowns, including the further spread of Covid-19 via the Omicron variant, global tension in China and Russia, political tension here at home, etc.
In this way, we can look at this morning’s sell-off as a fairly “responsible” move, coming off historic highs overall, if down a couple percentage points from all-time crests in valuation. We can expect this to continue until after Powell’s press conference, which will follow the statement released by the FOMC tomorrow afternoon. This will either sour investors’ moods further or give them a reasonable entry point back into some of the strongest and/or most oversold stocks.
In short, hold tight til tomorrow…
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