US PPI inflation beats expectations

US PPI inflation came in hotter than expected in February, with prices paid to producers rising at a six-month high of 0.6% m/m, compared with the predicted 0.3% rise which would have been in line with that recorded in January. Stripping out food and energy the rise was a more sedate 0.3%, down from 0.5% previously and only moderately higher than the predicted 0.2%. The data follows on from the upside surprise in CPI inflation released earlier this week, and will likely reaffirm the Fed’s cautious approach to rate cutting in the coming months as the final mile in bringing down price growth is proving the hardest.

Other data out of the US was somewhat softer than predicted, with retail sales expanding 0.6% m/m in February, bouncing back from a (revised downwards) 1.1% decline in January but still weaker than the predicted 0.8% gain. Stripping out automotives and gas, the rise was in line with expectations at 0.3%. Following on from the fall in January, the February data would seem to confirm that the remarkable resilience of the US consumer through the recent run of high inflation and high interest rates is starting to weaken, if not necessarily fall off a cliff. Eight of the 13 categories saw an increase in sales but a fall in sales for big-ticket furniture items and clothing stores suggests that buyers are becoming more discerning. Meanwhile, the initial jobless claims for the week to March 9 were at 209,000, lower than the predicted 218,000 but broadly in line with the previous week’s 210,000 (revised down from 217,000 on the initial print).

Saudi CPI inflation came in at 1.8% y/y in February, modestly faster than the 1.6% the previous month. Prices were 0.2% higher than in January. Over half of the components of the basket (seven out of 12) saw lower prices than a year earlier, but this was offset by a sizeable rise in the cost of housing & utilities, which was at 8.5% y/y and 1.2% m/m. This is up from 7.8% in January, but still lower than the recent peak of 9.1% in June 2023. We forecast an average CPI inflation rate of 2.5% this year.

Today’s Economic Data and Events

17:15 US industrial production, % m/m, February. Forecast: 0.0%

18:00 US University of Michigan sentiment index, March. Forecast: 77.2

Fixed Income

• Yields on USTs rose again yesterday on the back of the upside surprise in the PPI print. On the 10yr, yields rose 10bps to 4.2903%, while the 2yr closed up at 4.6936%.
• European treasuries also lost ground yesterday, with yields on 10yr bunds rising 6bps to 2.424% and 10yr gilts ticking up 7bps to 4.09%.
• The PBOC kept its one-year policy loans at 2.5% on Friday, but it did withdraw CPY 94bn from the banking sector to reduce excess liquidity as the central banks remained reluctant to use monetary policy to stimulate economic growth.

FX

• The US dollar index closed up 0.6% yesterday, with gains against all of its peers as the PPI print reduced bets on imminent rate cuts from the Fed.
• The Euro lost 0.6% to the USD to close at 1.0883, while GBP closed 0.3% lower at 1.2753. The Japanese yen closed at 148.33, down 0.4%.

Equities

• US equities closed down yesterday after the higher-than-expected PPI report. The S&P 500 and the NASDAQ both dropped 0.3%, while the Dow Jones ended the day 0.4% lower.
• In Europe, the CAC closed up 0.3% but it was an outlier, with the other key indices closing down. The FTSE 100 ended 0.4% lower and the DAX 0.1%.
• Locally, the ADX closed 0.1% higher and the DFM added 0.7%.

Commodities

• The IEA revised its oil demand growth forecast for 2024 higher by nearly 200k b/d to 1.3m b/d largely down to an increase to its expectations for OECD demand. The IEA now expects demand growth in developed markets to be near flat year on year compared with a more substantial decline projected previously. It also revised up its forecast for Asian demand by 120k b/d.
• For supply the IEA expects non-OPEC+ supply additions of 1.6m b/d in 2024, down from 2.4m b/d in 2023, thanks to supply increases from the US, Guyana, Brazil and Canada.
• Oil prices saw robust gains again yesterday, with Brent futures closing up at USD 85.4/b, while WTI added 1.9% to USD 81.3/b. Both benchmarks are trading a little lower in early trading this morning, however.