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November 25, 2022

Equity.Guru

Investment information for the new generation

INFLATION

More signs that inflation is peaking!

Today saw the release of the US Producer Price Index (PPI) for the month of October 2022. US PPI rose 0.2% in October which was below the estimate of 0.4%. Wholesale prices increased less than expected, which increases the chance (some would say hopes!) of inflation peaking and falling.

The PPI measures the prices that companies get for finished goods in the marketplace. Readers know that I closely follow PPI more than CPI. I have used the analogy of driving a car before. Driving and looking through the rear view mirror is akin to looking at CPI. It shows you what has passed. Driving and looking straight ahead through the windshield is akin to looking at PPI. It tells you what is coming.

PPI is considered a good leading indicator for inflation as it gauges pipeline prices that eventually work their way into the marketplace.

With PPI coming in lower, the likelihood of CPI coming in lower increases. Barring any new supply chain issues or major spike in oil.

On a year-over-year basis, PPI rose 8% compared to an 8.4% increase in September. If we exclude food, energy, and trade services, the index rose 0.2% on the month and 5.4% on the year. Excluding just food and energy, the index was flat on the month and up 6.7% on the year.

“The PPI read certainly adds more fuel to the fire for those who feel we may finally be on a downward inflation trend,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley’s Global Investment Office.

So October CPI came in lower than estimate. And PPI came in lower than expected. Good signs that come the December Fed meeting, the Fed may start slowing down the pace of interest rate hikes. But investors must remember: the Fed has said they want multiple months of data showing inflation is heading lower.

Fed Waller made this clear over the weekend:

“We’re at a point where we can start thinking maybe of going to a slower pace,” Waller said, but “we’re not softening…Quit paying attention to the pace and start paying attention to where the endpoint is going to be. Until we get inflation down, that endpoint is still a ways out there.”

“We’re going to need to see a continued run of this kind of behavior and inflation slowly starting to come down before we really start thinking about taking our foot off the brakes,” Waller said, adding that he has been further convinced the Fed is on the right path because its rates increases so far have not “broken anything.”

TradingView Chart

US stock markets have had a nice pop post PPI data after a muted Monday which failed to see momentum after Friday’s surge. From a technical standpoint, today’s daily candle close can confirm the first higher low in a new uptrend if we close above the recent highs.

Going forward, more upside is expected as long as we hold above the breakout zone.

TradingView Chart

If you want to know where stocks are going then look at this 10 year yield. I have been telling readers the importance of this chart in many Market Moments posts where they are probably sick of hearing it now.

Nonetheless, the 10 year is the most important chart to be followed and if yields drop or remain stable, then stock markets will continue higher.

Currently, the line hinting at the projection I want to see is playing out. The 10 year retested its breakout zone at 3.90% and if we can close below recent lows, then we have our first lower high in this new downtrend. But as you can see, the close right now is NOT below recent lows. So keep an eye on this today and in upcoming days.

TradingView Chart

The US Dollar falls in exactly the same camp as the 10 year yield. A lower high could be developing but currently the close is NOT below recent lows.

We want to see both the 10 year and the dollar close below recent lows to confirm more stock market upside.

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