LIVE MARKETS-Icy hot: PPI cools from scorching to sweltering

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ICY HOT: PPI COOLS FROM SCORCHING TO SWELTERING

Data maniacs had to scrape by with one lonely indicator on Friday.

The Labor Department's producer price index (PPI), which tracks the prices US companies get for their goods and services at the figurative factory door, came in cooler than expected.

The report showed PPI rose 0.3% last month, a sharp deceleration from September's bruising, upwardly revised 1.4% monthly surge, and just below the 0.4% consensus.

Year-on-year, PPI moved in the other direction, jumping 6.5%, hotter than the prior month's 6.3% annual growth rate but 0.1 percentage points shy of analyst estimates.

Stripping away volatile food and energy prices, PPI increased on monthly and annual bases by 0.3% and 5.0%, respectively. Both were in line with economist projections.

Under the hood, the energy component actually eased, dipping 0.1% after September's 10.0% monthly jump. Food and transportation provided much of the heat in this report, rising 1.3% and 2.0%, respectively.

"Perhaps more important than the headline number is the broadening of inflation beyond energy," writes Chris Osmond, CIO at Fifth Third Wealth Advisors. "That suggests inflation is working its way into the broader economy rather than remaining concentrated in the original areas of price pressure."

"If that continues, it becomes much harder for the Fed to simply look through inflation as temporary."

Core PPI, which excludes food, energy and trade services, heated up to 0.5% on the month, and to an even 4.9% year-on-year.

This is the third take on October price growth — after last Friday's wage data and the CPI report on Tuesday — and it remains the hottest inflation indicator of the bunch (by far), with the core number gliding 2.9 percentage points north of the Fed's average annual 2% target.

Note that year-on-year CPI data was not available for October due to the year-ago data gap that resulted from the government shutdown.

Financial markets are pricing in an increasing 89.4% likelihood that the Fed will hike its key interest rate by 25 basis points at the conclusion of the December FOMC meeting, up from 85.5% a day ago. The probability of a super-sized 50-bp rate hike is currently 10.6%, down from 14.5% on Thursday, according to CME's FedWatch tool.

"The good news is that producer price inflation cooled from September," Osmond adds. "The bad news is that it may not have cooled enough to give markets the rate relief they want. Today’s report increases the risk that restrictive rates stay with us longer than investors hoped."

(Stephen Culp)

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