Wholesale prices rose sharply last month as the integral services sector kept the pressure on inflation. January\u2019s PPI rose 0.3% month over month (m\/m), much faster than the forecasted 0.1% and December\u2019s 0.1% decline. The Core PPI, which excludes food and energy, rose a staggering 0.5% m\/m, also stronger than the projected 0.1% and the previous period\u2019s -0.1%. Year-over-year (y\/y) figures came in at 0.9% for headline and 2% for core, a tenth of a percent softer for the former and three tenths higher for the latter relative to December.<\/p>\n\n\n\n
The strength in this morning\u2019s report was narrow, with goods and commodities providing firm downside pressure. Wholesale prices for goods, foods and energy fell 0.2%, 0.3% and 1.7% m\/m. Costs for gasoline, electric power, hay, oil seeds, beef, veal, ethanol, iron and steel scrap led the charge lower. Services, meanwhile, rose a sharp 0.6% m\/m, the fastest speed since July of last year. Hospital outpatient care, which rose a sharp 2.2%, led the price increases within the services category. Machinery and chemicals wholesaling, portfolio management, travel accommodation and legal services also contributed to the upward push.<\/p>\n\n\n\n Past performance is not indicative of future results.<\/p>\n\n\n\n In real estate land, construction activity dipped sharply in January against the backdrop of severe affordability headwinds. Higher mortgage rates continue to widen the gap between seller and buyer negotiations. On the one hand, sellers want to transact at lofty prices to offset inflationary pressures in the economy and to capture enough equity to avoid buying elsewhere with a much higher mortgage rate. Buyers are sidelined though, as incomes and monthly mortgage payments remain acutely out of whack. In the multifamily sector, landlord margins are disappearing as tenants aren\u2019t able to absorb rent increases and have many options for finding lower-cost housing, a result of buoyant apartment construction in recent years. Furthermore, higher interest expenses and rising costs for insurance, maintenance, materials and labor are weighing on bottom lines.<\/p>\n\n\n\n Homebuilders slowed activity last month on fears that buyers won\u2019t show up post-construction. The pace of housing starts and building permits dipped 14.8% and 1.5% to 1.331 million and 1.470 million seasonally adjusted annualized units (SAAU). The figure missed estimates of 1.46 million and 1.509 million SAAU. The weakness was primarily driven by the multifamily segment, which fell 35.8% and 9% m\/m for starts and permits. Starts fell in all four regions, with the Midwest, Northeast, West and South experiencing declines of 30%, 20.6%, 15.7% and 9.7% m\/m. Permits were positive in all regions except the most active one, as the pace declined 7% in the South. The Northeast, Midwest, and West rose 19.4%, 6.6% and 1.5%.<\/p>\n\n\n\n Consumer sentiment remained favorable this month, as households were optimistic regarding job opportunities, the path of disinflation and business possibilities. The University of Michigan\u2019s Consumer Sentiment level of 79.6 nearly matched the anticipated 80 while improving slightly from last month\u2019s 79. Indices for current conditions and consumer expectations arrived at 78.4 and 81.5, with the former improving from 77.1 while the latter lost marginal ground, slipping slightly from 81.9. Inflation expectations rose modestly, with one-year projections rising from 2.9% to 3% while the five-year figure remained unchanged at 2.9%.<\/p>\n\n\n\n Semiconductor providers in China and elsewhere are rushing to buy manufacturing equipment as internet-connected devices are increasing demand for computer chips. Consumers, however, are tightening their purse strings by scaling back on streaming entertainment. The following earnings highlights illustrate these trends:<\/p>\n\n\n\n Investors are selling stocks and bonds this session as they factor in the risk of a continued acceleration in price pressures. The downside charge is being led by the small-cap, cyclically tilted Russell 2000 Index; it\u2019s down 0.7%. The Nasdaq Composite, Dow Jones Industrial and S&P 500 benchmarks are down a milder 0.2%, 0.2% and 0.1%. Sector breadth is mixed, with four out of eleven sectors higher while four other ones are down but near the flatline. Leading the decline are the communication services, real estate and consumer discretionary segments, which are down 1%, 0.7% and 0.2%. Materials, health care and energy are leading with gains of 1%, 0.7% and 0.2%. Rates are jumping with the 2- and 10-year Treasury maturities trading at 4.68% and 4.31%, 10 and 7 basis points (bps) higher on the session. The dollar is gaining slightly as higher rates provide support. The greenback\u2019s index is up 4 bps to 104.31 as the US currency gains against the euro, pound sterling, franc, yen, yuan and Canadian dollar. It is down relative to the Aussie dollar though. Crude oil is higher on continued tension in the Middle East, with the WTI benchmark up $0.27, or 0.4% to $77.80 per barrel. <\/p>\n\n\n\n The Fed has sought to dampen investor optimism for potential spring rate cuts by emphasizing that it needs more evidence that price stability improvements are durable and that a shift to accommodative monetary policy won\u2019t spark a resurgence in inflation. To that end, this week is a setback, with CPI data depicting stronger-than-expected January inflation and today\u2019s PPI showing that wholesalers jacked up prices during the same month. Future data could also depict inflation being persistent rather than this week being an isolated setback. Prices for services, goods and gasoline have all climbed this month, while in January, the inflation-sticky services category was the only culprit that propelled the indices higher. In my view, this week\u2019s CPI and PPI data may rule out a June rate cut while certain policymakers have expressed renewed expectations for delaying a dovish shift. Last night, Atlanta Fed President Raphael Bostic said rate cuts are unlikely until the third quarter of this year. With recent market gains being driven by valuation expansion resulting from optimism of spring rate cuts, the persistence of inflation is likely to drive a considerable realignment in short order.<\/p>\n\n\n\n![\"Wholesale](\"https:\/\/ibkrcampusdev.wpengine.com\/wp-content\/uploads\/sites\/3\/2024\/02\/Picture1-17.png\")
<\/figure>\n\n\n\nAffordability Weighs on Real Estate<\/strong><\/h2>\n\n\n\n
Consumer Sentiment Remains Positive<\/strong><\/h2>\n\n\n\n
China Snaps Up Semiconductor Equipment as US Consumers Weaken<\/strong><\/h2>\n\n\n\n
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Inflation Fears Spark Selloff<\/strong><\/h2>\n\n\n\n
A Bad Week for Price Stability<\/strong><\/h2>\n\n\n\n