January PPI

This morning the government reported that for January, the Producer Price Index (PPI) rose by more than was expected. The overall PPI grew by 0.3% (compared to December), while the less volatile core rate, which excludes both food and energy, rose by 0.4%. This signals that for January, at least, "wholesale inflation" was worse than thought (read an article about this and compare it to another article).

What do you suppose the reaction was in the bond market? Normally, a "hot" inflation number will cause a bond sell off, pushing bond prices down and interest rates higher. Today, however, the opposite was the case -- rates actually fell. How could this happen?

Remember, when we analyze this market, we must, of necessity, consider "other things being equal." Today, that was not the case. First, the number itself might have been bad, but this is only the first bad number in a while for the PPI. And, never pay too much attention to the value of an indicator for a single time period. Second, the shocking rise was on a sequential rate of change, comparing December to January. When an alternative comparison is used, comparing this January to last January, called the year-over-year growth rate, that number was actually fairly good (1.5%), and below the year-over-year growth rate for December (of 1.7%).

As this was happening, oil prices continued their recent rise, moving from around $58 per barrel just a few days ago to $61.29 today. Again, this would normally be bad for bonds, which makes the PPI story even more interesting. For extra credit, due at the beginning of Tuesday's class, go to StockCharts.com and plot the price of oil ($WTIC) with the 9-day RSI and the Relative Strength compared to the S&P and annotate it with comments and lines that summarize the main aspects of its performance over the last week or two.

Finally, the University of Michigan's Consumer Sentiment Index fell more than expected today, further reinforcing the upward price movement in bonds.