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By Scott McIntyre, CFA
Co-Head of Investment Management
HilltopSecurities Asset Management
The widely accepted narrative that inflation is under control was disrupted this morning as wholesale prices prove stickier than expected. Headline PPI rose +0.5% in January, while core PPI jumped +0.8% following a revised +0.6% gain in December, marking the largest back-to-back increase in core PPI in nearly four years. On an annual basis, core PPI rose from +3.3% to +3.6%, the highest since last March.
The breakdown was telling as final demand services jumped +0.8%, the biggest gain since last July, while final demand goods declined -0.3%, the sharpest drop in almost a year. Margin costs increased the most since 2009, presumably as companies passed along a greater percentage of import taxes. Underlying PPI, excluding food, energy, and trade services, rose +0.3% for the month, and +3.4% for the year, up sharply from a cycle low of +2.6% last June.
Producer prices are generally considered less important than consumer prices, but a number of PPI components flow into the Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation measure. Although investors and the markets have a tendency to focus on the more familiar CPI measure, the Fed favorite has been quite a bit warmer in recent months. In a release last week from the Bureau of Economic Analysis (BEA), headline PCE rose +0.4% in December and +2.9% year‑over‑year, while the core rate climbed +0.4% and +3.0%, both above expectations. The main difference between core CPI (+2.5% yoy in January) and core PCE is in the category allocations. The shelter cost weighting in the CPI index is twice as high as in the PCE index, while PCE assigns a higher allocation to healthcare costs.
A warmer inflation outlook would likely result in a more cautious Fed, keeping the FOMC on hold for longer. However, the inflation picture is muddled and ever-evolving. February CPI is scheduled for release on March 11, while January PCE is on tap for March 13. These two reports should better clarify the trend.
Stocks are down in early trading, although the drop probably has little to do with PPI as there are several contributing factors. WTI crude topped $67 per barrel this morning, the highest price for oil since last June, while OpenAI’s $110 billion funding announcement is adding to A.I. bubble concerns. Despite expectations of a longer Fed pause, bonds are rallying as investors seek the safe harbor of Treasuries, nudging yields lower for the second straight day.
About Scott McIntyre, CFA
As HilltopSecurities Asset Management’s Co-Head of Investment Management, Scott McIntyre specializes in investment management services and is responsible for the management, oversight and trade supervision of more than $30 billion in institutional fixed income assets for HilltopSecurities’ public sector municipal clients. Scott also provides investment advice and consulting, reviews local government investment policies, formulates overall investment strategies, evaluates account performance and oversees the day-to-day operations. He is a member of the Chartered Financial Analyst (CFA) Institute and a CFA Charterholder, a two-term advisor to the GFOA Treasury and Investment Management (TIM) committee, a Registered Investment Advisor, and holds FINRA Series 7, 24, 63, and 65 licenses.
About Greg Warner, CTP
As HilltopSecurities Asset Management’s Co-Head of Investment Management, Greg Warner specializes in investment management services and is responsible for the management and oversight of more than $30 billion in institutional fixed income assets for HilltopSecurities’ public sector municipal clients. Greg coordinates all client services and portfolio management duties, including security evaluation and portfolio analysis, trading, investment reporting, board presentations, and monitoring of broker-dealer relationships. He is an advisory committee member to the Texas Association of Counties, a member of the Government Treasurers’ Organization of Texas (GTOT), a Registered Investment Advisor, a Certified Treasury Professional (CTP) and holds FINRA Series 7, 63, and 65 licenses.
About Matt Harris, CFA
As HilltopSecurities Asset Management’s Senior Portfolio Advisor, Matt Harris specializes in investment management services for public sector municipal clients. He developed his experience in the banking industry, supporting balance sheet management, interest rate risk analysis, liquidity planning, and investment strategy implementation. At HilltopSecurities, he works closely with clients to develop and implement customized investment strategies, oversees account documentation and reporting, and assists clients with the public funds depository review process, including competitive RFP evaluations. Harris is a member of the CFA Institute and a CFA Charterholder, a Registered Investment Advisor, and holds FINRA Series 7, 63, and 66 licenses.
The paper/commentary was prepared by HilltopSecurities (HTS). It is intended for informational purposes only and does not constitute legal or investment advice, nor is it an offer or a solicitation of an offer to buy or sell any investment or other specific product. Information provided in this paper was obtained from sources that are believed to be reliable; however, it is not guaranteed to be correct, complete, or current, and is not intended to imply or establish standards of care applicable to any attorney or advisor in any particular circumstances. The statements within constitute the views of HTS as of the date of the document and may differ from the views of other divisions/departments of Hilltop Securities Inc. and its affiliates. In addition, the views are subject to change without notice. This paper represents historical information only and is not an indication of future performance. This material has not been prepared in accordance with the guidelines or requirements to promote investment research, it is not a research report and is not intended as such. Sources available upon request.
Hilltop Securities Inc. is a registered broker-dealer, registered investment adviser and municipal advisor firm that does not provide tax or legal advice. HTS is a wholly owned subsidiary of Hilltop Holdings, Inc. (NYSE: HTH) located at 717 N. Harwood St., Suite 3400, Dallas, Texas 75201, (214) 859-1800, 833-4HILLTOP.