PPI / Fed Speakers / UK Growth

Yesterday’s December PPI figures out of the US showed the smallest monthly gain since November 2020, moving up by just 0.2%, vs a consensus of 0.4%, however, the November reading was revised up to 1.0% from the 0.8% reported previously. The main drivers for the lower number were food, down 0.6%, and energy, 3.3% lower. In contrast, the PPI for trade services, that measures retailers and wholesaler margins, advanced by 0.8% and has now been up for 11 consecutive months, as sellers continue to pass on higher costs to final demand consumers.

We also had a plethora of Fed speakers on the wires giving their views on the current state of the economy and how they see tapering and rate rises panning out.

Evans said inflation is too high and sees 3-4 hikes this year. He believes inflation will end the year around 2.5% and is aligned with the FOMC median of 3 hikes this year. He thinks it would take a couple of years to get to neutral rate, however, that could be accelerated.

Harker said taper is to end in March and then we can probably expect a rate hike. He is concerned that inflation expectations could get unanchored and sees a fair amount of tightening this year. He sees the Fed funds rate as the main policy tool and has 3 hikes pencilled in, however, that could move to 4. Barkin also said the Fed is free to start normalising rates in March if needed and the Fed is having the right conversation on balance sheet adjustment.

Additionally we had Lael Brainard, in the hearing for her nomination to become the US central bank's Vice Chair, mention that the Fed funds are the main policy tool and that she is very concerned about high levels of inflation. She said the Fed is in position to hike as soon as asset buying ends.

Lastly, we had Waller, who agrees with the growing consensus that three rate hikes in 2022 is a ‘good baseline’, but if inflation stays high, the case will be made ‘for four, maybe five, hikes’. However, he did hedge his bets, adding that if inflation subsided as many, including him, expect ‘then you could actually pause and not even go the full three’.

We could not go without mentioning that figures released this morning showing the UK economy has recovered to its pre-pandemic level, after a surge of growth in November. GDP came in at 0.9%mom vs a consensus of 0.4%mom, and 1.1%yoy vs 0.8%yoy. Industrial production was at 1%mom vs 0.2%mom, and 0.4%yoy vs -0.3%yoy. However, it was construction output that was the real eye opener, 3.5%mom vs 0.6%mom and 6.8%yoy vs 3.1%yoy.

Fixed Income Team