February 13, 2025

QuickTakes

Bond Yields Do A Backflip On CPI & PPI,

Stocks Rally On Tariff News

The 10-year Treasury bond yield jumped by 10bps on Wednesday's hotter-than-expected January CPI report (chart). In his congressional testimony on Wednesday, Fed Chair Jerome Powell acknowledged that the Fed has more work to do to get inflation down. Today, the bond yield fell 10bps on a hotter-than expected January PPI report and an upward revision in December's PPI. Huh?

You read that right. Some of the key components of the PPI that are used to calculate the Fed's preferred PCED measure of inflation were benign or lower. For example, healthcare, with a nearly 20% weighting in the core PCED, declined 0.1%. Airline passenger services fell 1.6% m/m (after soaring 6.5% m/m in December).

January's PPI rose 0.4% m/m, and December's increase was revised up from 0.2% to 0.5% m/m. The index is up 3.5% y/y (chart). PPI services inflation is above 4.0% y/y, and PPI goods inflation rose to its highest pace since 2022. The PPI inflation rate has been rising since June 2023, when it was close to zero.

As is customary these days, morning macroeconomic news was followed by afternoon announcements from Trump 2.0. Tariffs will be delayed until at least April and will be enacted on a reciprocal country-by-country basis. That means there's much more room for negotiation and bilateral trade deals. Of note, the administration is including in its considerations other countries’ non-tariff market barriers like value-added-taxes (VAT) and currency manipulation.

Stocks rallied on the tariffs update. The S&P 500 rose 1.0%, and the Nasdaq rose 1.5%, approaching its record high set in December. The gold price also rose despite what appears to be progress toward negotiating an end to the Russia-Ukraine war and a more favorable tariff outlook. Gold rose 1.0% to $2,957 per ounce (chart). We think $3,000 might just be a pitstop on its way to $4,000 later this year.

Tomorrow's data deluge will include retail sales, industrial production, and import/export prices for January. We anticipate that real retail sales will beat expectations, which are relatively depressed. Industrial production likely slipped last month, given the decline in manufacturing hours worked (chart). However, better-than-expected production is possible if hours worked fell due to the LA fires and not an actual slowdown. So there's a good setup for stocks' strength to continue on Friday.

QuickTakes Archive

Contact us by email or call 480-664-1333.

Copyright (c) Yardeni Research, Inc. Please read complete copyright and hedge clause.