PPI decline may let Fed cut rates again

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The producer price index fell 0.3% in September on a seasonally adjusted basis, the Labor Statistics Department reported, the largest monthly drop in four years.

Economists surveyed by IFR Markers had expected PPI to have risen by 0.1% last month after rising 0.1% in August.

PPI minus the food and energy components also declined 0.3% after a 0.3% rise in August while the PPI minus the food, energy and trade components was unchanged last month after a 0.4% rise in August.

On a year-over-year basis, PPI was up 1.4% while PPI ex-food was up 2.0% and PPI minus food, energy and trade was up 1.7%.

The decline in overall PPI was the biggest since January and was the largest monthly drop since February 2015.

The report added strength to the arguement that relatively mild inflationary pressures will let the Federal Reserve lower interest rates one more time this year. The Federal Open Market Committee next meets on Oct. 29-30.

“Core producer prices — which excludes the volatile food and energy components — also fell 0.3 % in September,” Scott Anderson, chief economist at Bank of the West, said in a market comment. "This is the largest monthly drop in core prices since February 2015 and reverses the 0.3% increase in August. Core producer prices are up 2.0% from a year ago, down from 2.3% in August — the smallest annual advance in two years. Moderating producer prices and declining small business confidence supports our forecast that the Fed cuts the Fed funds target rate again before year-end.”
Anderson said that the declines were broad-based with goods prices falling 0.4% and services prices decreasing 0.2%.

“Producer price weakness was also seen in energy (-2.5%) and trade and transportation/warehousing (-1.0%). Final demand producer prices are up modest 1.4% from September 2018, down sharply from 1.8% in August,” he said.

Subadra Rajappa, head of U.S. Rates Strategy at Societe Generale, said the Fed would also be looking closely at data for its end-of-year meeting.

"The market is fully pricing a 25 basis point rate cut at the October meeting, while a cut at the December meeting is still a coin toss and will likely depend on incoming data and policy actions at the October meeting," Rajappa said.

Also Tuesday, the NFIB small business optimism index fell to 101.8 in September from 103.1 in August.

“Despite the decline last month, the small business optimism index remains in the top 20% of all readings in the survey’s 46-year history and is consistent with slower U.S. growth and not recession at this point,” Anderson said.

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