Abrams: PPI Data Shows Continued Disinflation; Rate Cuts Could Be On Deck

January 12, 2024 – Today’s Producer Price Index report supports the notion that inflation has essentially been defeated.  PPI fell to negative headline MoM, 0% core MoM, 1.8% YoY core change, and 1.0% YoY headline change.

The PPI feeds into PCE, which is the Fed’s preferred inflation gauge, which has already been running below 2% on a 6-month annualized basis.  Today’s data suggest PCE will fall further, potentially solidifying a March rate cut.

Yesterday’s CPI report was a bit misleading, still showing a 0.5% increase in shelter related costs (rent and owner equivalent rent).  As we have written about for months, this requires looking through.  All leading rent indices reflect rents coming down across the country; it will eventually show up in the highly lagged BLS calculation that goes into CPI.

The rate curve is steepening, with the 2-year now down over 10 bps below 4.15% (as of 9:35 a.m.).  If it closes here today below resistance, the next stop is roughly 3.95%, which would place the 2-year note approximately 155 bps inverted to Fed Funds (5.25 – 5.50%), ringing alarm bells for imminent Fed cuts.

Source: Bloomberg.

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Leland Abrams, Portfolio Manager
Leland Abrams, Portfolio Manager
Leland Abrams serves as Chief Investment Officer for the investment manager, Wynkoop LLC. Leland is Lead Portfolio Manager of an NARMBS income-oriented fund at Catalyst Funds. Prior to joining Wynkoop in September 2016 as Principal and Portfolio Manager, Mr. Abrams spent five and a half years at Candlewood Investment Group LP. Most recently, he was the RMBS Sector Manager responsible for overseeing approximately $1 billion in RMBS investments across the firm. Previously, Mr. Abrams spent two and a half years as a non-agency mortgage and esoteric ABS trader and credit analyst at United Capital Markets, Inc. Prior to that, Mr. Abrams was a Credit Analyst and Trader at Dresdner Bank, AG (Dresdner Kleinwort Wasserstein). Mr. Abrams holds a B.A. in Economics from Bucknell University. Mr. Abrams served as a Director and member of the Audit Committee for Front Yard Residential Corp, a public REIT headquartered in Christiansted, VI until the company’s sale in January 2021.

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