LIVE MARKETS-Hot PPI justifies Fed pause, Chicago PMI expands for first time in over two years

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HOT PPI JUSTIFIES FED PAUSE, CHICAGO PMI EXPANDS FOR FIRST TIME IN OVER TWO YEARS

Investors began their Friday learning that Trump had fingered former Fed Governor Kevin Warsh to replace Jerome Powell as chair of the central bank, news that was served with a side dish of steaming hot inflation data.

A third major take on December price growth arrived in the form of the Labor Department's Producer Price Index (PPI) USPPFD=ECI, which tracks the prices U.S. companies get for their goods and services at the figurative factory door.

On monthly and year-on-year bases, PPI landed at 0.5% and 3.0%, respectively. Both readings were 0.3 percentage points north of consensus.

Stripping away volatile food and energy prices PPI jumped 0.7% from November and 3.3% from December 2024, both numbers shooting past analyst expectations.

Core PPI, which excludes food, energy and trade services, grew 0.4% on the month, double the prior month's rate, and held firm at 3.5% year-on-year.

Below the surface, a 0.7% surge in services boosted the headline figure, while goods prices were unchanged.

The report appeared to justify Powell & Co's (soon to be Warsh & Co?) decision not to cut rates last week; inflation indeed remains stubbornly well above the central bank's average annual 2% target.

"Today's data continue to point to continued pipeline price pressures from tariffs and perhaps some stronger evidence that firms are looking to pass these through to consumers," writes James McCann, senior economist at Edward Jones, who adds that while nominee Warsh could make the case for rate cuts, "should broader inflation prove sticky, the Fed's pause might become more prolonged."

Separately, Midwest factory activity bounded back into expansion territory this month.

MNI Indicators' Chicago purchasing managers' index (PMI) USCPMI=ECI surged by an eye-opening 11.3 points to print at an even 54, leaping past 50 for the first time since November 2023.

Reminder: 50 is the magic PMI border dividing contraction and expansion.

The figure was 10 points stronger than the 44.0 economists were looking for.

Market participants will get a clearer picture of the state of U.S. manufacturing on Monday, when the Institute for Supply Management (ISM) releases its nationwide PMI.

Analysts expect that report to show an improved, but still-contractive 48.5.

(Stephen Culp)

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