LIVE MARKETS-Fed up: Hot PPI, tepid factory orders, cold mortgage demand

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FED UP: HOT PPI, TEPID FACTORY ORDERS, COLD MORTGAGE DEMAND

Flies on the wall of the Federal Reserve conclave no doubt took note of the policymakers' reaction to Wednesday's data offerings, which included hotter-than-expected inflation, a housing affordability squeeze due to rising mortgage rates, and a soft factory orders report.

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, provided a third - and surprisingly hot - take on February price growth.

The index increased by 0.7% over January, an unexpected acceleration over the prior month's 0.5% rate and barging past the 0.3% consensus.

Year-over-year, PPI shot up 3.4%, landing 0.5 percentage points north of analyst expectations.

Stripping away volatile food and energy prices, PPI jumped 0.5% from January and 3.9% from February 2025, both numbers barging past economists' predictions.

Core PPI, which excludes food, energy and trade services, grew at 0.5%, or 0.1 ppt hotter than the previous month, and increased to 3.5% year-over-year.

Below the surface, a 1.1% surge in goods boosted the headline figure, while the 0.5% monthly rise in services did little to cool things down.

The report certainly justifies Powell & Co's near-certain likelihood of leaving interest rates unchanged later today, and might even lend some ammo to the rate hike camp. Bear in mind this unexpectedly hot report predates the war on Iran, which has squeezed oil supply and stoked inflationary fears.

Regardless, this PPI report shows inflation drifting further beyond the central bank's average annual 2% target.

"This isn’t the kind of PPI report the Fed wants to see,” writes Nationwide Financial Markets Economist Oren Klachkin. "This report suggests inflation was going to accelerate even before the Iranian conflict hit."

New orders for U.S. factory-made merchandise USFORD=ECI eked out an as-expected 0.1% increase in January, a meager rebound from December's softened 0.4% decline.

Below the headline, that meager increase was stunted by an 11.8% drop in pre-Iran-war capital defense orders, including a 23.8% drop in defense aircraft. Excluding defense items, new orders would have risen by a more substantial 0.4%.

While orders for autos/parts dipped 0.2%, they rose 4.0% for computers and related products, hinting at the probability that expenditures on artificial intelligence continue unabated.

As shown in the graphic below, new factory orders have been hovering in the $600 billion area since mid-2022, during which time the Institute for Supply Management's manufacturing PMI has mostly languished in contraction territory - until January, that is.

ISM PMI has now clocked two consecutive months above the magic PMI level of 50, sounding a positive note for U.S. goods-makers in 2026.

Turning to the housing market, the cost of financing home loans jumped last week, according to the Mortgage Bankers Association (MBA).

Would-be borrowers, on balance, were unamused.

The average 30-year fixed contract rate USMG=ECI rose by 11 basis points to 6.30%, the highest this year.

Still, applications for loans to purchase homes USMGPI=ECI increased by 0.9%. However, an 18.5% plunge in refi demand USMGR=ECI, which accounted for 52.3% of total mortgage activity, dragged the combined mortgage demand metric down 10.9%.

"Mortgage rates continued to move higher, driven by increasing Treasury yields as the conflict in the Middle East kept oil prices elevated, along with the risk of a broader inflationary shock," says Joel Kan, MBA’s deputy chief economist.

The 30-year fixed rate currently sits 42 basis points below where it was a year ago.

Purchase and refi demand have risen by 11.8% and 68.8% over the same period.

(Stephen Culp)

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