Treasury yields rise after producer prices jump

Aug. 11:

The Producer Price Index rose 0.3% in July after recording no change in June. Year over year, the index grew 0.8%, up from 0.2% annual growth in June. While producer prices have been rising far more slowly than consumer prices recently, any upwards bump in the PPI can be regarded as cautionary.

The monthly increase in the PPI comprised a 0.1% increase in the price of goods and a 0.5% increase in the price of services.

The core PPI, which excludes food and energy prices — known to be more volatile — was also up 0.3% in July and 2.4% year over year. The annual growth rate held steady from June.

State of the market

Rates increased substantially yesterday due to a disappointing $23 billion 30-year Treasury bond auction that yielded 4.189% with weak demand. Five-year Treasury yields jumped over 0.1%.

This morning, PPI growth drove yields up again, as it became apparent that if the Federal Reserve doesn’t choose to raise rates again, it may have to hang onto higher rate levels for a longer period of time. Fed funds futures still show a very low likelihood of a rate move at the Sept. 20 Federal Open Market Committee meeting, and perhaps a 36% chance of a rate hike on Nov. 1.

Futures had been expecting that by the end of 2024, the upper end of the Fed funds target range (now 5.50%) will be somewhere between 4.00% and 4.25%, but following the PPI, the implied range would appear to be 0.25% higher.  

The Dow traded up this morning.

Economic calendar

Tuesday, Aug. 15

• Advance Retail Sales
• Import Price Index
• Business Inventories
• Empire State Manufacturing Survey

Wednesday, Aug. 16

• Housing Starts/Building Permits
• Industrial Production/Capacity Utilization
• The Fed releases minutes from the July 26 Federal Open Market Committee meeting.

Thursday, Aug. 17

• Philadelphia Fed Manufacturing Business Outlook
• Weekly Initial Jobless Claims
• Leading Indicators

Treasury calendar

There are no auctions of Treasury notes or bonds next week.

By Mike Kraft, Executive Director and Commercial Real Estate Treasurer for Commercial Banking