US Producer Prices Rose More Than Forecast in January

Michael Ball, Bloomberg News Macro Strategist, reacts to January PPI data.

Prices paid to US producers rose in January by more than forecast, fueled by services and pointing to lingering inflationary pressures.

The producer price index increased 0.5%, the most since September, after a revised 0.4% increase in December, a Bureau of Labor Statistics report showed Friday. An underlying gauge that excludes food and energy advanced by the most since July.

Consecutive months of firm wholesale-price readings add to evidence of slow progress toward beating inflation. Higher duties on imported materials have encouraged many producers to raise prices or find other cost savings to protect margins.

Economists and investors closely track the PPI because several of its components feed into the Federal Reserve’s preferred inflation gauge, the personal consumption expenditures price index.

Among those inputs used to compile the PCE price index, portfolio management costs, airfares and physician care costs rose firmly. The Bureau of Economic Analysis is scheduled to release January PCE price data, along with income and spending figures, on March 13.

After the report, some economists bumped up their estimates of the core PCE price gauge to a 0.5% advance, which would be among the strongest in recent years. Others expect a firm, but more moderate gain.

“This report validates the pivot of the FOMC away from labor market risks — we don’t see any, but some in the markets remain fixated on the slowing payroll figures — back toward price stability,” Carl Weinberg, chief economist at High Frequency Economics, said in a note. He was referring to the Federal Open Market Committee, the central bank’s rate-setting panel.

The S&P 500 opened weaker and Treasury yields remained lower after the PPI data. US stocks dropped as risk-off sentiment swept through markets and fintech Block Inc.’s massive layoffs fanned angst that artificial-intelligence is poised to upend broad sections of the economy.

A larger-than-forecast 0.5% increase in producer prices last month, fueled by services, also weighed on equities by signaling inflationary pressures that may keep the Federal Reserve from cutting interest rates. Nvidia Corp., the heaviest-weighted stock in the S&P 500, extended its post-earnings decline.

The S&P 500 Index was down 0.8% at 1:50 p.m. in New York, with four of 11 sectors in the red, led by financials and tech. The Nasdaq 100 Index fell 0.7%. The Dow Jones Industrial Average declined 1.3%, while the KBW Bank Index dropped by as much as 6%, the most intraday since April. Nvidia shares shed 3.3%.

Read more: Bank Shares Walloped by More ‘Cockroach’ Credit Woes, AI

Fresh credit worries are hurting bank stocks, Wells Fargo analyst Mike Mayo wrote in a note. Mayo cited creditors of failed UK mortgage firm Market Financial Solutions Ltd. cautioning about a shortfall in collateral backing their loans. Plus, “the reduction in headcount at Block reinforces the ‘AI Scare Trade’ and the potential for higher unemployment,” he said.

The economic backdrop also hurt sentiment, after the PPI data.

After the report, “markets are a little less confident that the Fed, despite a new chairman, will continue on the rate-cutting path,” said Brad Long, chief investment officer at Wealthspire. He also flagged the current “rotational trade,” with software dropping as energy and industrial stocks climb, as investors “are not sure what the through-put of AI means.”

Nvidia’s two-day drop of almost 9% came despite surging revenue and a better-than-expected first-quarter outlook, underscoring concerns about the high valuations of stocks that have rallied on the back of the AI boom.

The “positive earnings surprises weren’t on the scale of what markets got used to in 2023-2024, and arrived amidst growing scepticism about the AI trade in general,” Deutsche Bank strategist Jim Reid wrote in a note.

AI Ripples

Even as investors fret over whether the AI boom has pushed up some stocks too far, the steady rollout of AI programs has caused them to pull back from industries that look likely to be upended by the technology.

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