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Baker Market Update

Another week down and another week closer to Christmas. The Federal Reserve is trying to get off Santa’s naughty list by cooling inflation without tipping the economy into a recession. This morning we found out that wholesale prices as measured by the producer price index (PPI) rose 0.3% in November, more than the expected 0.2% gain. The year over year change was 7.4%. Excluding food and energy, core PPI was up 6.2% from a year ago, compared to 6.6% in October. The PPI is a measure of what companies get for their products in the pipeline. This hotter than expected PPI data more than likely keeps the Federal Reserve on track for another rate increase next week. Currently, the probability for a 50-basis point rate hike next week is 75% and 25% for a 75-basis point rate hike per the CME FedWatch Tool. A 50-basis point rate hike would reflect a slower pace in Fed tightening after four consecutive 75-basis point rate hikes.

Another release this morning comes to us from the University of Michigan Consumer Sentiment Index as the reading came in at 59.1, higher than the expected 57 and up from 56.8 in the prior month. The survey’s reading of one-year inflation expectations fell to 4.6%, the lowest reading in 15 months, from 4.9% in November. The decline in short-run inflation may not be all that surprising given the recent decline is gasoline prices. The five-year inflation outlook was unchanged at 3.0% from November.

Earlier in the week on Monday, a report from the Commerce Department showed that factory orders jumped 1.0% in October after rising 0.3% in September. The 1.0% increase came in higher than the expectations for a 0.7% increase. Durable goods orders also came in a touch higher than expected with a 1.1% increase with expectations of a 1.0% increase. The ISM services index was also released Monday with a reading of 56.5, well above expectation of 53.5. The ISM services index is populated from a survey of more than 400 non-manufacturing (or services) firms’ purchasing and supply executives. The services report measures business activity for the overall economy, a number above 50 indicates growth while a number below 50 indicates contraction.

Last Friday gave us the latest on nonfarm payrolls and the unemployment rate, but each Thursday we get initial and continuing jobless claims. First-time or initial unemployment claims rose 230,000 vs. 225,000 the prior week. Continuing claims hit 1.671 million, their highest level since February of this year. A tight labor market has continued to put upward pressure on wages and therefore inflation which has been a challenge for the Fed.

Most investors are laser focused on the final Federal Reserve policy setting meeting of 2022 with expectations for a 50-basis point rate increase. Next Tuesday will bring us the Consumer Price Index (CPI) data for the month of November. Estimates for Headline and Core CPI are both for a 0.3% month over month change. The year-over-year estimates call for a 7.3% increase on Headline CPI and a 6.1% increase in Core CPI. Have a great weekend and be careful out there!

Producer Price Index Year-Over-Year Percentage Change (December 2016 – Present)

Source: Bloomberg, L.P.

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Since 1979, we’ve helped our clients improve decision-making, manage interest rate risk, and maximize investment portfolio performance. Our proven approach of total resource integration utilizes software and products developed by Baker’s Software Solutions* combined with the firm’s investment experience and advice.



Dale Sheller
Associate Partner
Director of Financial Strategies Group
The Baker Group LP

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