US Producer Price Index (PPI) inflation rose by 1.4% month-on-month in April. The forecast was 0.5%.
The outturn was 0.9 percentage points above the forecast. No other figures were provided.
Implications For Fed Policy
This morning’s producer price data is a significant shock, showing persistent inflation that the market was not expecting. The 1.4% monthly increase wipes out the narrative that the Federal Reserve has price pressures under control. We must now position for the very real possibility that rate cuts are off the table for the summer.
This number follows an already sticky April CPI report that came in at 3.7%, a figure many had tried to dismiss as a one-off. The producer price surge confirms that inflationary pressures are re-accelerating, putting the Fed in a very difficult position. Any dovish language from officials in the coming weeks should now be viewed with extreme skepticism.
For equity markets, this means we should be buying protective puts on the S&P 500 and Nasdaq 100. Higher-for-longer interest rates are a direct headwind for corporate earnings and valuations, a dynamic we saw play out repeatedly during the sell-offs in 2022. The market’s complacency about inflation is now its biggest vulnerability.
Volatility is the most immediate trade, as this data injects a huge amount of uncertainty into the market. The VIX has already jumped from a low of 14 to over 18, and we see it heading higher as the market reprices risk. Buying VIX calls or front-month futures is a direct way to profit from the increased market anxiety we expect.
In the rates market, the reaction is clear: yields are going higher. The 2-year Treasury yield has already surged 20 basis points to 4.95% as the market rapidly prices out imminent rate cuts. We should be shorting Treasury futures to position for a continued move higher in yields across the curve.
Key Catalysts To Watch
All eyes will now turn to the next round of jobs data and, more importantly, the next CPI release. Until we see clear and convincing evidence that inflation is cooling once again, the default strategy should be defensive. We are trading as if the Fed’s next move is just as likely to be a hike as it is to be a cut.
