December 9th PPI: Stocks Fall — and Then Rise — What’s Going On?

The PPI is often referred to as "the Fed's favored gauge of inflation." So why didn't today's hotter-than-expected PPI data shake the market? And is the PPI really as important as people make it out to be?

Justin Nugent

This article was last updated on 12/09/2022.

PPI, PPI Data, November PPI, December PPI, producer price index, market reaction to ppi

Stocks across the board fell at 8:30am EST upon the release of the December 9th PPI Data (Producer Price Index), before staging a recovery, leaving the indices mostly unchanged. Here’s how it happened, and why.

What is the PPI?

PPI, or the US Producer Price Index is a year over year average of the change in prices received by domestic producers. While the PPI is famously known as the Fed’s “favored gauge of inflation,” its importance is faltering due to the consistent downtrend in manufactured goods as a measure of overall spending. 

That’s why, at the end of the day, while the stock market gives credence at the time to the PPI, it is the CPI, or the Core Price Index, that is the true headturner — the true indicator of pricing pressure on the consumer. The CPI is the inflation report that everybody, including the Fed, pays closest attention to, regardless of tawdry nicknames like “the Fed’s favorite inflation gauge.”

Still, the PPI is important. Let’s look at what happened in November.

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November PPI Data — December 9th

Producer Price Index for November, YoY: +7.4% vs +7.2% expected (Previous: 8.1%)

Producer Prices Final Demand for November, Headline Month Number: +0.3% vs +0.2% expected

YoY PPI data over the past two years. Source: Investing.com

While the PPI data did come in hotter than expected, PPI is still in a noticeable downtrend since July. The number wasn’t also far off from the expectation, and a slightly above target number is likely to pacify the crowd that believes the economy is barreling toward a painful recession in 2023. This duality is likely part of why the stock market reacted the way it did on Friday.

Let’s dig deeper into that reaction.

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Stock Market Reaction to November PPI

1D chart of SPY using 1M candles. Source: TradingView

Typically, “better than expected” PPI data means that the “actual” YoY data is higher than the expected data. If the expectation was 1.0, and the actual came in at 2.0, this would typically be cause for celebration — a sign of economic strength. However, 2022 is not a typical economic era.

In 2022, with the Fed locked in a life-or-death battle against inflation, hotter-than-expected PPI data is not welcome. Economic strength can be good, considering that everyone and their mother has now made it a consensus opinion across Wall Street that 2023 will see a massive recession. All that is to say, it isn’t bad to see some strength in the manufacturing sector.

That said, the Fed wants to see economic weakness. That’s the intended outcome of rising interest rates and quantitive tightening, and a weaker job market. A weaker economy means less demand, and less demand means less pressure to keep prices high. This theoretically should have a downward effect on inflation, and it has in the past. But even that — the impact that a weakening economy has on inflation — isn’t really what the market is focusing on.

The stock market is focused on one thing: What the Fed will do & say during the December 14th FOMC, and they feel that reports like the CPI, the PPI, and the jobs data all will impact those actions. That is the lens in which market participants are largely viewing these reports. Simply put: It isn’t really about whether inflation is falling, it’s about whether the Fed thinks inflation is falling.

The Bottom Line: Yes, Bad News Is Good News in 2022

A weak set of economic reports means that the Fed may be more likely to follow through with the plan it began to lay out during its November meeting — a possible pause in rate hikes coming as soon as December. However, the Fed left plenty of room for nuance, and that “room” likely leans on the economic data that comes out leading up to the event.

While Fed Chair Jerome Powell did say, “We don’t have to see signs of inflation abating in order to take a pause on rate hikes.” The market is clearly on edge, and will likely continue trading in a tight range until it receives the all-important CPI report.

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