A 1.3% monthly PPI jump should have rattled bonds. Instead, Treasury yields fell—and that curious reaction could reveal where the economy is headed.
KEY TAKEAWAYS
Wholesale inflation came in dramatically hotter than expected. September PPI rose 1.3% versus 0.6% expected, while producer prices were up 6.3% over the prior year.
The inflation pressure extends well beyond the headline energy shock. Goods prices jumped 2.6%, energy surged 10.8%, and even core PPI rose 0.7%, more than twice the expected increase.
Upstream inflation suggests additional pressure could still be coming. Unprocessed goods prices are up 21.5% over the past year, processed intermediate goods are up 14.1%, and September crude and diesel prices surged.
Pricing power is becoming increasingly important for investors. Gasoline retailers saw margins plunge 30.3%, illustrating how some businesses must absorb rising costs while others can pass them through.
The bond market delivered the most surprising signal of all. Despite the inflation shock, the 10-year Treasury yield fell roughly nine basis points, suggesting markets may currently fear slowing economic growth more than inflation.
MY HOT TAKES
The bond market’s failure to sell off is more interesting than the PPI number itself. Markets are forward-looking, and Treasuries appear to be weighing the growth destruction caused by the energy shock against its immediate inflationary impact.
Calling this “just energy” is becoming increasingly difficult. Core producer inflation was also hotter than expected, while enormous increases in upstream input costs suggest businesses haven’t finished dealing with the shock.
Pricing power could become one of the defining equity factors of this environment. Companies able to pass higher costs along should be structurally better positioned than businesses forced to sacrifice margins.
The consumer data are weaker beneath the headline. Retail sales look healthy until autos and gasoline are removed, suggesting higher mandatory spending is crowding out discretionary purchases.
The Treasury rally shouldn’t automatically be interpreted as an all-clear on inflation. If bonds are rallying primarily because investors are seeking safety, yields could face renewed pressure once risk sentiment improves while inflation remains elevated.
You can quote me: “A quiet dog can be a very loud warning.”
Elementary. I’ll confess something that will surprise exactly no one who has ever sat across a dinner table from me–I am a Sherlock Holmes nerd extraordinaire. All sixty or so stories. I have lost count how many times I have read the originals, never mind how many times I watched Basil Rathbone bring the iconic character to life. My favorite moment in the entire canon isn’t a chase across the moors or the showdown at Reichenbach Falls. It’s a throwaway exchange in Silver Blaze–penned by Sir Arther Conan Doyle in 1892. Inspector Gregory famously asks Holmes whether there is any other point he’d like to draw attention to. Holmes answers, “To the curious incident of the dog in the night-time.” Gregory, baffled, replies that the dog did nothing in the night-time. “THAT…was the curious incident,” says Holmes.
The case, you see, doesn’t turn on what happened. It turns on…well, what DIDN’T.
Odd, though it may sound, I thought about that very dog yesterday morning at 8:31 as I hurriedly collected my thoughts before running from my office to the New York Stock Exchange for an interview. The Bureau of Labor Statistics had just told us that wholesale prices jumped 1.3% in September–the biggest monthly leap since March 2022. I double-took at the news, wondered if my contact lenses were failing, leaned into my Bloomberg terminal to confirm the print, and said simply: “ouch!” I shifted my line of sight to a different screen in an instant. You see, that is the kind of number that should send bond traders howling at the moon. And the bond market? Silence. Not even a whimper. Yields didn’t jump. They had actually been falling all morning, and they finished the day LOWER. Cue the suspenseful orchestral music–cut after crescendo.
When the loudest inflation print in four and a half years can’t get the bond market to bark, the clue isn’t the number. Wait for it…wait for it..it’s the silence. The game, as they say, is afoot.
Let’s start with the evidence, because Holmes would never forgive me for theorizing before I had data. The PPI / Producer Price Index (basically, the prices businesses receive for what they sell, measured before anything reaches a store shelf) rose 1.3% in September. Economists expected 0.6%. And this wasn’t an ordinary miss–it landed outside the ENTIRE range of Wall Street estimates. I suspected it would be on the high side, but not that high. Not one forecaster saw it coming. Over the past twelve months, producer prices are up 6.3%, the fastest pace since December 2022.
Goods prices alone rose 2.6% in a single month. That’s the largest increase since the government began calculating that series in December 2009–a record. Full stop. Not surprisingly, energy did the heavy lifting, up 10.8%, with gasoline at the producer level up 20.3%–in ONE month. 👊 If you’ve wondered why filling your tank feels like a car payment, there’s your answer.
Now, the defense attorney in the room will object: “It’s just energy.” Fair enough. So, strip out food and energy and look at the core. That measure rose 0.7%, more than double the 0.3% forecasters expected. Even the narrowest version the government features (which also removes the margins earned by wholesalers and retailers) rose 0.5%. This isn’t one villain. It’s a gang!
Holmes was fond of telling Watson, “You see, but you do not observe.” The headline number is what everyone saw. What deserves observing sits further upstream. Yes, upstream, now pay attention. 😉🔎
The PPI tracks prices at every stage of production–from raw materials (crude oil coming out of the ground) to processed goods (the diesel refined from it) to the finished product loaded onto the truck. The early stages tell you what’s coming down the road. And what’s coming isn’t pretty. Prices for unprocessed goods–the rawest inputs in the economy–are up 21.5% over the past year. Processed intermediate goods are up 14.1%, the fastest pace since August 2022. Crude petroleum rose 28.3% in September alone. Diesel–the fuel that moves nearly everything you buy–jumped 21%.
Then there’s food. Producer food prices rose 1.2% last month. Yet in Wednesday’s consumer price report, prices at the grocery store actually slipped 0.1%. So far, the grocery aisle has been spared. “So far” is doing a LOT of work in that sentence. Several big packaged-food makers were already warning retailers about price increases earlier this fall. Pipeline pressure doesn’t evaporate. It flows downhill–straight toward your shopping cart.
Now, here’s where the investigation gets interesting for investors. When costs rise this fast, someone has to absorb them. The question is who. Buried deep in the report: margins for gasoline retailers–what your local station earns between what it pays for fuel and what it charges you–fell 30.3% in September. Thirty percent–THIRTY! Gas stations are swallowing part of the shock rather than passing every penny along to drivers. Meanwhile, margins for machinery and vehicle wholesalers rose 3.9%. Some businesses are price-takers. Others are price-setters.
The consumer is leaving clues, too. In a separate report, Retail Sales rose 0.8% in September, double the 0.4% economists expected. Sounds robust, right? Look closer. Strip out autos and gasoline, and sales grew only about 0.25%. Americans aren’t spending more–they’re spending more at the pump and tightening their belts everywhere else.
For investors, that’s the essential question in any inflationary stretch: do the companies I own set prices, or do they take them? Pricing power is the difference between a business that passes the bill along and one that ends up paying it–like a gas station that just watched its margins shrink by nearly a third. I think it should go without saying, but I will say it anyway, because–why not, it’s Friday, and it’s my blog: I prefer price setters–as an investment, of course.
Which brings us back to our silent dog. The 10-year Treasury yield fell roughly nine basis points yesterday, settling just under 5.1%–its lowest level since September 24. On the hottest wholesale inflation report in four and a half years.
And here’s the detail most of the coverage missed: the bond rally started BEFORE the 8:30 release. The PPI didn’t spark it–it merely trimmed it. Bonds took a record-setting inflation punch and still finished the day higher in price.
So why the silence? Remember how Holmes solved the case. The dog didn’t bark because it RECOGNIZED the visitor. The bond market has met this intruder before. It knows energy shocks don’t just push prices up–they drain wallets and slow economies on the way through. With chip stocks in a correction, South Korea’s market posting its worst week since October 2008, and the AI debt worries I wrote about yesterday, money went looking for shelter–and Treasuries are the oldest shelter on Wall Street. Add a consumer cutting back on everything but gasoline, and the bond market is effectively saying: slower growth worries me more than hotter inflation.
Of course, the bond market isn’t the only one listening for barks. Fed Chair Kevin Warsh spoke overnight WHILE YOU SLEPT at the IMF and World Bank meetings in Bangkok, and he gave away nothing about October. He doesn’t “pre-judge” meetings, he said, and he described central banks around the world as engaged in a “synchronous tightening” with “no free riders.” He also called the road to an AI-powered economy “very bumpy,” which may be the understatement of the year.
For some more color…or should I say, “colour.” His colleagues were far less cryptic. San Francisco Fed President Mary Daly said she has grown more concerned about inflation persistence and is less willing to “look through” repeated supply shocks–a notable shift from where she stood six months ago. Chicago’s Austan Goolsbee called the data “discouraging” and warned that the AI buildout may be overheating the economy. Richmond’s Tom Barkin said Wednesday’s consumer inflation number came in higher than he’d hoped. And the Fed’s own Beige Book (its anecdotal survey of the various Fed regions) found half of them reporting robust or intensifying price pressures.
Markets, however, are betting the Fed holds steady at its October 27-28 meeting, leaving Fed Funds at 4.00%. The odds of an October hike have bounced around all week–roughly one in three at Thursday’s close, and well below that after Warsh spoke. December is another story entirely, where markets put the odds of a hike by then at 100%. Translation: the hawks haven’t left the building. They’re simply waiting for the next meeting.
So what should investors make of all this? I won’t hand you a verdict–Holmes never revealed a solution until he was certain–but I will share the questions I’m asking myself. Is the bond rally a judgment on inflation, or simply a flight from fear? If it’s fear, what happens to yields when the fear fades and the inflation is still sitting there? Does my portfolio own the price-setters or the price-takers? And am I telling myself this is “just energy” because my grocery bill hasn’t moved–yet?
There’s a reason “Silver Blaze” has endured for more than 130 years. The lesson was never that silence means nothing happened. It’s that silence means something happened that you just haven’t figured out yet. The bond market’s quiet yesterday wasn’t complacency. It was recognition. It has seen energy shocks before, and it knows they have a nasty habit of breaking the economy on their way out the door.
But recognition isn’t the same thing as safety. Remember, in the story the dog’s silence wasn’t proof that all was well at the stables. It was the clue that something had gone terribly wrong–a stable boy drugged, a champion racehorse vanished, and a man found dead on the moor. A quiet dog can be a very loud warning.
So I’ll keep listening. October’s PPI arrives November 13th, the Fed meets in less than two weeks, and somewhere in that pipeline, a whole lot of diesel-powered price pressure is still rumbling toward your local store. Holmes would tell us that when you have eliminated the impossible, whatever remains, however improbable, must be the truth. The improbable truth this morning is that the bond market is more frightened of a slowdown than of 6.3% wholesale inflation.
Elementary? Hardly. Mrs. Hudson, I’ll take my tea extra strong this morning. Something tells me this case is far from closed. 🕵️ Now, if you’ll excuse me, Eloise is barking at the door for her morning walk.
YESTERDAY’S MARKETS
Stocks recovered from an early slide yesterday, as the selloff in AI-related shares eased. The S&P 500 rose 0.3%. The Dow Jones Industrial Average jumped 556 points, or 1.1%, to 52,177, and the Nasdaq Composite added 0.1%. The 10-year Treasury yield fell about nine basis points to around 5.09% after September producer prices rose 1.3%, while November WTI crude settled up 3% at $97.97 a barrel and Brent closed at $105.92.
NEXT UP
Industrial Production (September) is expected to gain 0.4% after remaining flat in the prior period.
Next week: lots of important earnings announcements in addition to housing numbers, flash PMIs, Leading Economic Index, and University of Michigan Sentiment. There is a lot of there…there, so you better come back next week to avoid being overtaken in the final furlongs.
Chicago Fed President Austan Goolsbee will speak today.
Important earnings today: Truist, Travelers, Citizens Financial, Cleveland-Cliffs, Fifth Third Bancorp, and Steel Dynamics.