Producer price index points at no inflationary worries

Rapid rise in inflation due to rebound in energy prices would have pushed Federal Reserve Governor Janet Yellen to act faster to curb prices, given recent rapid rise in longer end yields. This would have hurt US economy given it is already losing momentum from start of the year.

However today's release of producer prices indicate that Federal Reserve might wait and watch for longer time horizon before acting on first rate hike.

• Producer price index dropped by -0.4% m/m in April and by -0.2% excluding food and energy prices. PPI is down by -1.3% from a year ago. However prices rose by 0.8% y/y excluding food and energy prices.

Impact -

• FED is likely to wait before raising rates as other economic dockets like retail sales, GDP growth have fallen well below expectation. This is not good news for US short term rates and dollar.

• Inflation vigilantes, who have pushed bond yields across world at record pace in recent weeks need to consider their moves before pushing US long end curve at fast pace. However Spread between 10 year and 2 year still might move up as FED rate diminishing hike bets would push short end lower.