Tuesday, September 18, 2007

Inconsistent Market Response to Inflation

The PPI released this morning showed headline inflation much below forecast, due to falling energy prices; but core PPI was higher than forecast. Stock futures markets rallied on the news. This is completely inconsistent with prior month's releases, when the markets rallied on relatively high headline readings because core inflation was at or below expectations.

It would seem that greater than expected PPI inflation, which also remains above the Fed's supposed comfort range of 1-2% year-over-year, would lessen the probability of the 50 bps rate cut the market's been hoping for.

UPDATE: It appears that some or all of the futures rally could be attributed to Lehman's earnings report. Even so, the PPI report didn't evoke any negative reaction.