In June 2003, the 10-year Treasury did something extraordinary by yielding around 3.07% at one point in that month. That was a generational low, and it’s proven to be the nadir for the 10-year ever since. Judging by this morning’s report on producer prices, the odds improved again for 3.07% remaining the low for the foreseeable future.
As of last night’s close, the 10-year’s yield was some 200 basis points higher from the low of three years ago. The great question coursing through the financial markets is whether the elevation that the price of money has accumulated over the past 36 months will suffice to stifle the mounting inflationary pressures that appear to be bubbling in the economy.
Producer prices advanced by 0.5% in June, the Bureau of Labor Statistics reported today. In addition to being well above the consensus forecast, 0.5% represents a sizable jump from May’s 0.2% rise. On the other hand, the core PPI (which removes energy and food from the mix) slipped a bit last month, increasing by 0.2%, down from 0.3% the month before.
If any of this gives investors reason to wonder about the primary trend in wholesale prices, a rolling 12-month gauge of PPI offers a more-enlightening picture. On that score, there’s reason to worry: PPI has climbed 4.8% over the past 12 months, the second-highest rate this year. Yes, the trend looks less ominous after subtracting energy prices. But in the real world, we all consume energy and pay market prices, ensuring that energy’s threat on inflation is more than theoretical.
Granted, there’s a sizable risk premium built into the price of oil these days. Neil McMahon, an oil analyst in Sanford C. Bernstein’s London office, writes in a research note to clients today that a $27-a-barrel premium is embedded in crude’s price. “In the absence of the perceived risks the market is factoring in, we believe prices would be below $50/bbl based on the supply demand balance, and current levels of spare capacity which has been steadily expanding for the last 12 months,” he writes.