Producer Price Index : Economic Reports
We have already discussed the economic reports release dates and now we shall endevour to go into more detail of the usefulness of each economic report to various traders.
We shall look at the Producer Price Index ( PPI) . It’s reported on the 9th to 16th of each month by the bureau of labor statistics.
The PPI measures the average change over time in selling prices by producers of goods and services in the USA.PPI measures price change from the perspective of the seller.The PPI is noteworthy as it’s the first look at inflation in the month. Many economists filter our the volatile food and energy sectors when coming up with a figure to arrive at a more stable number.
| If PPI is up | If PPi is down | |
|---|---|---|
| Dollar | Uncertain | Uncertain |
| Bonds | Down | Up |
| Stocks | Down | Up |
How the PPI affects the dollar
For stocks higher inflation may cause consumers to buy less ,which leads to less goods sold and probably lead to decreased profits. At the same time ,the value any stock is the present value of future expected cash flows. With higher interest rates ,this will decrease the present value of stocks
For bonds, consumers will demand a higher inflation premium to cover the inflation rate thus reduce the bond prices.
For the dollar it is important to be more prudent. There are 2 possible scenarios
- If interest rates are percieved to be rising ( without a fear of inflation) then it is possible for the dollar to strengthen relative to other foreign currencies. This is because foreign investors will sell their currency and purchase dollars to invest in the higher interest rates. This relative to the currencies being judged against the dollar, may cause the foreign currency to fall and the US dollar to rise.
- If inflation is imminent ,the purchasing power of the dollar is reduced and as such the value falls.
That is why it is essential for those trading pairs related to the dollar to not just follow what the new Fed rates are when the feds meet but also to try and understand if they think there is inflation present or not. Most traders just rush to hear the new rates without understanding if the feds bank thinks there is inflation or not.
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