PPI numbers send Precious Metals Higher

The Producer Price Index, PPI, which measures prices at the wholesale level, came in sharply higher than expectations this morning, and sent both gold, and especially silver, strongly higher.

The April reading rose 0.6% for the month, well above the 0.2% increase that the market had baked into the cake. That was the sharpest rise since September 2012. When the usually volatile food and energy component was stripped out leaving the core measurement, the number rose 0.5%. The market expectation for the core reading was a 0.2% increase. The number caught the market by surprise and forced a good-sized round of short covering in the PM complex.

The Federal Reserve is no doubt welcoming this PPI number ( the governors are probably doing cartwheels in the hallway)  as they have been scared to death of deflation. Their goal is to produce an annual inflation reading of 2%.

As mentioned yesterday, silver MUST have inflation to rally and rally it did, although I am noticing that once again it has been stymied at the $20 level.

One would have thought that the bond market would have fallen on the news, meaning interest rates on the long end would have risen but oddly enough, they fell lower. I am still trying to make sense out of that. Same goes for the US Dollar which could have been expected to move higher alongside higher US interest rates. That both moved lower has me scratching my head right now and wondering what is the thinking behind this.

If the market was convinced that the uptick in price pressures is the development of a new trend, then that would lend credence to the view that the Fed would raise interest rates sooner rather than later. That would support the US Dollar, especially against the Euro where the discussion over there centers around lower rates. The long bond however is now up over a full point as I type these comments early in the session. Obviously the bond market is not the least bit concerned about inflation pressures. So what in the world is going on? Gold and silver are thinking "inflation" and bonds are thinking ????? - Deflation! Why else would they be moving higher today and sending rates lower on the long end?

The bond vigilantes must be punch drunk.

This is going to be very interesting to monitor to see whether or not it is the beginning of a trend or another one of those "one off's". Also, we will want to see if the feds show any sort of change in the CPI, which measures prices at the retail level to see if producers are passing the price rises along to end users or are absorbing those.

One thing that has me a bit skeptical that we are witnessing a huge shift towards an inflationary bias right now is the forward structure in the grains and beans. Grain prices, if we get a good growing season ( and this is of course always a question), are showing ample supplies for later this year which will mean lower costs. Also pork production, along with beef production, is expected to increase late this year and into next spring, although it will not be burdensome. China's slowing growth is also a negative factor for commodity prices in general so all of this needs to be considered. That being said, I am looking at this data with an open mind and watching closely. Again, this big bond rally today has me really skeptical as the bonds are usually right. We'll see.

Stocks certainly did not like the news one bit. Keep in mind that one of the big drivers behind the consistent rise in equities has been the lack of inflation. An ultra low interest rate environment has thus far driven money flows into stocks. If, and this is a big, big "IF", we do see a shift towards an inflationary bias in these PPI's and CPI's, we might finally see a bit more selling pick up in equities.

I will get some more up later in the session. Let's see how things close today.