The US Department of Labor released its monthly PPI Report on Tuesday June 17. It was a surprise.

The Producer Price Index for Finished Goods decreased 0.2 percent in June, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Among prices for finished goods, the index for energy goods fell 1.1 percent in June after rising 4.1 percent in May. Prices for consumer foods decreased 0.8 percent following a 0.2-percent decline in the previous month. The gasoline index fell 3.9 percent following a 10.2-percent jump in the previous month.

The index for fresh fruits and melons declined 14.9 percent after climbing 12.1 percent in the preceding month. Prices for eggs for fresh use, beef and veal, pork, processed fruits and vegetables, and soft drinks also turned down following increases in May. The index for processed young chickens decreased more in June than it had in the prior month. By contrast, prices for fresh and dry vegetables rose 0.2 percent following a 35.0-percent drop a month earlier. The index for dairy products advanced more in June than it had in May.

MarketWatch is reporting Producer prices unexpectedly fall 0.2% in June.

Wholesale prices fell 0.2% in June as food and energy prices declined after four months of hefty increases, the Labor Department reported Tuesday. The producer price index fell for the first time since January, confounding economists’ expectations for a 0.2% increase in prices for goods at the wholesale level. The PPI is up 3.3% in the past 12 months.

Food prices sank 0.8%, the second straight decline. Egg prices plunged 26%, while fresh fruit prices fell 15%. Dairy prices rose 6.3%.
Energy prices fell 1.1% as gasoline prices dropped 3.9%. Natural gas prices rose 2.6%.

Excluding volatile food and energy prices, the core PPI rose 0.3%, a tenth higher than the 0.2% gain expected. It’s the biggest gain since February. The larger-than-expected gain in core prices was largely due to large increases in car and truck prices, which rose more than 1%. Prices of capital equipment rose 0.3%. Prices of consumer goods fell 0.4%.

One might think that a falling PPI would be good for treasuries. Not so fast. SmartMoney is reporting Treasurys Fall On Unexpected Jump In Core PPI.

Treasurys were under pressure early Tuesday, sending yields higher, after news that core producer prices increased slightly more than expected in June.

Given the Fed’s irrational fixation on core prices as if energy and food prices don’t matter, one can see where that headline came from. Of course had treasuries rallied, the explanation would have been treasuries rallied because the overall PPI fell. This is typical headline reporting. The market did “whatever” so find a reason for “whatever”. A word of caution: It is very difficult to figure out “why” the market does what it does. Perhaps there was a cause or perhaps treasuries were simply ready to decline.

The Lehman 20+year bond fund fell as did the Lehman 7-10 year Treasury Fund. Both charts are interesting.

TLT 20+ Year Treasury Fund

(click on chart for a better view)

TLT certainly has been volatile since May, primarily down but lately in both directions. A major move one way or another (or both) seems likely.

IEF 7-10 year Treasury Fund

(click on chart for a better view)

As you can see the chart patterns are nearly identical. The difference being that the magnitude of TLT is far greater (as one with expect with longer durations). From the May peak to the June trough, IEF declined from 82.75 to 79.25 while TLT declined from 88.25 to 82.0 (nearly double the move). This is true on the rebound as well.

Whichever way those triangles break, the move could be a huge one. If the move is south, yields will go soaring and housing will take yet another huge hit right as huge numbers of adjustable rate mortgages are resetting. Rest assured, it won’t be pretty.

Mike Shedlock / Mish/