Markets are starting the day on the defensive after a hotter‑than‑expected Producer Price Index (PPI) reinforced the message that business‑level inflation remains sticky. December PPI rose 0.5% month over month, well above expectations of 0.2%, driven primarily by services inflation, where margins for wholesalers and retailers jumped sharply. Core PPI (ex‑food and energy) was even more surprising, rising 0.7% versus flat one month ago. The data underscore that pricing power at the business level has not cooled meaningfully and continues to pose upside risk to the Fed’s preferred inflation gauges. For markets, the takeaway is simple: inflation pressures remain persistent earlier in the supply chain, complicating the path toward easier monetary policy.

Layered on top of the inflation surprise is a major policy headline: President Trump has nominated former Fed Governor Kevin Warsh to replace Jerome Powell as Fed Chair. The pick caught markets off guard given Warsh’s reputation as a relative inflation hawk and a long‑standing critic of balance‑sheet expansion and ultra‑easy money. While confirmation still lies ahead, markets are already reacting to the prospect of less Fed accommodation, with stocks and Treasuries both lower and the dollar higher as investors price a more disciplined policy regime. The development reinforces concerns that rate cuts may arrive later — and more cautiously — than previously assumed. And full disclosure: everyone, including myself, got Trump’s Fed pick dead wrong.

Looking ahead, next week’s economic calendar heats up with ISM, JOLTS, and the January employment report. Despite this morning’s tape bombs, MBS are holding up relatively well, with current coupons down just 3–4 ticks. We’re also beginning to see modest flight‑to‑safety behavior, pushing short‑end rates slightly lower as equities get hit (they like easy money, too). As of this writing, the Dow is down roughly 165 points, while gold is getting clobbered.

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