The U.S. PPI fell 0.1% month-on-month in December, not growing for three consecutive months
The US PPI continues to cool, signaling a decline in inflation in the coming months, and the swap market is pricing in more Fed rate cuts in 2024.
On Friday, January 12, data from the U.S. Department of Labor showed that the U.S. PPI increased by 1% year-on-year in December, less than the expected 1.3%, and rebounded from 0.9% in November, and the PPI was -0.1% month-on-month, also lower than the expected 0.1%, slowing down from the previous value of 0%, and did not increase for the third consecutive month.
Excluding volatile food and energy, core PPI rose 1.8% year-on-year in December, missing expectations of 2% and slowing from 2% in November, the smallest increase since late 2020. Core PPI rose 0% month-on-month, less than expected by 0.2%, in line with the previous value, and remained unchanged for the third consecutive month.
Used to reflect early prices in the production process – the intermediate demand PPI is still below zero, but is starting to accelerate higher.
After the release of the US PPI data, the swap market priced in more rate cuts by the Fed in 2024.
The US 2-year Treasury yield fell to 4.211%, the lowest level since May. The U.S. dollar index is trading about 20 pips lower in the short term and is now trading at 102.31. U.S. stock futures rose in the short term. Spot gold rose in the short term and is now at $2048.89 an ounce.
The PPI for goods declined, while the services sector remained unchanged
Similar to the trend in previous months, the PPI for commodities declined, with energy and food prices being the main drivers, while the services PPI remained stubborn.
Specifically, the final demand goods index fell by 0.4% in December, following a 0.3% decline in November. Among them, the price of final demand food decreased by 0.9%, the demand energy index decreased by 1.2%, and the final demand goods (excluding food and energy) remained unchanged.
Broken down, half of the decline in the final goods demand index was attributed to diesel prices, which fell by 12.4%, but gasoline prices rose by 2.1%.
The final demand services index was flat, with prices for final demand services, excluding trade, transport and warehousing, rising 0.4% month-on-month. On the contrary, the trade services index and the transport and storage services index fell by 0.8% and 0.4%, respectively.
Among them, prices in areas related to financial consulting increased by 3.3%, while profit margins in machinery and vehicle wholesale decreased by 5.5%.
The probability of a Fed rate cut in March has risen
The market believes that even if inflation is above target, waning signs of inflation will prompt the Fed to cut interest rates starting in March.
Traders in the federal funds futures market are pricing in about a 74% chance of a rate cut in the first quarter at the FOMC's March 19-20 meeting, according to CME FedWatch tools. The market is then expected to cut rates five more times, bringing the benchmark federal funds rate down to a target range of 3.75%-4%.
However, recent statements from a number of Fed officials seem to refute the market's aggressive view. In addition, JPMorgan Chase & Co. CEO Jamie Dimon warned on Friday that large government deficit spending and a range of other factors could lead to stickier inflation and higher interest rates than market expectations.