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Markets price in more Fed rate cuts on weak PPI

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By Craig Erlam  

Stock markets ended the week on a high, buoyed by weaker PPI readings from the US that suggest inflation will keep falling in the coming months.

The PPI data has repaired the damage done by Thursday’s CPI data which came in a little higher than expected. But it’s clear from Friday’s readings that disinflationary pressures remain in the pipeline, which should give the Fed confidence over the coming months that inflation is heading back to target.

Whether we’ll see it in the PCE figures – the Fed’s preferred measure – in time for the new forecasts in March is the key question now. Those will determine whether policymakers feel comfortable cutting rates at that meeting or hold off until the second quarter, as the December dot plot indicated.

Not only are markets now fully pricing 150 basis points of cuts this year, they’re also pricing in a greater than 50% chance of 175, with the first heavily backed to come in March.

And to think, many people thought markets ended last year too bullish on rate cuts.

Sterling steady

The UK could be in recession, although GDP figures for November may enable the economy to just avoid it.

The economy grew 0.3%, bouncing back from the -0.3% recorded in October, so it all now hangs on whether the festive season delivered or not.

Either way, it doesn’t change much as the economy is basically flatlining. Two-quarters of marginal contraction – while falling under the definition of a technical recession – doesn’t change that.

The pound wasn’t particularly moved by the data.

Brent above $80

Oil prices were trading more than 2% higher at the end of the week with Brent breaching $80 earlier on Friday. It was up more than 4% at one stage, but gradually gave some of those gains back throughout the day.

The price jump came as the US and UK launched strikes against Houthi targets in Yemen, raising the risk of broadening the conflict in the region and disrupting oil supplies.

Despite Friday’s moves, there’s clearly still a view that the risk of a significant disruption is small or prices would be much higher. Still. they will remain sensitive to further developments.

Gold rallies as US yields tumble

Gold is trading more than 1% higher, boosted by the PPI data and the US 10-year yields tumbling well below 4%, while the 2-year hit an 8-month low.

The yellow metal has been struggling over the last couple of weeks and the jobs report and CPI data did little to revitalise it.

The PPI appears to have done just that though, although it still has some way to go to reach the new highs reached in early December.

 

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.