PPI and core PPI expected to pick up again in January

Today’s PPI And Next Week CPI Will Decide on the FED 5% Rate and Stock Markets

Posted Friday, December 9, 2022 by
Skerdian Meta • 2 min read

The Federal Reserve has been raising interest rates at the fastest pace in record this year, but after doing so it has come to the narrative that they will keep hiking somewhere in the 4.75-5.25% range and then flatten out throughout next year probably. The economy is expected to remain weak but to avoid a recession, even though we saw one earlier this year. Supposedly inflation will come down eventually to target in 2024 and rates will decline back to around 2.5-3% range.

But that’s not exactly the case if we look at history. Deutsche Bank published an interesting chart of FED rate hike cycles and how history shows that it often takes a long time before rates are cut and that in some cycles it takes a second round of hikes, probably even more aggressive.

US rate hikes

Although at the moment where we stand all scenarios are possible. The US consumer is still holding on despite a slowdown in the sentiment and there are no big cracks in the labour market. In the bigger picture, demographics may keep the jobs market tight, and spending directed by governments for the green transition will bring inflation.

On the other hand, we have a 30-year history of suppressed inflation due to globalization and anchored expectations; so it is too early to say that’s done or reversing. However, in terms of trading, next year will be about a harder landing, more inflation or both. It will be a tough environment to navigate through.

S&P500 Index H1 Chart – Stuck Between 2 MAs

The 200 SMA (purple) acts as support, while the 100 SMA (green) is providing resistance 

Although, today we have the US producer inflation PPI (producer price index) report and next Wednesday the US consumer inflation CPIP (consumer price index) report will be released. These will give us an idea of where the FED will be heading in the near term, so we’ll follow these reports closely on our economic calendar.

The PPI report that was just released came out better than expected in all fronts, which gave the USD a push higher. If the CPI reports comes out higher as well, then the odds of the FED keeping up rate hikes will increase, which will be negative for risk sentiment and stock markets. Although S&P500 (SPX) is holding up well despite the jump in the USD after the PPI report and the decline in risk currencies, so this is a good sign.

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