Disappointing Philly FED Manufacturing and Falling Prices

The prices received index has declined to the lowest level in three years, since the height of the coronavirus lockdowns in May 2020, which suggests that inflation is no longer a major concern. Despite this, the market is still predicting a 90% chance of a 25 basis point hike by the Fed in the next meeting in May, but there is only a moderate chance of another rate hike after that.

The speeches from the FED members Waller and Mester, both of whom are hawks, are likely to focus on continuing to hike or at least maintaining restrictive policies for a longer period. However, recent data shows that inflation is heading back to normal levels while economic activity is slowing, which could result in an unnecessary recession that may force the FED to cut interest rates later this year.

So, the US dollar is also under pressure and weakening against commodity currencies. This may be due in part to the decline in US 2-year yields, which fell by 8.2 basis points to 4.18% following five days of gains. AUD/USD and NZD/USD are around 50 pips higher, while GOLD popped above $2,010 but it has retreated back down.

Based on the reported data, it appears that the prices of goods and services are decreasing, with only a small percentage of firms reporting an increase in input prices. Additionally, the prices received index has dropped to a negative reading, which is the first time this has happened since May 2020.

Despite this trend, the Federal Reserve is still raising interest rates, which may be impacting demand. As a result, there is a growing concern that the Fed may not be responsive enough to change economic conditions, which could lead to a harsh recession.

In terms of wages and compensation, over half of the firms have reported increases in the past three months, and a significant number of firms are planning to increase wages and compensation beyond their original budgets for 2023.