December 12 – Today’s inflation data received a cooler response from Wall Street, with the tech sector leading the way lower following the data release, although the Treasury market had a little different take. The VIX firmed to trade just below 14, while the dollar index traded near 106.8. Yields on 10-year Treasuries are trading near 4.29% after hitting a fresh two-week high earlier in the morning, while yields on 2-year Treasuries are trading near 4.16%. Crude oil prices are quietly trading mixed to weaker after setting fresh two-week highs overnight, while the grain and oilseed sector was mixed to weaker overnight.
The headline producer price index rose 0.4% month-on-month in November, doubling the 0.2% growth seen in October, and exceeding the 0.3% rate expected by analysts. The headline PPI rose 3.0% year-on-year in November, up from 2.2% in October, and exceeding analyst expectations of 2.6%. The core PPI that excludes the more volatile food and energy sectors rose 0.2% month-on-month in November, down from 0.3% in October, but matching analyst expectations. The core PPI rose 3.4% year-on-year in November, up from 3.1% the previous year and up from analyst expectations of 3.2%. PPI for the services sector rose 0.2% month-on-month and 3.9% year-on-year. On an unadjusted basis, the Bureau of Labor Statistics reports that the index for final demand advanced 3.0% year-on-year in November, which is its largest rise since moving up 4.7% in the 12 months ending February 2023. The index for final demand goods rose 0.7% in November, which is its largest increase since rising 1.1% in February. The BLS noted that 80% of the broad-based growth in November can be traded to prices for final demand foods, which jumped 3.1% during the month, with a quarter of the rise in final demand goods attributable to a 54.6% rise in the index for chicken eggs. I mentioned the strength in services inflation in November. More than a third of that can be attributed to rises in machinery and vehicle wholesaling. Airline passenger services dropped by 2.1% in November, with additional declines in guestroom rentals, computer hardware, software, and supplies. Crude petroleum dropped by 3.3%, while the price of milk also fell.
My initial take on this week’s inflation data was to ask myself how the Federal Reserve could justify further stimulating the economy with another rate cut next week in light of some of the lingering inflation pressures still in the economy? Yet, it’s not that simple. The European Central Bank cut its benchmark rate by another 25 basis points today, which puts further upward pressure on the U.S. dollar amid weakness in the euro. President Donald Trump is already acting as if he is president, and the world is as well. Trump has made his distaste for Fed Chair Jerome Powell well known, and Trump has long been an advocate of lower rates, so there’s the political factor. Wall Street chose the components out of this week’s inflation reports that it wanted to focus on, and it clearly wants to see more rate cuts. This Fed has shown that is wants to please Wall Street, even though it would argue quite the opposite. The other factor at play – this morning’s weekly jobless claims numbers argue for a rate cut.
First-time claims for unemployment benefits rose to 242K in the week ending December 7, up from 225K the previous week, and beating analyst expectations of 220K. The largest increases were in Wisconsin and North Dakota, with the biggest decreases in California, Texas, Florida, and Georgia. The four-week moving average rose to 224.25K claims, up from 218.5K the previous week. Continuing claims for the week ending November 30 rose by 15K to 1.886 million. The four-week moving average for continuing claims rose by 3.5K to 1.888 million, which is at its highest level in three years.
President-Elect Trump reportedly has invited Chinese President Xi Jinping to attend his inauguration on January 20. Xi likely will not commit either way until just ahead of the event, but it does reflect the working relationship that Trump and Xi had in Trump’s first term in office. They were adversaries, but they had a relationship of respect, which is important in the Chinese culture for getting something done. What to watch for – China will often times make significant purchases ahead of such a state visit. In this case, we should be watching for the potential of significant purchases of U.S. agricultural commodities as a goodwill gesture if Xi plans to attend.
China may allow its yuan to depreciate versus the U.S. dollar in the meantime to address anticipated significant headwinds that U.S. tariffs could create. Reuters reports that Chinese leaders are discussing the possibility, but they refrained from indicating whether a decision has been made. A weaker yuan would help to offset the cost of the tariffs, which might maintain demand for consumer goods coming to the United States. China will continue to play the long game regarding its overall strategy of reaching global superiority and of replacing the dollar as the world’s currency of trade, but it may be willing to make some exceptions over the next four years to heal its economy.
