Producer Inflation Outruns Expectations In January, Chills Investor Bets On Fed Rate Cuts

Price pressures faced by U.S. producers rose more than expected in January, stoking concerns after a stronger-than-expected consumer price index earlier in the week. These developments led traders to adjust their expectations regarding Federal Reserve rate cuts in 2024.

In January, Producer Price Index (PPI) inflation increased by 0.3% month-over-month, rebounding from a 0.1% decrease in December.

January PPI Report: Key Highlights

• The PPI for final demand in January 2024 saw a monthly increase of 0.3%, recovering from a 0.1% decrease in December and slightly exceeding the anticipated 0.1% rise.
• Year-over-year, the PPI rose by 0.9% from January 2023, marking a slowdown from December’s 1% rate but surpassing the forecasted 0.6%.
• Excluding volatile items such as energy and food, the core PPI climbed by a robust 0.5% month-over-month, a sharp rise from a 0.1% decline in the previous month and outpacing the expected 0.1% increase.
• On an annual basis, the core PPI saw a 2% increase, surging from December’s 1.8% rate and exceeding the anticipated 1.6%.

Market Reactions

Before the release of the PPI report, traders had pegged a 77% chance of a Fed rate cut by June, with the likelihood exceeding 90% for a cut by July. Overall, there was anticipation of a full percentage point in rate cuts by December 2024.

The higher-than-expected PPI figures for January could prompt a reevaluation of these expectations.

Following the report, Treasury yields and the U.S. dollar experienced slight increases. Specifically, the 10-year yield was trading at 4.33% at 8:35 a.m. Friday in New York.

On Thursday, the S&P 500 index, as tracked by the SPDR S&P 500 ETF Trust SPY, closed at new record highs of 5,038 points.

In Friday’s premarket trading, futures on major U.S. averages flipped to the downside following the higher-than-expected producer inflation report.

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