Mixed PPI report allows investors to believe the Fed is done
But US CPI data has the potential to change their mind
Wall Street gains on ‘no more hikes’ bets
Oil falls as Saudi Arabia pledges to stabilize the market
Dollar trades mixed on mixed PPI data
The US dollar traded mixed on Wednesday, staying on the back foot against the euro, the pound, and the franc, but gaining against the yen. The greenback finished the day close to its opening levels against the risk-linked aussie, kiwi, and loonie.
The mixed performance of the US dollar may have reflected the mixed outcome of yesterday’s PPI data for September. Both the headline and core rates came in better than expected with the August prints being revised up, but the rate excluding food, energy, and transportation ticked down to 2.8% y/y from a downwardly revised 2.9%.
This, combined with remarks by Fed Governor Christopher Waller, who echoed the latest dovish views of his colleagues, allowed the market to continue believing that the Fed is probably done raising interest rates. Currently, investors are assigning only a 28% probability for another 25bps hike by year end, while they expect interest rates to end 2024 at 4.5%, which comes in high contrast to the 5.1% indicated by the Fed’s latest dot plot.
Although Fed officials maintained their projections of one more hike at their latest meeting, the minutes of that gathering revealed that most of them continued to see a highly uncertain future path of the economy, listing several reasons for proceeding carefully before deciding on whether they should raise rates again.
Is the door to another Fed hike closed?
Having said all that though, the door to another hike may not be fully locked. Most policymakers have been arguing that the latest surge in Treasury yields might negate the need for additional hikes, but Kashkari added that if high yields are due to expectations of what policymakers may do, they may need to satisfy those expectations.
With yields pulling back this week following the latest Fed rhetoric, anything suggesting that inflation is stickier than previously thought may encourage investors to start reconsidering the likelihood of another rate increase before this tightening crusade ends.
Ergo, the spotlight today is likely to turn to the US CPI numbers for September. Expectations are for both the headline and core rates to have slid but considering the rally in oil prices during the month, the higher-than-expected headline and core PPI rates and their upward revisions for August, the risks may be tilted to the upside.
Therefore, if the data convinces market participants to bring their hike bets back to the table, the US dollar is likely to recover a decent portion of the ground it lost lately.
Wall Street extends gains, oil falls on Saudi Arabia’s pledge
US equities continued to march north yesterday, even as the conflict between Israel and Palestine continues to rage. Perhaps with the probability of another hike remaining low and several rate cuts being penciled in for next year, investors were tempted to increase their risk exposure.
However, stock traders may get disappointed today if the CPI data point to stickier-than-expected inflation, as a higher market implied rate path could translate into higher borrowing costs for companies and lower present values, especially for high-growth tech firms that are valued by discounting projected free cash flows for the quarters and years ahead.
In the energy market, oil prices fell more than 3% after Saudi Arabia eased fears of supply disruptions due to the conflict in the Middle East after it said that it is in discussion with international partners to avert an escalation and pledged to help stabilize the market.