Cool-ish PPI reading paves way for CPI report

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Markets got a pre-CPI treat on Tuesday in the form of a mildly cool PPI reading. 

Producer prices in December rose 0.2%, down slightly from analysts’ projection of a 0.4% rise. Core PPI, which excludes food and energy, was in line with expectations and unchanged from November (+0.3%). 

The report generally sets the stage well for tomorrow’s more-closely-watched CPI reading, slated to be published at 8:30 am ET. Still, analysts caution investors not to take a cool reading as a sign for future rate cuts. 

“We’ve seen a stubbornness in inflation over the last few quarters, causing investors to wonder whether the Fed jumped the gun by cutting rates by 100 basis points in the second half of last year,” eToro US investment analyst Brett Kenwell said. “A strong monthly jobs report and a strong ISM services report didn’t help matters, although they do point to a strong economic foundation.” 

As a reminder, analysts are calling for headline CPI to come in at 2.9% annually, an increase from November’s 12-month 2.7% reading. Core CPI is expected to remain unchanged at 3.3% for the 12 months ended December. 

Looking ahead to March, today’s PPI did slightly increase odds of a 25bps interest rate cut. Fed funds futures are currently pricing in a 21.6% chance of such a cut, up from 19.4% a day ago.

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