Daily Market Color

December Producer Price Inflation: Weaker Than Expected

Rates fall another 10+bps following weak inflation data. Short term rates dropped to their lowest level since May 2023 today after lower-than-expected Producer Price Inflation spurred incremental rate cut bets. Futures now suggest a strong likelihood of 7 rate cuts by the end of 2024, a stark shift from yesterday’s significant lean toward 6 rate cuts. Elsewhere, Brent crude prices rose above $80 per barrel after the US and UK launched ~70 airstrikes against Houthi rebels.

U.S. Policy Rate Outlook Graph

More rate-cutting bets after soft December PPI data. Producer inflation was below or in-line with expectations across all measures in December, which prompted dovish Fed bets by traders. Headline PPI logged its 3rd straight MoM negative reading at -0.1%, largely driven by a decrease in fuel costs, while core PPI remained flat at 0.0% MoM. On a YoY basis, headline PPI was slightly elevated vs. November, but core PPI logged a 4th straight decline. The results were viewed positively by markets, with PNC senior economist Kurt Rankin saying, “Whether surveying from producers’ intermediate or final demand perspective, there is little to no pricing pressure headed into the U.S. economy from the supply side entering 2024.”

U.S. PPI (Producer Price Index) History Graph

Bank earnings season underway. Though the potential for early 2024 rate cuts spurred a rally for bank stocks late last year, Q4 earnings are expected to reflect headwinds from peak interest rates. JPMorgan, Bank of America, Citigroup, and Wells Fargo kicked off earnings season today on a sour note, with three of the four lenders’ share prices falling by the session’s close. Common themes included YoY declines in Q4 earnings and a jump in net charge-offs, which doubled to $6.6B in Q4, twice the amount from a year prior. JPMorgan reported $9.3B in Q4 net income, a 15% decline YoY but a cap to their most profitable year ever.

KRE Index Graph

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