The dollar index (DXY00) is moderately higher by +0.41% on today’s hawkish U.S. PPI report, which caused market participants to slightly dial back expectations for a Fed rate cut within the next few months. The dollar index is also seeing support from today’s sharp +10 bp rise in the 10-year T-note yield, which improved the dollar’s interest rate differentials.
Weekly U.S. initial unemployment claims fell by -1,000 to 209,000, showing a stronger labor market than expectations for a rise to +218,000. Continuing claims rose +17,000 to 1.811 million from a revised 1.794 million (preliminary 1.906 million), showing a stronger labor market than expectations of 1.905 million.
Today’s Feb U.S. retail sales report of +0.6% m/m was weaker than market expectations of +0.8%, and Jan was revised lower to -1.1% m/m from -0.8%. The Feb retail sales ex-autos report of +0.3% m/m was weaker than market expectations of +0.5%, and Jan was revised lower to -0.8% m/m from -0.6%.
The Feb U.S. PPI report of +1.6% y/y was stronger than market expectations of +1.2% and was up from Jan’s revised +1.0% y/y (preliminary +0.9%). The Jan core final-demand PPI report of +2.0% y/y was unchanged from Jan and was slightly stronger than market expectations of 1.9%.
The Feb PPI report added to this week’s slightly hotter-than-expected inflation data after Tuesday’s Feb headline CPI report of +3.2% y/y was slightly above expectations of +3.1% and was 0.2 points above last June’s 2-3/4 year low of +3.0%. However, the Feb core CPI dipped to a 2-3/4 year low of +3.8% y/y. In any case, the Feb headline CPI and CPI measures both remain well above the Fed’s +2% inflation target.
Fed Chair Powell said last week that the Fed is “not far” from having enough confidence to cut interest rates. However, the markets are discounting the odds at virtually zero that the Fed will cut interest rates at its meeting next week since inflation is still too far above target. The odds of a rate cut are much better for the June FOMC meeting.
Today’s economic reports caused the markets to slightly dial back expectations for a rate cut in June to 70% from Wednesday’s 73%.
The markets are discounting the chances for a -25 bp rate cut at 1% for next week’s March 19-20 FOMC meeting, 11% for the following meeting on April 30-May 1, and 70% for the meeting after that on June 11-12.
EUR/USD (^EURUSD) is down -0.43% on dollar strength. In addition, ECB Governing Council member Stournaras said today he favors two interest rate cuts before the ECB’s August break and another two by the end of the year. He also indicated that a rate cut is more likely in June than April.
Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 10% for its next meeting on April 11 and 89% for the following meeting on June 6.
USD/JPY (^USDJPY) is up +0.25% on dollar strength. However, the yen saw an uptick on a Jiji report today that the BOJ will raise interest rates at its meeting next week, although the Jiji report did not cite any source for its information.
Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 55% for next week’s meeting on March 19 and 68% for the following meeting on April 26.
April gold (GCJ4) is down -16.1 (-0.74%), and May silver (SIK24) is up +0.009 (+0.04%). April gold continues to consolidate below last Friday’s contract high. Gold prices were undercut by today’s stronger-than-expected U.S. PPI report, which was hawkish for Fed policy and caused the markets to slightly dial back hopes for Fed rate cuts within the next several months. Gold prices were also undercut by today’s sharp +10 bp rise in the 10-year T-note yield.
Gold has underlying support from market expectations that the Fed and ECB will begin cutting interest rates in June. Precious metals prices also have underlying support from Middle East geopolitical tensions.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
