Tame US PPI Offsets Hot CPI

For the week ending 12 January 2024

As of midday Friday, global equities were firmer on the week despite an uptick in US consumer prices and retaliatory strikes by US and British forces against Houthi militias in Yemen. The raids came in response to repeated attacks against commercial shipping and US naval forces in the region and helped keep the price of a barrel of West Texas Intermediate crude elevated at $74.50. The yield on the US 10-year Treasury note held steady at 4% while equity volatility, as measured by the Cboe Volatility Index (VIX), fell to 12.5 from 13.5 a week ago. 

MACRO NEWS

US consumer prices ticked higher in December

The US Consumer Price Index rose a more-than-expected 0.3% in December from the month before after rising only 0.1% in November. On a year-over-year basis, prices rose 3.4%, up from November’s 3.1% pace. Elevated housing and auto insurance costs stood out. Despite the unwelcome data, markets discount chance of a quarter-point rate cut from the Fed in March. Benign producer price data released Friday helped sooth fears that inflation will become “stuck” well north of the Fed’s 2% target.

US lawmakers reach topline budget deal but devil’s in the details

US Senate Majority Leader Chuck Schumer and Speaker of the House Mike Johnson reached an agreement on topline spending figures last weekend ahead of the 19 January expiration of a temporary government funding bill. After several resignations and retirements at the end of 2023, Johnson’s GOP majority has dwindled to a single vote, leaving him little room to maneuver and giving individual lawmakers tremendous leverage to push their legislative priorities. With only a week to go before funding runs out, the passage of another stopgap measure seems likely because the details of the four remaining appropriations bills are still being hashed out. US Secretary of the Treasury Janet Yellen said this week that she is encouraged by the preliminary budget deal and is hopeful a shutdown can be avoided.

Saudi Arabia cuts Asian crude prices

Beginning in February, Saudi Arabia will cut the price of crude oil bound for Asia by $2 a barrel amid persistent weak demand. Analysts had expected a smaller, $1.25 a barrel cut. Oil prices have traded choppily in a range in the mid-$70 a barrel amid the continued disruption of oil shipments through the Suez Canal and Iran’s seizure of a Greek-owned tanker over a dispute over sanctions evasion. 

QUICK HITS

Federal Reserve Bank of New York President John Williams said on Wednesday that monetary policy is restrictive enough for the Fed to reach its 2% inflation goal and that meaningful progress on bringing down inflation has been made though inflation remains far above target. He said rates will normalize as inflation falls and the timing and speed of any cuts depends on the economy. Several other Fed officials downplayed the likelihood of a rate cut coming as early as March.  

European Central Bank President Christine Lagarde said Thursday that absent a shock and with rates likely at their peak, cuts can begin once data confirm that inflation is on a path to reach the central bank’s target. On Friday, the ECB’s chief economist, Philip Lane, said that rate cuts are not a topic for discussion in the near term.

The US Securities and Exchange Commission approved trading in spot bitcoin exchange-traded funds on Wednesday, and some of the funds began trading on Thursday.

Makoto Sakurai, a former Bank of Japan board member, told Bloomberg that he expects the central bank to hike rates in April after the conclusion of spring wage talks in March.

Inflation in Argentina ended 2023 at 211%.

A Chinese invasion of Taiwan would shave 10.2% from world GDP in the first succeeding year, a Bloomberg analysis forecasts. US growth would decline 6.7%, and growth would decline 16.7% and 40% in China and Taiwan, respectively, the analysis showed.

Eurozone unemployment fell to 6.4% in November, the lowest level in the 25-year history of the eurozone.

Analysts at Deutsche Bank pointed out this week that US investment-grade bond yields are below the fed funds rate, something that happens only 1% of the time, usually ahead of recessions.

China’s share of the MSCI Emerging Markets Index fell to 23.8% of the index as of December 31, about 16% below peak levels in 2020. In early 2024 trading, Chinese stocks have fallen toward a five-year low. India’s weighting in the index increased to 16.7% at the end of 2023, Taiwan’s to 16% and South Korea’s to 12.9%.

Fed vice chair for supervision Michael Barr indicated this week that the Bank Term Funding Program, set up in response to last March’s regional banking crisis, will be allowed to expire on March 11.

French President Emmanuel Macron promoted education minister Gabriel Attal to prime minister, replacing Élisabeth Borne. At 34, Attal is France’s youngest-ever premier.

Australian consumer prices rose 4.3% year over year in November, the smallest rise since January 2022.

The White House announced US President Joe Biden will send a high-level delegation to Taiwan after Saturday’s Taiwanese presidential election.

Data from the Federal Reserve Bank of Philadelphia show that US credit card delinquencies have risen to 3.2%, the highest level in a decade, and 40 basis points higher than in the previous quarter.

Consumer prices in China declined for the third-straight month in December, dipping 0.3% from a year ago while producer prices fell 2.7%. Falling prices in China should keep downward pressure on goods prices globally. Exports from China rose 3.8% last month, led by electric vehicles. The People’s Bank of China is expected to trim interest rates on Monday.