Wall Street Rallies On Falling PPI

The fall in US producer price index (PPI) triggered a fresh round of buying on Wall Street and the S&P 500 has set a new three-month high. The PPI reading cooled to 9.8%, from 11.3%, and it missed the 10.4% forecast. The sizeable fall in PPI indicates the inflationary pressure is easing, and that led to chatter the Federal Reserve might look to dial down its aggressive hiking cycle. PPI measures costs at the factory level, and if they are falling that could pave the way for lower prices for the end consumer. As we saw yesterday, US CPI fell to 8.5%, and considering today’s PPI update, we might see CPI fall further in the months ahead. There was some cause for concern in today’s US economic update as the core PPI reading dropped to 7.6% from 8.2%. The core report strips out commodity prices, and it paints a clearer picture of true demand, and the fact the core PPI reading dropped could be a sign that underlying demand is waning. This is a slight worry because the US economy is in a technical recession, and it is possible the economy might slip into an actual recession. US stocks are up even though bond yields are higher, it seems strange the US 10-year yield has ticked up to 2.83% given the PPI reports. Stock markets in Europe were less eventful and they had a mixed session.  

It has been another difficult day for the greenback as the headline PPI indicates that prices are beginning to cool, and the drop in core PPI speaks to dwindling demand. The sell-off in the US dollar is assisting EUR/USD, and the currency pair is not too far away from yesterday’s one-month high. A break above that peak could pave the way pave for 1.0450 to be tested. AUD/USD is powering ahead, firstly because of the weak US dollar, and secondly, the broad rally in industrial metals like copper is boosting the Australian dollar. 

WTI and Brent crude are both up over 2% as the IEA raised its 2022 demand forecast by 380,000 barrels per day. The positive news was a welcome change as this week’s EIA and API data showed major increases in US oil stockpiles, which can be a sign of weak demand. Despite the fall in the US dollar, gold is in negative territory as the bullish move in US equities is impacting demand for lower-risk assets.