US dollar surges on higher than expected PPI data
Fear is entering the market once again. There are a few unknowns circulating of which tomorrow should at least clear up some of the uncertainty. Will the FOMC taper harder, faster, and with the purpose of accelerating the rate hike timeline? Does the market think faster is better? Clearly, the current data is showing prices are not coming down and inflation is here for longer.
Tier-1 news in today's US session was centered on an increase in the Producer Price Index (PPI) of 0.8% in November on a seasonally adjusted basis, exceeding market expectations, according to a report released by the US Bureau of Labor Statistics. The 12 months ended in November with a 9.6% rise in producer prices on an unadjusted basis. Prices for final demand goods rose by 1.3%, which accounted for most of the rise in the final demand index. Final demand services were up 0.7%. Final demand excluding foods, energy, and trade increased by 0.7% from the previous month and added 6.9% from the previous year.
According to survey results published by CNBC, the United States Federal Reserve is expected to double the pace of tapering to $30 billion this month. It plans to end asset purchases by March. The FOMC meeting has begun today and the market reaction to the higher PPI and probable tightening of monetary policy is rocking the US equity markets.
Next year's interest rate increase will now take place in June instead of late 2022, according to today's CNBC survey.
Though the reality of inflation + jobs being in the Fed's sweet spot by then is in the balance. Inflation is expected to peak in February and then start declining over the course of next year, with some market watchers predicting a deflationary backdrop to the end of the year. According to forecasts, the US economy will grow by about 4% in 2022, while unemployment will decline to 3.8%. Meanwhile, stock markets are expected to grow by a paltry 1.5% in 2022. The S&P500 is looking to test the daily 50 EMA, which if it doesn’t hold at the first time of asking will more than likely give up and allow the equities to tumble to recent support levels around 4500. If the FOMC is particularly Hawkish tomorrow this could spook the markets further and a test of the daily 200 EMA could be coming.
With the start of the Federal Open Market Committee (FOMC) meeting underway today, precious metals traded lower. Gold, which doesn't pay interest ie, has no yield, might have been affected by accelerated rate hike timelines but is more likely being sold off with other liquid assets as margin calls make traders seek out capital to service their riskier positions. There is also the other side of the XAUUSD which is showing a rising US dollar.
After a volatile period with the start of the Omicron variant, the VIX had returned into the lower bounds of the range. However, it would appear fear is re-entering the markets and the ranges are being expanded once more.
Tuesday marked the highest daily increase in COVID-19 infections in the UK since January 9 with 59,610 new infections. Sajid Javid the UK Health Secretary, said the definition of the term "fully vaccinated" is currently "under review." This comes after advisors have warned that not having a booster to top up the waning protection from the initial jabs will leave people vulnerable. Just talking anecdotally with businesses there has already been a massive decline in footfall on the high streets and cancellations of planned events in the run-up to Christmas. The FTSE 100 is falling from the recent highs as the sentiment is declining for the UK as Boris Johnson presses the message home that the virus should not be treated as a lesser variant than any other.