Stocks waver post PPI and UMich survey, Oil jumps, Gold shines and Bitcoin anchored at $17k

US stocks are settling higher after a mixed round of pricing data seemed unlikely to change what the Fed will do next week.  Stocks are finishing a down week on a positive note as expectations remain high that the Fed will downshift to a slower pace. Inflation is heading lower but we won’t know for a couple quarters if more tightening will be required by the Fed.  For now, investors appear confident that the Fed will stop tightening once the terminal rate peaks around the 5.00% to 5.25% levels.

A big risk for next year is that many traders are still expecting the Fed to cut rates at some point in the fourth quarter. If those expectations change, risk appetite could struggle significantly.   

US Data

Wall Street had a somewhat mixed day of economic data. A hot PPI report was then countered by a University of Michigan report that showed inflation expectations are coming down quickly.  The producer price index rose 0.3% for the month, which was a tick higher than expectations, while the core reading surged from 0.1% to 0.4%.  Vegetable prices skyrocketed 38%, while the gasoline index fell 6.0%. 

The University of Michigan report showed consumer sentiment is improving as both current conditions and expectations posted better-than-expected increases. Traders paid close attention to the  1-year inflation expectations that fell from 4.9% to 4.6%, which is the lowest level since September 2021. 

Oil

Crude prices surged after President Putin said Russia could cut its oil production, which would be their response to the G7 price cap over Russian crude. Oil’s bad week is almost over as global doom and gloom outlooks have killed the crude demand outlook. 

The short-term crude demand outlook has deteriorated significantly as no one has a strong handle on how bad a recession will hit the US economy.  China’s Covid situation also remains a big concern as the end of their Covid zero strategy could cripple their health system. Energy traders are going to trade very technically here and probably look to defend the $70 level for WTI crude. 

Gold

Gold prices pared gains after a hot PPI report. This PPI report put an end to the slide in Treasury yields, which should cap gold’s recent rally.  Gold might struggle for meaningful moves until we get the last key piece of inflation data before the Fed meets.

This producer price report will have many expecting the CPI report to remain stubbornly hot, which could tilt the scales for the Fed to do more tightening beyond February.  If CPI runs hot, you might see a strong case for the Fed to deliver back-to-back half point rate increases before they pause, which might suggest gold might give back some of the gains its made over the past month. 

Crypto

Bitcoin isn’t doing much of anything ahead of next week’s FOMC decision and as the crypto market looks to see what type of legislation will hit the space.  Senator Markey is proposing mining companies to report emissions and the source of power.  The use of Bitcoin still requires a significant amount of power and that could eventually become a bigger problem next year.  Earlier this year, the crypto boom was creating jobs and opportunities and Bitcoin mining was given a hall pass, but greater scrutiny could happen for Bitcoin as the economy heads to a recession and the global energy crisis persists.

Bitcoin seems stuck around the $17,000 area and that could continue until next week’s FOMC decision.  Next week is the last trading week of the year that we will see full participation, so that could finally help Bitcoin have a more meaningful move.  If Wall Street is confident that the Fed will be done hiking after the February rate rise and nothing new breaks in crypto, you could see Bitcoin make a run for the $18,000 level.  If the Fed signals more work may need to be done and if legislation looks crippling for Bitcoin, sellers could quickly emerge and make a push to retest the November lows.