US PPI will say the last word of the week

The US initial jobless claims for employment benefits rose last week, and continuing claims advanced to their highest levels since February, meaning that people who are out of work take more time to find a job.  

It sounds terrible to a normal ear, but it’s music to the Federal Reserve’s (Fed) ears, as it is a sign that the jobs market in the US could be weakening – and that could help weaken inflation. 

So, yesterday’s trading session was a bit better than the previous five sessions. The US indices eked out small gains after taking over a mixed session from European traders.  

The Eurostoxx index was flat yesterday, while FTSE 100 fell despite a good session for the mining stocks, which rallied on a jaw-dropping $7 billion profit announced by the commodity trader Trafigura. 

Activity on FTSE and European index futures hint at a slightly positive start on Friday. The US PPI data will, however, say the last word. 

The data of the week  

The US will release its November PPI figure today and expectations are low.  

Released earlier, the Chinese inflation fell to 1.6%, the lowest since March in line with expectations; the factory gate prices fell 1.3%. Prices of production materials shrank as the cost of extractions and processing cost continued to decline. A sharp slowdown in the cost of raw materials also helped cooling the Chinese PPI.  

The consensus of analyst estimates on Bloomberg survey shows that the US PPI is expected to have slowed to 7.2% in November from 8% printed a month earlier. The core PPI is also seen down from 6.7% to 5.9%.  

If this is the case, if the factory gate inflation in the US slowed last month – which would also hint at a potentially slower CPI data next Tuesday before the FOMC decision – we could see the risk assets shrug off some of this week’s weakness. The S&P500 could rebound back to its 200-DMA and close the week above the 4000 mark.  

But if the US PPI figure is higher than expected – which is well possible given that the low expectations are harder to beat, then we will probably see the US stocks sink back in the red.  

The key bearish targets for the S&P500 stands at 3900, which has acted as a pivot a couple of times this year, and the 3870 mark, the major 38.2% Fibonacci retracement on the latest bear market rally, if broken, would hint at a medium term bearish reversal.  

More potential for hawkish price action 

The US dollar index remains under a decent selling pressure against many majors. The US dollar index hasn’t extended losses below last week’s lows but remained clearly offered into its 200-DMA this week, meaning that the conviction that the US dollar should fall sustainably strengthens among traders.  

A US PPI figure in line, or ideally softer-than-expected, could boost the US dollar bears, and help the dollar close the week at fresh lows since summer. Whereas disappointment on the PPI front will likely give a boost to the dollar, as it would boost the hawkish Fed expectations and the rate bets. 

It’s important to note that the Fed is given around 80% probability to hike the interest rates by 50bp next week. But the inflation data will hardly change that expectation. It will change the bets on the Fed’s terminal rate, instead. The market pricing still points at a terminal Fed rate below 5%, which means that, in case of PPI disappointment, there is more potential for a hawkish price action, than a dovish one. 

In commodities, gold is also pushing higher thanks to a broadly softer US dollar. The precious metal is above its 200-DMA this morning and is flirting with the $1800 mark. Soft PPI data could help extend the yellow metal’s rally above $1800, whereas a stronger-than-expected figure will likely lead to some profit taking before the weekly closing bell.  

Crude to $65pb? 

The barrel of American crude extended losses to $71 per barrel. Trend and momentum indicators remain comfortably bearish, inviting traders to sell the tops for a further fall in oil prices in the short run. A fall below the $70 psychological level could pave the way for a further decline to $65, in continuation of an ABCD pattern building since end of September. 

But the price should rebound back above $82 sometime in the first quarter of next year.