Producer prices in the USA accelerated in February at a faster pace than expected, signaling that inflation remains a troublesome issue for the Federal Reserve and the entire American economy. The dollar increased in value and the EUR/USD exchange rate fell below 1.09. The reaction in the FX market was almost double than what we saw after Tuesday’s CPI report. The bond market responded with an increase in yields. US government 2-year yields grew to 4.69. Wall Street indices recorded a moderately declining session yesterday.
The Producer Price Index (PPI) increased by 0.6% over the month, the US Labor Department’s Bureau of Labor Statistics reported on Thursday. This was more than the forecasted 0.3% and came after a 0.3% increase in January. Excluding food and energy, the core PPI index accelerated by 0.3%, compared with the estimated increase of 0.2%. In year-on-year terms, the main index rose by 1.6%, which was the largest movement since September 2023. The BLS stated that about two thirds of the main PPI index’s growth came from a 1.2% increase in goods prices, marking the highest surge since August 2023. Similar to CPI, the acceleration was due to energy prices, which recorded a 4.4% increase. Gasoline prices rose by 6.8% at the wholesale level. PPI is considered a leading indicator of inflation, as it indicates costs at an early supply chain stage.
In addition to price data, we also learned about retail sales results. They rebounded, growing by 0.6% over the month, according to seasonally adjusted data from the Commerce Department. This growth helped reverse a downward revised fall of 1.1% in January, but it was still below estimates assuming a 0.8% increase.
Yesterday’s data set was the last significant one before the FOMC’s two-day meeting next week (Tuesday-Wednesday). The publications contributed to a decline on Wall Street, and major US stocks fell slightly. Treasury bond yields increased following the report along the entire yield curve. There was a noticeable strengthening of the US dollar. The main currency pair fell and is currently below 1.09.
The Fed will almost certainly maintain its benchmark interest rate at an unchanged level, while markets will be looking for hints about the future of monetary policy. Futures contract prices suggest that the Federal Open Market Committee will start reducing the cost of money in June, with three quarter-point cuts expected this year. However, market chances for a mid-year cut have been reduced to about 55%. Remember that the latest dot plot and current inflation, GDP, and unemployment projections will also be evaluated.
Łukasz Zembik Oanda TMS Brokers.
