Oil prices continue to slide, benefits inflation report

Oil prices continued to slide, down 4% on fears of weaker economic growth. Today’s inflation data, combined with last week’s employment data, suggests that inflation remains sticky – despite the benefit of lower energy prices.  The “group think” on Wall Street is that the Fed must start pivoting early in 2024, but this has been wrong for the past 20 months. Let’s see if the Fed Chair will convincingly reassert his ‘higher for longer’ message tomorrow.

TODAY’S MAJOR NEWS

Inflation dips, but is still too high for the Fed

November Consumer Price Index (CPI) data was a little better than expected, but with core inflation running at 4.0% it’s still double the Fed’s two percent target. Inflation is still running too hot for the Fed in some key components: the rise in shelter (up 6.5% year-on-year, a notable contributor being 70% of the rise in core inflation), in transportation, in medical services, and in used vehicle prices only served to offset notable declines in energy prices.

• CPI inflation was up 3.1% year-on-year in November, matching analyst expectations, but down from 3.2% the previous month
• CPI rose 0.1% month-on-month in November, compared to a forecast for no change, as it was in October
• Core CPI, excluding more volatile food and energy sectors, rose 4.0% year-on-year in November, matching analyst expectations, and unchanged from last month’s pace
• Core CPI, rose 0.3% month-on-month in November, matching analyst expectations, but up from 0.2% the previous month

Traders lower US interest rate forecasts

Fed fund futures immediately increased the odds of a Fed rate cut by the March meeting when this morning’s CPI inflation data was released, somewhat of a disconnect with what the data indicates versus what the Fed has been telling us for the past year. The Fed has repeatedly said that it would rather error on the side of “too high for too long” rather than pivot too soon. It said repeatedly that it would not pivot until it was confident that we were on a sustainable path that it was confident would take us back to the 2% inflation mandate, and that its primary focus was on shelter and wage costs.

Market’s risk being shocked if the Fed to strengthen its hawkish rhetoric when it releases it statement on Wednesday: will Fed Chair Jerome Powell’s tone in his press conference be convincing? It hasn’t been in some of Powell’s recent appearances. Part of the problem may be that Powell continues to insist on unanimous policy decisions, and it’s getting more difficult to achieve that from some of his stronger dove members who are giving in to the “group think” of Wall Street.

Argentina’s surprise President hits Peso

Argentina has vast rich agricultural resources, but that country has been unable to take advantage of those resources due to a punishing fiscal policy that heavily taxed output. The Argentine Peso fell almost five per cent against the dollar on his election, continuing a fall which has seen the Peso lose a third of its value in six months. Newly elected President Javier Miley took office on Sunday, after winning election on a campaign to slash taxes and social funding.

TODAY’S MAJOR MARKETS

Russell 2000 sell-off continues

• The S&P 500 and NASDAQ were up 0.2% after today’s CPI print, but the more cyclical Russel 200 fell 0.4%
• The Nikkei 225 continued its recovery after recent weakness, up 0.2%, with the Dax and FTSE 100 unchanged
• The VIX, Wall Street’s fear index, fell to 12.1

Bonds yields rise, Dollar slips

• US bonds sold off at the shot end, with 2-year yields rising to 4.71% while 10-year yields fell to 4.23%
• 10-year TIPS index-linked yields rose to 2.05%
• The dollar index fell 0.2% to 103.9
• Versus the dollar, Yen and Euro rose 0.3%, with Sterling unchanged

Oil prices slide, gold unchanged

• Oil prices fell 4.2% to $6.4 per barrel, hitting two year lows
• Gold prices were unchanged at $1,994 per ounce, while Silver prices fell 2.0% to $23.0 per ounce
• Grain and oilseed prices were active after a big drop on Monday. Buyers quickly emerged once the markets in Chicago, Kansas City, and Minneapolis wheat failed to push below Monday's lows
• A big sell-off in crude oil weighed on soy oil prices, but soybean and soymeal prices turned lower as buying slowed above yesterday's highs

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@stonex.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com