Stocks, dollar little changed as inflation data sends mixed signals

By Herbert Lash and Carolyn Cohn

NEW YORK/LONDON (Reuters) – The dollar and Wall Street stocks traded little changed on Friday after data on U.S. producer prices drove conflicting reactions, stirring hope that inflation is moderating while also raising fears the Federal Reserve will need to keep interest rates higher for longer.

The producer price index (PPI) for final demand rose 0.3% last month and increased 7.4% in the 12 months through November, while the PPI for October was revised up to 0.3% from 0.2% as previously reported, the U.S. Labor Department said.

Economists polled by Reuters had forecast monthly PPI climbing 0.2% and rising 7.2% year-on-year.

While the data showed a moderating pace of inflation for the last 12 months, the monthly rise fueled concerns that next week’s report on the consumer price index may indicate hotter-than-expected inflation and lead the Fed to not cut rates as soon as many anticipate.

Fed policymakers are expected to raise rates by 50 basis points next Wednesday, in their last policy meeting of 2022, to a range of 4.25% to 4.50%, which would mark a slower pace of rate increases.

“The markets are overly optimistic that at some point between June and December (next year) the Fed is going to be willing to cut,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial in Troy, Michigan.

“Today’s data shows that inflation is coming down, but it’s lingering and is stickier than most assume,” he said. “The Fed is going to have to raise interest rates a little bit more.”

Futures show the terminal rate peaking at 4.948% next May, and then declining to 4.488% by December 2023.

U.S. stocks earlier pared losses after the University of Michigan’s preliminary reading on consumer sentiment showed an improvement to 59.1 in December from 56.8 the prior month.

But enthusiasm over the UMich surveys soon waned, and stocks on Wall Street traded little changed. The Dow Jones Industrial Average fell 0.25%, while the S&P 500 lost 0.06% and the Nasdaq Composite added 0.11%.

“The Fed has made it abundantly clear that it’s not in the business of repeating mistakes of the past,” Johan Grahn, head of ETFs at Allianz Investment Management in Minneapolis, said in a reference to halting rate hikes too soon.

“Time just needs to run its course before we know we’re on the right path toward the Fed’s goal, a softish landing that’s been talked about,” Grahn said. “It will take time for inflation to work its way down.”

MSCI’s gauge of stocks across the globe gained 0.29%, and in Europe the broad STOXX 600 index closed up 0.84%. But recession worries dragged the pan-European index to a weekly loss after a seven-week rally.

Treasury yields mostly rose, suggesting higher rates ahead for the long term, with the benchmarket 10-year yield up 6.9 basis points to 3.562%.

The two-year note, which often moves in step with rate expectations, rose 0.9 basis points to 4.321%.

Market prices also showed a declining trend in breakeven inflation rates for U.S. Treasury inflation-protected securities (TIPS), seen as a good leading indicator for future prices.

The two-year breakeven rate fell to 2.3372% from 2.407% late Thursday, suggesting that investors expect inflation to average almost 2.34% over the next two years. The yield curve measuring the gap between yields on two- and 10-year notes, a recession harbinger, lessened too, at -76.1 basis points.

The dollar was broadly weaker overnight, but reversed some of its losses after the PPI report.

The euro fell 0.1% to $1.0545, and the yen strengthened 0.16% to 136.43 per dollar.

The world’s largest investment banks expect global economic growth to slow further in 2023 following a year roiled by the Ukraine conflict and soaring inflation, which triggered one of the fastest monetary policy tightening cycles in recent times.

Investors sold stocks and bought gold in the week to Wednesday, withdrawing $5.7 billion from equity funds, BofA Global Research said, a week of “small, joyless flows.”

In addition to the Fed, the European Central Bank and the Bank of England are also set to announce interest rate hikes next week as policymakers continue to put the brakes on growth to curb inflation.

Euro zone banks are set to repay early another 447.5 billion euros in multi-year loans from the ECB, bringing the total reduction of outstanding loans to nearly 800 billion euros in just a few weeks, the ECB said.

Oil prices rose but both benchmarks were set for a weekly loss as worries over a weak economic outlook in China, Europe and the United States weighed on oil demand.

U.S. crude fell 44 cents to settle at $71.02 a barrel.

U.S. gold futures settled 0.5% higher at $1,810.70 an ounce.

(Reporting by Herbert Lash; Additional reporting by Carolyn Cohn in London, Stella Qiu in Sydney; Editing by Chizu Nomiyama, Mark Potter and Leslie Adler)