US Close: Stocks lower post hot PPI report and hawkish Fed speak, Fed’s Mester saw case for 50 bp rise, Oil edges higher, Gold rebounds after six-week low, Bitcoin rises

A hot PPI report and unexpected initial jobless claims decline sent stocks lower as investors started to price in more Fed tightening. This week was a rude awakening for the disinflation process. The majority of the data suggest the economy is mostly stronger than what Wall Street was expecting.  Manufacturing and housing are still in a recession, but the rest of the economy isn’t looking too bad. 

The Fed’s Loretta Mester also helped send Treasury yields higher after saying she saw a ‘compelling’ case for a half-point rate rise at the last FOMC meeting.  Hot PPI data and hawkish Fed speak helped send the 10-year Treasury yield to the highest level this year. 

Fed

Fed’s Mester sees inflation reaching 2% in 2025, which signals they have a lot more work to do to bring inflation down.  Mester saw a compelling case for a half-point rate rise last meeting, which means the market should not expect the Fed to stay on cruise control with quarter point hikes.  Her reiteration that they need to bring rates above 5% and hold for some time is becoming the consensus view and should suggest the dot plots in March will be much higher.  She is a non-voter but her comments suggest the Fed could do a lot more given how strong the economy remains.

US Data

The disinflation process is getting threatened here after a scorching hot PPI report.  PPI for final demand rose 0.7% from a month ago, exceeding the 0.4% consensus estimate, and upwardly revised prior reading of -0.2%.  Surging energy (electricity, natural gas, and gasoline) costs were behind this hot January PPI report and they probably aren’t going away this month.  The core readings came in even hotter than forecasts, which is very worrisome for the disinflation process.

Companies are holding onto their margins and you can’t blame them considering how strong the labor market/consumer remains. 

Oil

Crude prices are pushing higher after a hot PPI report and hawkish Fed comments suggest the US economy is still strong.  A strong dollar could emerge following a steady flow of hawkish Fed speak and that should keep any oil price rallies capped.  It is going to be hard for oil to break out here until we see clear signs that China’s reopening is reaching the next level.  With US production anchored and the Russians are reducing output, this market should remain tight given how strong the outlook remains over the short-term.  The world’s two largest economies are likely going to consume more oil over this period and that should keep WTI crude well supported at the mid-$70s. 

Gold

Gold prices initially weakened after a hot PPI report sent the Treasury yields higher.  Bullion traders however remember the worst case scenario for gold is a ‘no landing’ scenario.  The US economy is too strong and the Fed will have to consider being more aggressive with its rate hiking cycle, which should surely send this economy into a recession. 

Gold might consolidate here until we see exactly how high markets want to price in the peak rate.  Short-term dollar strength might drag gold down a little, but the outlook should be for higher prices by the end of the year.

Crypto

A major move in Bitcoin is upon us.  There has been a major wave of institutional money coming into the exchanges over the past week, $1.6 billion according to data from Lookonchain. A lot of that money is leaving stablecoins, including Circle-issued USD coin. The fate of stablecoins will be decided in the near future, but many are not expecting regulators to crush the entire space.     

Everyday that passes that we don’t see Bitcoin break, sellers become less patient.  Bitcoin is showing strong resilience given the broader weakness across most risky assets. 

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