U.S. December PPI lower than expected but hard to change the pause in interest rate cut expectations

According to Zhitong Finance, the U.S. December PPI year-on-year recorded 3.3%, continuing to hit a new high since February 2023, with market expectations at 3.4% and a previous value of 3%. The U.S. December PPI month-on-month recorded 0.2%, the lowest since September 2024, with market expectations at 0.3%. The U.S. December core PPI month-on-month was 0%, expected at 0.3%, with a previous value of 0.2%. The U.S. December core PPI year-on-year was 3.5%, expected at 3.8%, with the previous value revised from 3.4% to 3.5%.

The PPI report shows that food prices fell by 0.1%, with vegetable prices dropping nearly 15%. Energy prices rose by 3.5%. Commodity prices have generally been recovering. Crude oil futures rose to a five-month high on Monday, and corn futures climbed to a seven-month high. Prior to this, cocoa and coffee prices surged significantly at the end of last year.

The unexpected cooling of the PPI is attributed to the decline in food costs and stable service prices, which may help alleviate concerns about persistent price pressures. In recent weeks, amid strong demand and the incoming Trump administration threatening to impose higher tariffs on imported goods, investors and consumers have raised their inflation expectations.

The PPI provides the market with an initial understanding of where the CPI may be headed. Economists pay attention to this index for another reason: some of its components, especially healthcare and financial services, affect the Fed's preferred inflation measure—the PCE price index. These categories had mixed results in December, with hospital care unchanged, and slight growth in physician services and portfolio management categories. However, airfares saw the largest increase since March 2022. Meanwhile, the PPI report indicated that service prices remained unchanged, marking one of the mildest readings of 2024.

A PPI lower than expected is a positive signal for the economy, as recent market concerns have been that inflation will not decline as quickly as anticipated to the Fed's 2% target level. On Wednesday, the U.S. will also release CPI data; economists expect the core CPI year-on-year to remain around 3.3% for the fifth consecutive month.

The U.S. December PPI data fell short of expectations, but this is unlikely to change the view that the Fed will not cut rates again before the second half of this year, given the strong performance of the labor market. The surge in year-on-year growth reflects last year's price declines, especially in energy products, which have been excluded from the calculations. Currently, at least one Wall Street institution (Bank of America) believes that the Fed's easing cycle has ended. Goldman Sachs expects two rate cuts in June and December this year, down from the previous three.

The yield on the 10-year U.S. Treasury bond fell after the PPI data came in below expectations, dropping 4.6 basis points to 4.7594%. The U.S. Dollar Index (DXY) briefly declined by 30 points to 109.44. Futures for the three major U.S. stock indices rose, with the Nasdaq 100 futures up 0.77%, S&P 500 futures up 0.56%, and Dow futures up 0.45%