US producer prices surge in January, pushing Treasury yields higher and increasing pressure for further interest rate hikes. Fed may need to surpass 5% mark and maintain rates for an extended period, says Loretta Mester, President of the Federal Reserve Bank of Cleveland.
All the Wall Street stock indices opened in the red yesterday, and Treasury yields surged after data showed that US producer prices had rallied more than expected in January, highlighting the lingering inflationary pressures that could push the Federal Reserve to pursue further interest rate hikes.
The producer price index increased by 0.7% last month, marking the largest rise since June and a 6% increase from the previous year, largely due to higher energy costs. Following the release of this data, Loretta Mester, President of the Federal Reserve Bank of Cleveland, commented that she saw a "compelling economic case" for implementing another 50 basis points increase. She further stated that the Fed will need to surpass the 5% mark and maintain the interest rate at that level for an extended period of time.
The PPI data provides an early indication of inflation and suggests that sellers, especially those of goods, will face increased pressure to maintain prices. In addition to the producer price index data, initial jobless claims this week remained at a low level of 194k compared to the expected 200k, indicating that the labor market remains tight.
One of the Federal Reserve's goals when raising interest rates is to weaken the labor market to avoid potential wage inflation. Thus, this figure, along with the previous one, suggests that the Fed may need to maintain high interest rates for an extended period.
After the report was released, the dollar climbed to the day's peak, which pushed the EUR/USD to 1.0654 and the USD/JPY to 134.46.
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Following the release of the figures, the Wall St. indices experienced a downward reaction, with losses exceeding 1%. However, over the course of the session, these losses were mitigated through a corrective technical movement.
The S&P500 Index has been trading within a bullish channel since the start of the year and recently reached the bottom of the channel at 4100, from where it bounced back immediately. This level serves as a support level, and the bullish trend remains intact at the moment. The VIX, or volatility index, has surged, and on Friday morning 17th February got above 21.5. This increase appears to be in tandem with the rise of the dollar.
The market is now anticipating the Personal Consumption Expenditure figure, which will be published next week and is expected to have a significant impact on the market, potentially confirming or altering the current trend.
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Sources: Bloomberg, Reuters