At 8:30 this morning, the US PPI (producer price index) came in a little hot at an increase of 1.8% vs. expectations of .8%. In addition, the Empire Manufacturing Index came in at a disappointing 2.55 vs. an expectation of 24, missing by a wide margin.
What does this all mean?
Well there are a few takeaways from this. The first is that PPI is showing that inflation is heating up faster than expected which could cause the Fed to have to think about a rate increase sooner than they wanted. All eyes are on the Fed this week for tomorrow’s FOMC meeting, and now there is an increased possibility that they may change their language regarding rate hikes. Because we are near year end, many traders are on the sidelines, content to hang on to gains from earlier this year. This could be a time that the Fed could try to “slip one in there” while market impact could be minimized.
The manufacturing index number is disappointing because it shows that the temporary pick up we have had may have been due to the stimulus packages and that the economy may not be ready to stand on its own 2 feet.
So this could have a negating effect, although if inflation really starts to heat up, the Fed may have to act quickly to keep inflation at bay.
Another thing to consider is the news out of the Euro-Zone, that Austria nationalized a bank in a multi-billion dollar bailout to prevent further contagion throughout the region.
This all plays in handily to the risk aversion trade, which seems to be the way the market is headed this morning. US stock futures are down this morning, and the US dollar is showing major strength, up .96% vs. the Aussie, .8% vs. the Kiwi, and 1% vs. the Yen.
I’m going to keep an eye on dollar strength today, and will put up some charts later. It is quite possible that we may see dollar strength due exclusively to risk aversion and not interest rate fears, although any change out of the Fed could be the “double whammy”.
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