US PPI Data: What Should We Expect? | Daily Market Analysis

Key events:      

USA – PPI (MoM) (Nov)

European markets ended the day lower yesterday as nervousness over the global slowdown was very visible, and the market is in defensive mode ahead of the weekend.

In contrast, U.S. markets were able to break a five-day losing streak, ending the session higher despite further weakness in oil prices, which reached their lowest levels of the year for the second straight day. This recovery, along with a positive Asian session, looks set to translate into a positive European open.

But most importantly, the November producer price index will be released in the U.S. today.

Earlier released Chinese inflation data fell to 1.6%, the lowest level since March, in line with expectations; factory prices fell 1.3%. Input prices fell as the cost of mining, and refining continued to decline. The sharp slowdown in raw material costs also contributed to the cooling of China's PPI.

A consensus of analyst estimates shows that the U.S. producer price index is expected to slow to 7.2% in November from 8% released a month earlier. The core producer price index also declined from 6.7% to 5.9%.

If U.S. inflation slowed last month - which also points to potentially slower CPI data next Tuesday before the FOMC decision – we could see risk assets shed some of this week's weakness. The S&P500 could return to the 200-DMA and close the week above the 4000 mark.

But if the U.S. PPI figure comes in above expectations - which is possible, given that low expectations are harder to beat - we could likely see U.S. stocks fall back into the red zone.

From a technical perspective, the key bearish targets for the S&P500 are at 3900, which has acted as a reference point a couple of times this year, and at 3870, the major 38.2% Fibonacci retracement of the last bear market rally, a breakout of which would hint at a medium-term bearish reversal.

The U.S. dollar index remains under decent selling pressure against many of the major currencies. The U.S. dollar index did not continue its losses below last week's lows, but it remained clearly positioned toward its 200-DMA this week, which means there is a growing belief among traders that the U.S. dollar should fall steadily.

A U.S. producer price index reading in line or, ideally, softer than expected could strengthen the bears and help the dollar end the week at new lows from the summer. While a disappointment in the producer price index is likely to give a boost to the dollar, as it would reinforce the Fed's hawkish expectations and projections for a rate hike.

Importantly, there is about an 80% chance that the Fed will raise interest rates by 50 bps next week. But the inflation data is unlikely to change those expectations. Instead, they will change the rates on the Fed's final rate. Market pricing still indicates that the Fed's final rate will be below 5%, which means there is more room for hawkish rather than dovish price action if the PPI is disappointing.

As for commodities, gold is also rising thanks to a much weaker U.S. dollar. The precious metal is above its 200-DMA this morning and approaching the $1800 mark. Weak PPI data could help extend the metal's rally above $1800, while a stronger-than-expected reading would likely lead to profit-taking before next week's close.