Evelyn Reynolds

The producer price index, a gauge of wholesale prices, fell 0.1% for the month and ended 2023 up 1% from a year ago, the Labor Department reported Friday.
Excluding food and energy, core PPI was flat against the estimate for a 0.2% increase. Excluding food, energy and trade services, PPI also was up 0.2%, in line with the estimate.

Wholesale prices unexpectedly declined in December, providing a positive signal for inflation, the Labor Department reported Friday.
The producer price index fell 0.1% for the month and ended 2023 up 1% from a year ago, the Labor Department reported Friday. Economists surveyed by Dow Jones had been expecting a monthly gain of 0.1%. The index had surged 6.4% in 2022.

Excluding food and energy, core PPI was flat against the estimate for a 0.2% increase. Excluding food, energy and trade services, PPI also was up 0.2%, in line with the estimate. For the full year, the final demand measure less food, energy and trade services rose 2.5% for all of 2023 after being up 4.7% in 2022.
The PPI release comes a day after less encouraging news from the Labor Department, which reported Thursday that the prices consumers pay for goods and services rose 0.3% in December and were up 3.4% on the year. That was higher than Wall Street expectations and still a good deal away from the Fed’s 2% inflation target.
However, PPI is generally considered a better leading index as it measures pipeline prices that companies get for intermediate goods and services.
Markets initially reacted positively to the PPI release but turned lower through morning trading.
“What inflation risks remain in the U.S. economy clearly cannot be sourced to any upward pressure in producers’ costs,” said Kurt Rankin, senior economist at PNC. “Whether surveying from producers’ intermediate or final demand perspective, there is little to no pricing pressure headed into the U.S. economy from the supply side entering 2024.”

Prices for final demand goods declined 0.4% in December, the third straight month of decreases, according to the release. Diesel fuel prices tumbled 12.4%, even though gasoline increased 2.1%.
On the services side, which Fed officials have been following more closely, prices held at unchanged for the third straight month. Prices in fields associated with financial advice rose 3.3%, while margins for machinery and vehicle wholesaling dipped 5.5%.
PPI measures the prices that producers pay for goods and services, while CPI gauges what consumers pay in the marketplace. CPI also includes imports whereas PPI does not. PPI, however, covers a broader set of goods and services.
Markets are convinced that waning inflation signs will push the Fed to cut interest rates starting in March, even with inflation above target.
Traders in the fed funds futures market are pricing in about a 70% probability that the first-quarter percentage point cut will come at the March 19-20 meeting of the Federal Open Market Committee, according to the CME Group’s FedWatch tracker. From there, markets expect another five rate cuts, taking the benchmark fed funds rate down to a target range of 3.75%-4%.
However, various Fed officials in recent days have made statements that seem to counter the market’s aggressive view. Moreover, JPMorgan Chase CEO Jamie Dimon on Friday warned that heavy government deficit spending along with other factors could cause inflation to be stickier and rates to be higher than the market expects. More

For the period from October 2023 through December 2023, the budget deficit totaled just shy of $510 billion, following a shortfall of $129.4 billion in December alone.
The deficit has continued to pile up despite the Biden administration’s assurances that the Inflation Reduction Act, in addition to reducing prices, would shave “hundreds of billions” off the deficit.

US President Joe Biden, with Treasury Secretary Janet Yellen, speaks during a meeting with his cabinet at the White House in Washington, DC, on March 3, 2022.
Jim Watson | AFP | Getty Images

The U.S. government ran up another half a trillion dollars in red ink in the first quarter of its fiscal year, the Treasury Department reported Thursday.
For the period from October 2023 through December 2023, the budget deficit totaled just shy of $510 billion, following a shortfall of $129.4 billion in just December alone, which was 52% higher than a year ago. The jump in the deficit pushed total government debt past $34 trillion for the first time.

Compared to last year, which saw a final deficit of $1.7 trillion, 2024 is running even hotter.
In the first quarter of fiscal 2023, for example, the difference between spending and receipts totaled $421.4 billion. On an unadjusted basis, that’s an increase of $89 billion between fiscal 2024 and last year. Adjusted for calendar factors, the Treasury Department said the change between the two years is actually $97 billion. December’s shortfall was higher by more than $34 billion compared to the previous year, driven by higher Social Security payments and interest costs.
If the current pace continues, 2024 would end with a deficit of just more than $2 trillion.
The deficit has continued to pile up despite the Biden administration’s assurances that the Inflation Reduction Act, in addition to reducing prices, would shave “hundreds of billions” off the deficit.
While the rate of inflation has come down, Labor Department data Thursday showed the consumer price index increased another 0.3% in December, pushing the 12-month rate up to 3.4%, higher than the Wall Street consensus and above the Federal Reserve’s 2% goal.

With interest rates elevated as the Fed fights inflation, financing costs for the government in 2023 totaled nearly $660 billion. Debt as a percentage of gross domestic product rose to 120% in the third quarter of 2023.Don’t miss these stories from CNBC PRO: More

The consumer price index increased 0.3% in December and 3.4% from a year ago, compared with respective estimates of 0.2% and 3.2%
Excluding volatile food and energy prices, the so-called core CPI also rose 0.3% for the month and 3.9% from a year ago, compared with respective estimates of 0.3% and 3.8%.
Much of the increase came due to rising shelter costs. The category rose 0.5% for the month and accounted for more than half the core CPI increase.
Wages adjusted for inflation posted a 0.2% gain on the month, while rising a modest 0.8% from a year ago.

Prices that consumers pay for a variety of goods and services rose more than expected in December, according to a Labor Department measure Thursday that shows inflation still holding a grip on the U.S. economy.
The consumer price index increased 0.3% for the month, higher than the 0.2% estimate at a time when most economists and policymakers see inflationary pressures easing. On a 12-month basis, the CPI closed 2023 up 3.4%. Economists surveyed by Dow Jones had been looking for a year-over-year reading of 3.2%.

By comparison, the annual CPI gain in December 2022 was about 6.4%.

Excluding volatile food and energy prices, the so-called core CPI also rose 0.3% for the month and 3.9% from a year ago, compared with respective estimates of 0.3% and 3.8%. The year-over-year core reading was the lowest since May 2021.
Much of the increase came due to rising shelter costs. The category rose 0.5% for the month and accounted for more than half the core CPI increase. On annual basis, shelter costs increased 6.2%, or about two-thirds of the rise in inflation.

Fed officials largely expect shelter costs to decline through the year as renewed leases reflect lower rents.
Stock market futures were negative following the release while Treasury yields held slightly higher.

Food prices increased 0.2% in December, the same as in November. Egg prices surged 8.9% on the month, but were still down 23.8% annually. Energy posted a 0.4% gain after sliding 2.3% in November as gasoline rose 0.2%, but natural gas declined 0.4%. Airline fares increased 1% for the month.
In other key price indexes, motor vehicle insurance bounced 1.5% higher, medical care accelerated by 0.6% and used vehicle prices, a key contributor in the initial inflation surge, increased another 0.5% after being up 1.6% in November.
Wages adjusted for inflation posted a 0.2% gain on the month, while rising a modest 0.8% from a year ago, the Bureau of Labor Statistics said in a separate release.
Fed officials are paying particular attention to services prices as evidence for whether inflation is showing durable signs of getting back to the central bank’s 2% target.
Services less energy increased 0.4% for the month and 5.3% from a year ago.
The inflation readings cover the same month that the Federal Reserve held its key borrowing rate steady for the third straight meeting. Along with that decision, policymakers indicated that they could begin cutting rates this year so long as the inflation data continues to cooperate.
Despite the higher-than-expected inflation readings, futures traders continued to assign a strong possibility that the Fed would start cutting interest rates in March. The CME Group’s FedWatch gauge of futures pricing indicated about a 69% probability of a March reduction, slightly higher than where it stood Wednesday.
However, the probability also reflects a divide between the market and the Fed about the timing and extent of rate cuts in 2024. Markets expect six rate cuts this year; Fed projections point to just three.
“These are not bad numbers, but they do show that disinflation progress is still slow and unlikely to be a straight line down to 2%,” said Seema Shah, chief global strategist at Principal Asset Management. “Certainly, as long as shelter inflation remains stubbornly elevated, the Fed will keep pushing back at the idea of imminent rate cuts.”
In recent days several policymakers have avoided committing to easier monetary policy.
New York Fed President John Williams said Wednesday that inflation clearly has abated from its more than 40-year peak in mid-2022 and is making solid progress. But he gave no clues as to when he thinks rate cuts will be appropriate and insisted that “restrictive” policy is likely to stay in place for some time.
Other officials, such as Fed Governor Michelle Bowman and Dallas Fed President Lorie Logan, also expressed skepticism and said they wouldn’t hesitate to hike should inflation turn higher.
Those comments come against a resilient economic backdrop, with unemployment holding below 4% and consumers continuing to spend despite evidence of rising debt loads and contracting savings.
In other economic news Thursday, the Labor Department reported that initial jobless claims were little changed at 202,000, below the Dow Jones estimate for 210,000.
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Maersk CEO Vincent Clerc said it was unclear whether Red Sea trade would resume in “days, weeks or months,” and that there could be “significant consequences” for global growth.
Maersk and other shipping giants are diverting vessels away from the Red Sea and around the south of Africa, adding to journey times and driving up freight rates.

Ongoing disruption to trade flows through the Red Sea could hit global economic growth, the head of one of the world’s largest container shipping firms said Thursday.
Maersk CEO Vincent Clerc said it remained unclear whether passage through the waterway would be re-established in “days, weeks or months,” in comments first provided to the Financial Times and confirmed to CNBC.

“It could potentially have quite significant consequences on global growth,” Clerc said.
The company announced Friday its vessels would be diverted from the Red Sea — which provides access to Egypt’s Suez Canal, the quickest route between Europe and Asia — for the “foreseeable future.”
Vessels are instead traveling around the southern coast of Africa, which can add between two to four weeks to a Europe-Asia voyage, Clerc previously told CNBC.

Arrows pointing outwards

Maersk further said this week that some inland transportations were facing delays due to a wave of strikes in Germany.
The seaborne diversions by Maersk and a host of other firms are due to a series of attacks on ships by Houthi militants from Yemen. The group’s leaders say they are responding to Israel’s bombing of Gaza.

Clashes have continued into the new year despite the launch of a U.S.-led military taskforce which has seen major powers send warships to the area.
Houthi militants this week launched the largest attack of the campaign so far.

Companies including Sweden’s Ikea have warned of potential product delays as a result, while freight rates are moving higher.
In a further sign of volatility in the region, an oil tanker was hijacked near the Gulf of Oman on Thursday.
The World Bank meanwhile said Tuesday that global growth is set to mark its worst half decade for 30 years.
Ayhan Kose, the group’s deputy chief economist, told CNBC that the world economy faced a host of risks, including escalations of conflict in the Middle East or the war in Ukraine.
— Additional reporting by Ruxandra Iordache More

The beleaguered lira has fallen some 37% against the U.S. benchmark over the past year, as monetary policymakers try to combat double-digit inflation by steadily raising interest rates.
Inflation in Turkey rose to 64.8% on an annual basis in December, up from 62% in November.
A new finance team was appointed in June last year, and Turkey’s central bank embarked on a sharp pivot, pulling rates higher under new governor Hafize Gaye Erkan.

Vanishing Turkish Currency: 1 Turkish Lira with the Portrait of Kemal AtatürkTurkish
Manuel Augusto Moreno | Moment | Getty Images

The Turkish lira hit a fresh record low against the U.S. dollar on Thursday, trading at 30.005 to the greenback just before noon local time.
It marks the first time that the lira has broken 30 against the dollar, which was up 0.17% against the Turkish currency from the previous day’s session.

The beleaguered lira has fallen some 37% against the U.S. benchmark over the past year, as monetary policymakers try to combat double-digit inflation by steadily raising interest rates.
The more conventional approach follows several years of unorthodox policy during which Ankara refused to tighten rates despite ballooning inflation, while Turkish President Recep Tayyip Erdogan routinely called interest rate rises “the mother of all evil.”
Inflation in the country of roughly 84 million rose to 64.8% on an annual basis in December, up from 62% in November. It’s still an improvement on the prior year, after Turkish inflation hit a peak of 85.5% in October 2022.
The lira’s weakening comes as Turkey’s top finance officials gather at J.P. Morgan’s Wall Street headquarters in New York for investor presentations focused on the country’s monetary policy, banking, assets, and financial markets.

Dubbed “Investor Day,” the inaugural event will feature question-and-answer sessions and will include presentations from new Turkish central bank governor Hafize Gaye Erkan, who was appointed in June 2023, on a range of topics, such as the country’s disinflation path. Turkish Finance Minister Mehmet Simsek will deliver presentations virtually on the outlooks for Turkish financing and fiscal policy.

Turkish outlet Daily Sabah reports the event will be attended by more than 200 senior executives from major finance institutions, including Vanguard, BlackRock, Goldman Sachs, Morgan Stanley, and J.P. Morgan.
The Turkish lira has lost more that 80% of its value against the dollar over the last five years, increasing import and foreign debt costs and dramatically weakening the purchasing power of ordinary Turkish people.
A new finance team was appointed in June last year, and Turkey’s central bank embarked on a sharp pivot, pulling rates higher under Erkan’s supervision. The country’s benchmark interest rate has since been lifted from 8.5% to 42.5%. More

The consumer price index is projected to have risen 0.2% in the final month of 2023, or 3.2% for the full year.
There is a wide gap between what the Fed has indicated in terms of rate cuts and what the market is expecting.
The Fed’s central mission now is calibrating policy in a way that it doesn’t ease too much and allow inflation to return or hold policy too tight so that it causes a long-anticipated recession.

Consumers shop at a retail chain store in Rosemead, California, on Dec. 12, 2023.
Frederic J. Brown | AFP | Getty Images

Economists expect that inflation nudged higher in December, a trend that could call into question the market’s eager anticipation that the Federal Reserve will slash interest rates this year.
The consumer price index, a widely followed measure of the costs folks pay for a wide range of goods and services, is projected to have risen 0.2% in the final month of 2023, or 3.2% for the full year, according to Dow Jones.

At a time when the Fed is fighting inflation through tight monetary policy including elevated rates, news that prices are holding at high levels could be enough to disrupt already-fragile markets.
“The Fed did its policy pivot, and the data’s got to support that pivot,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. “The market seems to have gotten excited that the Fed’s going to have to do more than what the Fed thinks in terms of rate cuts now. … The market got ahead of itself.”
There is certainly a wide gap between what the Fed has indicated in terms of rate cuts and what the market is expecting.
After months of insisting that easier monetary policy is still a ways off, central bank policymakers in December penciled in three quarter-percentage-point rate cuts by the end of 2024, effectively a policy pivot for this inflation-fighting era. Minutes from that meeting released last week did not indicate any discussion about a timetable for the reductions.
Markets hold a different view.

Looking for easing

Traders in the fed funds futures market are pointing to a strong chance of an initial rate cut in March, to be followed by five more reductions through the year that would take the benchmark overnight borrowing rate down to a range of 3.75% to 4%, according to the CME Group’s FedWatch gauge.
If inflation data such as Thursday morning’s CPI release and Friday’s producer price index don’t show stronger inflation progress, that is liable to cause more volatility in a year when stocks have already gotten off to a rocky start.
“We’re going to see it across all markets, because it’s going to be that dynamic between what the Fed’s doing and what the market expects them to do,” McIntyre said of a likely volatile time ahead. “Ultimately, they’ve got to come together. It probably means that right now, the market needs to give back some of the rate cuts that they priced in.”

A smattering of public statements since the December meeting of the Federal Open Market Committee provided little indication that officials are ready to let down their guard.
Fed Governor Michelle Bowman said this week that while she expects rate hikes could be done, she doesn’t see the case yet for cuts. Likewise, Dallas Fed President Lorie Logan, in more pointed remarks directed at inflation, said Saturday that the easing in financial conditions, such as 2023’s powerful stock market rally and a late-year slide in Treasury yields, raise the specter that inflation could see a resurgence.
“If we don’t maintain sufficiently tight financial conditions, there is a risk that inflation will pick back up and reverse the progress we’ve made,” Logan said. “In light of the easing in financial conditions in recent months, we shouldn’t take the possibility of another rate increase off the table just yet.”

The search for balance

Logan, however, did concede that it could be time to think about slowing the pace of the Fed’s balance sheet reduction. The process, nicknamed “quantitative tightening,” involves allowing proceeds from maturing bonds to roll off without reinvesting them, and has cut the central bank’s holdings by more than $1.2 trillion since June 2022.
The Fed’s central mission now is calibrating policy in a way that it doesn’t ease too much and allow inflation to return or hold policy too tight so that it causes a long-anticipated recession.
“Policy is too restrictive given where inflation is and likely where it’s going,” said Joseph Brusuelas, chief economist at tax consultancy RSM. “The Fed is clearly positioning itself to put a floor under the economy as we head into the second half of the year with rate cuts, and create the conditions for reacceleration of the economy later this year or next year.”
Still, Brusuelas thinks the market is too aggressive in pricing in six rate cuts. Instead, he expects maybe four moves as part of a gradual normalization process involving both rates and the rollback of the balance sheet reduction.
As for the inflation reports, Brusuelas said the results likely will be nuanced, with some gradual moves in the headline numbers and likely more focus on internal data, such as shelter costs and the prices for used vehicles. Also, core inflation, which excludes volatile food and energy prices, is expected to increase 0.3% on the month, equating to a 3.8% rate compared to a year ago, which would be the first sub-4% reading since May 2021.
“We’re going to have a vigorous market debate on whether we’re going back to 2% on a durable basis,” Brusuelas said. “They’ll need to see that improvement in order to set the predicate for modifying QT.”
Former Fed Vice Chair Richard Clarida said policymakers are more likely to take a cautious approach. He also expects just three cuts this year.
“The progress on inflation for the last six months is definitely there. … There’s always good news and bad news,” Clarida said Wednesday on CNBC’s “Squawk on the Street.” “Markets maybe are a little relaxed about where inflation is sticky and stubborn. But the data is definitely going in the direction that’s favorable for the economy and the Fed.”

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