Market Rally Gains Momentum as Inflation Fears Ease
Wholesale Prices Rise Less Than Expected
US stocks surged across the board on Tuesday, driven by a key inflation report that showed prices rose less than expected in December. The benchmark S&P 500 and Dow Jones Industrial Average both gained around 0.4%, while the tech-heavy Nasdaq Composite jumped 0.6%. This rebound comes after Monday’s losses, as investors digest the latest economic data.
Producer Price Index Shows Modest Increase
The Producer Price Index (PPI), which tracks price changes at a wholesale level, rose 3.3% over the past year, up from 3% in November but below economists’ expectations. The monthly increase was also lower than expected, at 0.2%. This report sets the stage for Wednesday’s highly anticipated consumer inflation print.
Trump Administration Considers Gradual Tariff Hikes
Meanwhile, President-elect Donald Trump’s team is reportedly considering a month-by-month rollout of promised tariff increases, rather than imposing higher levels in a single move. This strategy aims to ease inflationary pressures and limit the impact on the Federal Reserve’s ability to cut interest rates.
Dollar Retreats, Treasury Yields Pull Back
Following the tariff report, the dollar retreated from its five-day winning streak, while the 10-year Treasury yield pulled back from its 14-month highs. The likelihood of gradual tariffs has eased some market concerns, but the impact on inflation remains a key question.
KB Home Shares Jump on Strong Earnings
On the corporate front, shares of KB Home surged over 10% in early trading, driven by the home builder’s fourth-quarter earnings beating estimates.
Economists Weigh In on Inflation Report
Economists are cautiously optimistic about the latest inflation data, with some noting that the report is positive for the markets. “Better than expected PPI in December are going to be positive for the markets which have been concerned with higher inflation readings during the last several months,” said Eugenio Aleman, chief economist at Raymond James.
Core PPI Remains Sticky
When excluding volatile food and energy categories, the index showed no increase in producer prices last month. However, energy prices increased by 3.5% month over month, the largest monthly increase since February 2024. Domestic and international airline prices also edged up by 7.2% month over month.
Tariff Uncertainty Remains a Key Concern
Tariff uncertainty remains a key question for the rest of the year, with estimates ranging from a one-off 0.5% to 1.5% increase in inflation from increased tariffs alone. Central banks typically look through one-off increases from tariffs, unless it leads to a rise in inflation expectations.
Fed Faces Uphill Battle on Inflation
The Federal Reserve faces an uphill battle in bringing down inflation to its 2% target, with recent economic strength combining with a rising threat of tariffs to increase upside inflation risks. As Seema Shah, chief global strategist at Principal Asset Management, noted, “The Fed cannot ignore the upside inflation risks facing the US economy.”
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