Hot PPI Ahead of Fed Decision

MACRO FRAME

Renewed geopolitical tensions add another layer of uncertainty to global markets, while February’s nonfarm payrolls report keeps the case for a summer Fed rate cut intact but offers limited clarity on the extent of easing.

STOCK INDEX FUTURES

US equity futures fell lower following a hotter-than-expected PPI reading, which saw producer prices rise 0.7% MoM in February, above 0.5% in January and much higher than forecasts of 0.3%. Core PPI increased 0.5%, after a 0.8% rise in January but above forecasts of 0.3%. On an annual basis, headline producer inflation jumped to 3.4%, the highest in a year, compared to 2.9% in January and forecasts it would remain at 2.9%. Core producer inflation also jumped to 3.9%.

Additionally, higher oil prices are capping  gains given the geopolitical risk premium. European risk sentiment was positive ahead of PPI data, with the Euro Stoxx 50 having closed 0.5% higher yesterday and the March future now indicated another leg up around 5,938–5,953.

The key driver for equities remains the interaction between the Middle East shock and the Fed’s reaction function. Despite Brent briefly pushing $105 and WTI near $96, airlines and other rate‑sensitive names rallied on upbeat guidance from US carriers, underscoring investor confidence that higher energy costs will not immediately derail US demand. At the same time, collapsing expectations for near‑term Fed cuts offer headwinds to prices, with markets now eyeing the 1:00 p.m. FOMC decision and dot plot as the catalyst that could either validate the cautious risk‑on tone or trigger a reversal. Overall, equity markets are trading a narrow path between geopolitical escalation and the hope that the Fed sticks to a shallow‑cut trajectory rather than pivoting to outright tightening.

Watch point: Markets will focus on whether the Fed’s dot plot reinforces a “higher-for-longer” stance, as persistent inflation and elevated energy prices risk further tightening financial conditions and weighing on equities.

CURRENCY FUTURES

US DOLLAR: The USD index is higher at 99.726 as a hotter-than-expected PPI reading reinforces its uptrend after slipping 0.14% on Tuesday. The dollar’s modest pullback on Tuesday allowed other currencies to retrace part of last week’s oil‑driven weakness, though they are still firmly lower. FX remains closely tethered to geopolitical narratives driving bonds and stocks. A hawkish shift in the dots, especially paired with hot PPI, would probably re‑steepen US rate differentials in the dollar’s favor and pressure pro‑cyclical currencies and precious metals; conversely, any sign that the Fed still sees one to two cuts this year would allow EUR, GBP, and AUD to extend gains and offer incremental support to global equity risk sentiment.

Near-term price action is likely to remain headline-driven; any signs of de-escalation could weigh on the dollar as safe-haven demand fades, while continued fighting and tighter energy markets would likely reinforce dollar strength through higher inflation expectations.

Watch point: Dollar direction is likely to remain driven by geopolitical headlines and energy markets in the near term.

EURO: The euro is little changed at $1.1530. EUR has recovered from a recent low near 1.1410 as the currency finds support from steady local data; Eurozone inflation was confirmed at target (1.9% YoY in Feb.). EUR direction today will hinge on whether today’s dot-plot from the Fed is perceived as hawkish enough to continue the dollar’s uptrend.

Money markets are favorable to a rate hike from the European Central Bank by July, as the fallout from the conflict in Iran has shifted monetary expectations hawkish as inflation expectations rise. The ZEW Indicator of Economic Sentiment for the Euro Area fell sharply by 47.9 points from the previous month to -8.5 in March, the lowest in 11 months. The indicator for inflation expectations surged 78.9 points to a reading of 79. The impact of higher energy prices raises upside risks to price pressures and also raises concerns that Germany’s economic recovery could be halted. The ultimate impact will depend on the duration of the conflict, while most analysts are doubtful that a quick resolution is likely.

Watch point: Euro direction will likely remain sensitive to global risk sentiment and dollar dynamics.

BRITISH POUND: Sterling slipped 0.13% to $1.3337, as markets focus on the Fed decision and conflict in Iran ahead of tomorrow’s Bank of England’s policy decision. Like the EUR, a hawkish dot-plot could pressure the Sterling, while any positive developments out of the Middle East will offer an upside. Focus at this week’s meeting will center around any signals about how policymakers would react to a potential new oil shock as recent data has painted a stagnant picture of the UK economy. Market pricing for BoE policy suggests that the rise in energy prices has put an end to the banks easing cycle.

UK jobs data later in the week is also likely to shape expectations for the longer-term outlook for BoE policy. Employment is softening and wage growth, which has proven particularly resilient, has also started to show signs of abating. GDP growth stagnated in January, missing forecasts for 0.2% growth. The services sector recorded no growth, despite recent upbeat PMI readings. Industrial production declined by 0.1%, while manufacturing production rose 0.1%, both missing forecasts.

Watch point: Policy decisions from the Bank of England are now on hold with renewed geopolitical risks and a potential sustained rise in energy prices.

 JAPANESE YEN: The yen slipped 0.12% to 159.18, ahead of policy decisions from the Fed and Bank of Japan, with both banks expected to keep rates on hold. Intervention risk is back in focus: a dovish BoJ that downplays yen weakness and offers little guidance on future tightening could see USD/JPY probe the 160 area, while any hint of a faster hiking path or stronger FX rhetoric would likely trigger a sharp corrective move toward 157–158. Finance Minister Satsuki Katayama said the government is monitoring currency movements closely and is prepared to act with strong measures if needed. Bank of Japan Governor Kazuo Ueda said underlying inflation was accelerating towards the bank’s 2% target, stressing that price rises must be matched by solid wage gains.

Watch point: A move beyond the ¥160 range would likely intensify intervention rhetoric, while sustained energy-driven inflation could keep tightening expectations intact despite political pressure.

AUSTRALIAN DOLLAR: The Aussie fell back 0.38% to $0.7074 as copper and other commodity prices fell, but still finds solid support from the Reserve Bank of Australia’s future tightening bias. The central bank raised rates by 25  bps late Monday, while warning of “material” risks to inflation.

Middle East conflict aside, domestic data alone has proven inflationary enough to justify the case for monetary tightening, while the rise in energy prices supports the case for further tightening. The bank voted 5-4 in favor of the hike, though Governor Michelle Bullock stressed that the split was more of a difference in timing than direction and that further tightening is necessary. Inflation risks in the country remain firmly skewed to the upside, as a result of excess demand and higher energy prices. The RBA’s latest February forecasts already penciled in headline inflation reaching 4.2% by mid-year before the war unleashed a fresh global oil shock.

Markets currently imply an additional 43 bps of total tightening by year-end, pricing in a second rate hike by August.

Watch point: Wage figures, capacity utilization, PMI readings, and other signals on economic momentum will dictate market sentiment over future timing expectations.

TREASURY FUTURES

Treasury yields reversed direction to trade higher across the curve following a hotter-than-expected PPI print for February, which showed producer prices rose 3.4% YoY vs. expectations of 2.9%. The hotter reading was lead by jump in goods prices, while prices for services rose 0.5%, the least in three months. Core prices rose 0.5% on the month (3.9% YoY vs. an expected 3.7%) following a 0.8% rise in January, but above forecasts of a 0.3% rise. The headline reading marks the biggest increase in producer prices in seven months.

The FOMC concludes its two-day meeting today; Money markets assign a 99% probability to a hold at 3.50–3.75%, making the dot plot and Powell’s press conference the main events. Money markets now price an 80.8% chance rates remain unchanged through June, with the first cut pushed to September or December depending on the inflation trajectory from the oil shock. Goldman Sachs and Barclays both see September as the earliest plausible cut.

The key question for markets will be what signals the bank sends on the prospects for further easing this year. Labor supply vs. demand dynamics will likely be a key top for policymakers when discussing the prospects for future easing given February’s weak hiring report. However, given the rise in energy prices, the balance of risks between inflation and the labor market is likely to deepen the divide between policymakers on how to approach interest.

The Fed will also release updated projections for the economy and its “dot-plot” forecasts for interest rates. A hawkish change in expectations is likely to reinforce yield strength, while minimal changes will leave direction up to oil prices. Oil will likely continue to be the main driver for sentiment and yields, with the risk of a prolonged conflict likely to further shape Fed policy toward a halt in policy for the remainder of the year.

Watch point: A weak headline NFP figure supports the case for Fed easing this year, but questions as to how slow labor demand is cooling will likely determine further policy at the Fed, while a prolonged conflict in Iran is likely to limit the amount of easing in policy.

The spread between the two- and 10-year yields is 48.90 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.714%.

 

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