The producer price index report on Friday morning was higher than expected, but it didn't produce a sharply negative market response like prior "hot" inflation news. The market did fall sharply in the final hour of trading, but that looked more like general concerns about market conditions and upcoming news rather than a reaction to inflation.
It still looks like we have already seen peak levels in the PPI and inflation, so the news didn't have any significant impact on Fed Funds Futures, which still indicate about a 75% chance of a half percentage point hike next week.
Prior to the Fed interest rate decision next Wednesday, is the consumer price index report on Tuesday, which is much more important than the PPI and could generate a strong reaction. But at this point, the likelihood of a Fed hike of half percentage point is not likely to change dramatically.
What will be key next week are the comments by Fed Chairman Jerome Powell after the Fed issues its interest-rate decision. The economic worries have shifted from consumer inflation to wage inflation and the potential of a slower economy in 2023. The likelihood of a recession in early 2023 has been ramping up, and it is now the consensus view that the economy will see a sharp drop fairly soon.
The tepid reaction to the PPI report on Friday is strong evidence that the market is starting to shift its focus away from inflation and to growth. Unfortunately, that is just the next phase of this ugly bear market, and it is going to take some time for the market to work through these issues. There were some hopeful bulls that thought that "peak" inflation would produce a significant market bottom, but that doesn't seem to be the case.
At this point, the most important issue on the trading agenda is the Fed interest rate decision next week. Once the market digests that news, then we may have an opportunity for some positive action into the end of the year. The action this week was poor, but it may be a good setup for some sort of bounce and trending action for the holidays if the Fed isn't too hawkish.
Have a great weekend. Get that holiday shopping done, and I'll see you on Monday.
