US bond yields fell after the PPI report

The mood on Wall Street last Friday was mixed. Today, due to the holiday (Martin Luther King Day), there will be no trading. Stock indices remained within historical highs. Dow Jones lost 0,3%, SP500 gained 0,1%. and Nasdaq Composite closed the day at the opening level.

The US inflation report (CPI and PPI) was mixed. Consumer prices increased and producer prices decreased. The EUR/USD rate is in consolidation between the levels of 1,0990 and 1,0935. Crude oil gained 0,9% on Friday. although the initial increases were much greater.

US bond yields down

On Friday, we learned the data on producer prices in the USA. PPI decreased by 0,1 percent month to month (Bloomberg consensus +0,1%) compared to the revised down to -0,1%. November result. This translated into a PPI result of 1%. on an annual basis (expected 1,3%). Core month-on-month inflation remained unchanged compared to the previous result. On a year-to-year basis the indicator turned out to be lower than forecasts and the result from last month and was at the level of 1,8 percent.

As a result of the data, yields on US treasury bonds fell. 2-year bonds decreased by 10 basis points and during the week by approximately 24 basis points and amounted to 4,14% on Friday. 10-year bonds dropped by only 3 bp and ended the week around 3,94%.

EUR / USD exchange rate after increasing again to around 1,0980, it fell to 1,0950. On the main currency pair consolidation is underway in the short term and only breaking the lower or upper barrier (1,0990 from above and 1,0900 from below) may result in a larger move.

Last Friday, Fed Fund futures were trading at 79%. chances of an interest rate cut of 25 basis points by March, up from 67 percent. week earlier. They estimated a total cut of 168 basis points by the end of the year, down from 138 basis points a week earlier.

Israel's war with Hamas

Crude oil gained strongly on Friday and the price exited the downward trend channel. At the end of the day, the strong gains were largely reduced. The price increase was caused by another escalation of the conflict in the Middle East. The USA and Great Britain decided to attack Houthi targets in Yemen. These events increase market concerns that the war between Israel and Hamas will develop into a broader conflict that could impact oil supplies from the region. This mainly applies to those transports that pass through the Strait of Hormuz. It is a strategic place on the trade map of the world.

The strong price increase may be due to the fact that approximately 20 million barrels of this raw material flow through Hormuz daily. There are opinions that if flows through it are stopped or transport is severely limited, the market price shock may be greater than that of the 70s last century or the one observed after the outbreak of the war in Ukraine. The commodity prices have left the downward trend channel, which, at least in theory, indicates a continuation of increases.

Source: Łukasz Zembik, OANDA TMS Brokers