The U.S. Producer Price Index fell for the third month in November, quickly snuffing out a dollar rally that was fueled by increasing expectations of an imminent tapering in Federal Reserve quantitative easing policies. Wholesale prices were down 0.1%, compared to 0.2% in October. Analysts had expected prices to be flat. The decline was mostly due to lower energy and car prices. The core PPI, which excludes energy and food, was up 0.1%, in line with expectations.
Gold had touched below $1,224 in Europe, and already triggered light buying before the report. The fall in the dollar helped it steady above the $1,230 mark. Silver had dropped below $19.40 in Asia, but had inched its way back up in Europe by 20 cents. The PGMs followed basically the same path, easing in Asia, and strengthening in Europe.
The brief overnight dollar rally, fueled by belief that the Fed would decrease the amount of bond purchases next month, saw the greenback hit a five-year high versus the yen. The yen also fell against the euro, which helped the Nikkei break into the green. Many stock markets are snapping a three-day losing streak today. Mutual funds pulled over $6.5 billion out of the U.S. stock market in the week ended Wednesday, over concerns Fed tapering is around the corner.
However, perhaps the one thing that the Fed is afraid of more than unemployment is deflation. This morning's PPI numbers may by themselves counter-act all the good economic news over the last week, including surprisingly high payroll numbers and the partial budget deal passing the House.
The market uncertainty should compel the Fed to provide explicit forward guidance in next week's meeting, whether they taper or not. Whether the market can actually decypher what they say is another matter.