To The Moon

US Producer inflation (reported by the Labor Department) rose less than expected in December 2024, as higher costs for goods were partially offset by stable services prices.

According to the report, a surge in energy costs was the culprit behind the monthly increase.

Wholesale energy prices rose +3.5% for the month (fueled by a 9.7% jump in gas prices) driving goods prices and overall index higher.

The latest data, shows that US inflation remained on a see-saw trend with progress stalled in recent months.

The moderation reported in producer prices on Tue, 14 Jan 2025, did not change overall consensus, that the Fed is unlikely to cut interest rates before H2 2025, based on:

• Resilient labour market (as confirmed by Fri, 10 Jan 2025 - US non-farm payroll report on ).

• High threat of potentially inflation-boosting tariffs on imported goods by incoming Trump administration.

Even though producer prices did not rise much on Tuesday, most still think the Fed won't lower interest rates until H2 2025.

This is because:

• The labour market is still strong. (as confirmed by Fri, 10 Jan 2025 - US non-farm payroll report)

• Inflation-boosting tariffs on imported goods to be levied by incoming Trump administration is “real”.

December Inflation numbers:

Headline. (see above)

• Monthly : 0.2% vs expected 0.3% vs November’s 0.4%.

• Annual: 3.3% vs expected 3.4% vs November’s 3.0%.

Core. (see above)

• Monthly: 0.0% vs estimated 0.3% vs November’s 0.2%.

• Annual: 3.5% vs estimated 3.8% vs November’s 3.5%.

Note : In the 12 months thru December 2024, the PPI accelerated 3.3%, the most since February 2023 (4.4%), after increasing 3.0% in November.

Analysts’ Expectations.

Below were analysts’ reactions to the PPI numbers:

• Santander US Capital Markets, Chief US economist, Stephen Stanley remarked, "PPI numbers should offer absolutely no comfort about Wednesday's CPI release,"

• EY-Parthenon, Chief economist, Gregory Daco commented, PPI inflation has increased from its early 2024 low point, but overall, both core and headline PPI inflation remain within pre-pandemic levels, suggesting inflationary pressures are still relatively contained.

US Market - Tuesday.

US market took the PPI readings at face value and ran with it. Throughout Tuesday, stocks oscillated between gains and losses.

Meanwhile investors braced themselves, for quarterly earnings reports to justify stock valuations and the strength of the US economy.

In the end, the S&P 500 edged higher while the Nasdaq dipped after a volatile session.

By the time 4pm came around: (see above)

• DJIA: +0.52% (+221.16 to 42,518.28).

• S&P 500: +0.11% (+6.69 to 5,842.91). Trading at valuations well above its historical long-term average. A disappointing earnings season spells jeopardy for equities.

• Nasdaq: -0.23% (-43.72 to 19,044.39). Fell for the 5th straight session Tuesday, dragged lower by continued weakness in technology shares.

Treasury Yields.

Treasury yields, which move in the opposite direction of bond prices, initially dropped on Tuesday after the Producer Price Index report was out.

That move quickly faded.

Overall yields still ended slightly lower on the session :

• 2 year 4.375%, -2.7 basis points

• 5 year 4.580%, -3.6 basis points

• 10 year 4.773%, -3.1 basis points. (see above)

• 30 year 4.967%, -19 basis points.

Consumer Price Index.

The consumer price index (CPI) is the most keenly anticipated report this week, setting the tone for US market for the rest of the week.

Recap.

To recap US’s November 2024 CPI data:

Headline inflation.

• Monthly: CPI increased +0.3% for the month after rising 0.2% in October.

• Annual: CPI increased +2.7% YoY, after increasing by 2.6% the prior month.

Core inflation.

• Monthly: Core CPI climbed +0.3%, status quo as October inflation monthly number.

• Annual: Core CPI rose +3.3% YoY, status quo as October inflation number.

CPI headline inflation rose by +0.1% both monthly and annual, while core inflation remained flat.

CPI Forecast.

Above is a summary of what some US banks think CPI inflation for December 2024, will be.

Economists think overall inflation will go up slightly:

• Month-to-month: It's expected to increase by 0.3%, same as November’s data.

• Year-over-year: It's predicted to rise to 2.8%, according to FactSet consensus estimates.

Marginal increase is attributed to:

• Higher energy prices.

• Higher egg prices.

• Potential marginal rebound (nothing major) from higher shelter cost of inflation.

Banks Earnings - Wednesday.

Earnings from banks will be investors’ other main preoccupation, on Wed, 15 Jan 2025, after CPI inflation report.

The 4 US banks announcing their quarterly earnings will be:

• $JPMorgan Chase(JPM)$.

• $Goldman Sachs(GS)$.

• $Wells Fargo(WFC)$

• $Citigroup(C)$.

Recap Q3 / Forecast Q4.

It is hoped that readers will not be too surprised by the “lower” earnings per share (EPS) forecasted for Q4 2024 vs Q3 2024’s EPS.

JPMorgan Chase (JPM)

• Net Income: $12.9 billion

• Earnings Per Share (EPS): $4.37

• Revenue: $43.32 billion

• Net Interest Income (NII): $23.5 billion, rose +3% YoY.

• Forecast for Q4 2024. (see below)

Goldman Sachs (GS)

• Net Income: $2.99 billion

• Earnings Per Share (EPS): $8.40

• Revenue: $12.70 billion

• Net Interest Income (NII): $2.60 billion.

• Forecast for Q4 2024. (see below)

Wells Fargo (WFC)

• Net Income: $5.1 billion

• Earnings Per Share (EPS): $1.52

• Revenue: $20.37 billion

• Net Interest Income (NII): $11.69 billion, -11% YoY decline.

• Forecast for Q4 2024. (see below)

Citigroup (C)

• Net Income: $3.2 billion

• Earnings Per Share (EPS): $1.51

• Revenue: $20.32 billion

• Net Interest Income (NII): $13.4 billion, -3% YoY decline.

• Q4 2024 forecast. (see below)

“Hidden” Bank Account.

While strong performance in areas like investment banking and trading is expected, a key metric to watch is the 'Loan Loss Reserve Accounts', an account that US banks seldom highlight.

Reserves in this particular account are set aside to cover potential losses from consumer defaults, such as mortgages and credit cards.

This also means “a significant increase in these reserves could signal concerns about an economic downturn”.

For banks like Wells Fargo (WFC) and Bank of America (BAC), close attention should be paid to their commentary on the housing and mortgage markets.

Overall, outlook for the banking sector remains positive, with anticipated growth driven by factors like (a) increased dealmaking and (b) favourable interest rates.

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