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November PPI a bit hotter than expected

FILE PHOTO: A worker arranges slabs in the factory at IceStone, a manufacturer of recycled glass countertops and surfaces, in New York City

NEW YORK (Reuters) - U.S. producer prices increased a bit more than expected in November, but the underlying trend in inflation is moderating, which could allow the Federal Reserve to slow its pace of interest rate hikes next week.

The producer price index for final demand rose 0.3% last month, the Labor Department said on Friday. Data for October was revised higher to show the PPI gaining 0.3% instead of 0.2% as previously reported. In the 12 months through November, the PPI increased 7.4% after advancing 8.1% in October. Economists polled by Reuters had forecast the PPI climbing 0.2% and rising 7.2% year-on-year.

MARKET REACTION:

STOCKS: S&P 500 futures turned down 0.3% pointing to a weak opening on Wall Street

BONDS: The yield on 10-year Treasury notes rose and was up 1 basis points at 3.503%; The two-year U.S. Treasury yield rose and was up 0.7 basis points at 4.319%.

FOREX: The dollar turned higher and the euro reversed to show a 0.17% loss.

COMMENTS:

ART HOGAN, CHIEF MARKET STRATEGIST, B. RILEY, NEW YORK

"When you look at the year-over-year numbers, we’ve now gone down. So directionally, inflation is heading in the right place but sequentially, it disappointed expectations. So to me, this is a modest disappointment. We’ll get more information on Tuesday with the CPI.""I don’t believe this changes anything about what the Fed was going to do on Wednesday in terms of raising rates by 50 basis points.""The next big concern that we’ll have and would learn more about at the (Fed) meeting on Wednesday is that the terminal rates for the Fed funds may nudge higher from 4.75% to 5%, which is the range of consensus now, to 5%-5.25%."

ANTHONY SAGLIMBENE, CHIEF MARKET STRATEGIST, AMERIPRISE FINANCIAL, TROY, MICHIGAN

“The market is wrong. The markets are overly optimistic that at some point between June and December the Fed is going to be willing to cut."

“Today's data shows that inflation is coming down, but it's lingering and is stickier than most assume. That tells me the market in the back end of next year anticipating the Fed to cut rates is wrong. "

“Our view is that they're going to keep, whatever the terminal rate is, say about 5%, it's likely to stay there all of next year. What we'll see in the dot plot on Wednesday, the summary of economic projections, is that the Fed is going to get to the terminal rate quicker. You're unlikely to see the majority of those members believe we're going to cut rates in 2023. That's more of a 2024-2025 story."

“The market is going to have to adjust to the Fed telling them, ‘we’re leaving rates higher for longer.’ That’s the disconnect right now and that creates some volatility.”

IAN LYNGEN, HEAD OF US RATES STRATEGY, BMO CAPITAL MARKETS, NEW YORK (by email)

"PPI in November surprised on the upside at 0.3% MoM vs. 0.2% MoM expected and the prior read was revised to 0.3% MoM vs. 0.2% MoM. This brings the YoY pace to 7.4% compared to the forecast for a 7.2% print and 8.1% Oct. The strength of the data was broad based with ex-food, energy, and trade also topping estimates at 0.3% MoM vs. 0.1% MoM anticipated in an acceleration from last month's 0.2% MoM print. Extrapolating this to the YoY pace we see a 4.9% read -- down from 5.4% in Oct, but well above the 4.7% consensus. It was a stronger read on prices to be sure that will leave the market cautious on a similar outcome next week when we see the consumer price update."

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

“It’s disappointing, higher than expected. The markets have reversed from positive to negative. On a year-to-year basis it’s a bit lower. It’s not the end of the world. But certainly, a negative surprise for the markets.”

“It still shows inflationary pressures in the pipeline and that’s not good news for the Fed. If there’s any positive signs it’s the yearly decline.”

“Bottom line is inflation is in a down-trend but month-on-month it’s hotter than expected. Markets always look at the monthly topline.”

ROBERT PAVLIK, SENIOR PORTFOLIO MANAGER, DAKOTA WEALTH, FAIRFIELD

“The Fed realizes that the work that they've done so far does take some time to have an effect. There's a lag effect and so I don't think it's going to sway them from their path of 50 more basis points next week.”

“It’s going to be 50 basis points next week and then another 50 basis points at the end of February post which inflation will start to show some cooling, hopefully. Then, in March I expect it to be a 25 basis points after which they’ll hold to see how all these rate hikes have played out unless something dramatic happens. I foresee that'll be the Fed's glide path right now.”

(Compiled by the Global Finance & Markets Breaking News team)