Yesterday saw the release of the Producer Price Index (PPI), which revealed that wholesale prices rose by 3.2% in November, the largest increase since August 1973. Today, the Consumer Price Index (CPI) shows that consumer prices rose by 0.8% in November, which was larger than expected. This helps explain why the Fed opted for a 0.25% cut earlier this week instead of the desired 0.5%.
The worse than expected inflation picture also lowers the probability of subsequent Fed funds rate cuts, which goes some way to explain today’s 1.3%, 1.4% and 1.2% declines for the Dow, S&P 500 and Nasdaq, respectively.
The excessive pessimism will undoubtedly result in extreme market breadth readings that should produce some buying opportunities next week.