US PPI in focus after a surprising decline in CPI

The European stock markets are expected to open higher Thursday, boosted by solid gains on Wall Street overnight following yesterday's surprise drop in the US CPI. Additionally, oil flows in the southern part of the Druzhba pipeline have resumed after being stopped last week. The markets await the weekly jobless claims and US PPI figures for more clues on the macroeconomic picture.

The Federal Reserve may not have to be as aggressive on rate hikes in September because of the bigger than expected drop in headline inflation and the weaker-than-expected core reading.

Therefore, expectations of a rate rise have fallen from 75bps to 50bps, resulting in a decline in US 2-year yields. However, some slides have been tempered after Chicago Fed President Charles Evans played down the importance of a single CPI reading. According to him, the Fed Funds rate is still expected to be between 3.75% and 4% by the end of 2023.

Gold traders await US PPI

Gold prices now appear to be caught between a weakening dollar and improved risk appetite. US producer price inflation may provide further cues to the yellow metal.

Inflation in producer prices is expected to follow a decline in consumer prices. However, a lack of evidence that this trend extended to factory prices would dent risk appetite.

With today's PPI figures, which are likely to be more forward-looking, we'll be able to get a better idea of what's coming with the following CPI number, which is released during the Fed blackout period before September.

In June, PPI unexpectedly jumped back to 11.3%, raising concerns that US supply chains were under further inflationary pressure. There was little indication of such upward pressure in the equivalent prices paid numbers for the same month as there was in headline PPI. July's prices paid numbers also showed a downward trend.

In contrast to the headline numbers, core prices fell in June away from their March peaks, which is expected to continue in July.

With food and energy excluded from the price calculation, prices fell from 8.5% to 8.2% in June. There are hopes of this broader trend continuing into July, with an expectation that prices will fall to 7.7% in July.

Since prices paid numbers have dropped sharply over the past two months, it's possible the June spike was a one-off. According to expectations, the headline PPI will fall back to 10.3% from 11.3%. The monthly PPI is also expected to drop from 1.1% to 0.2% in July.