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DECEMBER 13, 2023

UNCHANGED PRODUCER PRICES

In November, U.S. producer prices remained unchanged, as the decline in the cost of energy products counterbalanced higher food prices. The producer price index (PPI), which tracks inflation at the factory gate, reported a steady reading, following a revised 0.4% drop in October; previously, it had declined 0.5% in that month. Moreover, over the 12 months through November, the PPI rose by 0.9%, a slower pace than the 1.2% gain in October. Simultaneously, recent data revealed that consumer prices had inched up in November, mainly due to persistently high rental costs. However, despite being above the Federal Reserve’s 2% target, price hikes are becoming less comprehensive. The core PPI, a narrower measure that excludes food, energy, and trade services components, inched up by 0.1% last month after rising by the same margin in October. On a year-on-year basis, the core PPI increased by 2.5% in November, down from 2.8% in October. These indicators suggest that while inflation remains a concern, it appears to be moderating, particularly at the production level.

UPDATED APPLICATION

In a bid to make it easier for Wall Street banks like JPMorgan and Goldman Sachs to participate in its spot Bitcoin exchange-traded fund (ETF), BlackRock, the world’s largest asset manager, has made changes to its ETF application. The updated application allows the banking giants to create new fund shares using cash instead of cryptocurrencies. This new redemption model, known as “prepay,” allows major banks to bypass restrictions preventing them from holding Bitcoin or crypto directly on their balance sheets. They can transfer cash to a broker-dealer, which then converts it into Bitcoin, enabling them to take part in the fund. Furthermore, BlackRock is confident that the new structure offers improved resistance to market manipulation, a key factor that has led the U.S. Securities and Exchange Commission (SEC) to reject previous spot Bitcoin ETF applications. Moreover, BlackRock recently met with the SEC for the third time on December 11, and the government agency is expected to make a decision on the updated spot Bitcoin ETF application by January 15, 2024.

LOWER RATES BOOST REFINANCING

Homeowners seeking to refinance their mortgages are enjoying a favorable trend as mortgage rates dip once again. During the previous week, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances fell to 7.07% from 7.17%, and points decreased to 0.59 from 0.60. This has led to an upsurge in refinance applications, which soared by 19% from the previous week, reaching a 27% increase compared to a year ago. Simultaneously, applications for new home purchases experienced a 4% increase, although still remaining 18% below last year’s levels. These reductions in rates have provided relief to borrowers who were previously presented with rates near 8%, driving many to explore refinancing, especially for FHA and VA loans. Nevertheless, despite the decrease, the market for purchasing homes still remains highly competitive due to limited inventory and high prices. Moreover, although, as of now, the overall economic data regarding mortgage rates aligns with expectations, any changes are contingent on the fallout from the latest Federal Reserve meeting and the comments of Chair Jerome Powell happening later today.

POSSIBLE POLICY SHIFT AHEAD

The upcoming Federal Reserve meeting is expected to mark a significant policy shift, moving away from aggressive rate hikes. Analysts anticipate that the Fed is likely to maintain current interest rates and adopt a more cautious posture with potential future rate cuts on the horizon. In addition to an announcement on rates, the Fed will also reveal its updated projections for economic growth, inflation, and unemployment. Key aspects to watch for potential shifts in Fed policy include the statement and the “dot plot,” a grid reflecting individual members’ expectations on interest rate changes. Market expectations for rate cuts are being closely monitored, with traders already pricing in reductions to start in May 2024. However, some analysts are taking a more conservative approach, suggesting that a significant dovish pivot may not happen immediately. The Fed’s economic outlook will also be closely watched, with expectations that it may show a slow-down in GDP growth, a slight uptick in unemployment, and gradual movement of inflation towards the Fed’s target.

INTERNATIONAL NEWS

Argentina’s new economy chief, Luis Caputo, is taking significant steps to address the country’s financial issues. He’s cutting government spending by a substantial amount, including reducing funds allocated to different areas. Additionally, he’s devaluing the country’s currency by 54%. While some people view these as positive actions, others are uncertain about their effectiveness. The government is also in discussions with other countries to secure financial aid and is seeking the International Monetary Fund’s support to reduce their debt repayments. However, there are concerns about the potential impact of these measures, including the potential adverse effects on smaller regional governments. Furthermore, questions arise regarding the government’s long-term plan and whether these actions are being carefully considered and strategically implemented.

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