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James Hyerczyk
crude oil

U.S. Treasury yields fell for the time in four sessions on Thursday after a government report surprisingly showed U.S. producer prices fell in August. Declines in the prices of food and a range of trade services offset an increase in the cost of energy products for the first drop in 18 months.

Although yields are being pressured today, investors shouldn’t read into the numbers. It should not alter the Fed’s plans to raise rates later this month. Furthermore, investors are likely to pay more attention to Thursday’s report on consumer inflation.

To recap today’s key report, the Labor Department reported on Wednesday is producer price index (PPI) for final demand edged lower by 0.1 percent last month after being unchanged in July. The drop in the PPI was the first since February 2017. Economists were looking for an increase of 0.2 percent in August.

The report also had an effect on an annual basis. In the 12 months through August, the PPI rose 2.8 percent, a 0.5 percent decrease from July’s 3.3 percent increase. Economists had forecast the PPI increasing 3.2 percent year-on-year.

Additionally, the Core PPI also gained 0.1 percent in August. Traders were looking for a 0.2% increase. In the 12 months through August, the core PPI increased 2.9 percent after rising 2.8 percent in July.

What Does it All Mean to Interest Rates?

Nothing. Even though producer prices fell moderately last month, the move doesn’t represent a trend. Furthermore, the slight decline came at a time when inflation is rising steadily against a backdrop of a strong labor market and robust economy. If you recall, last Friday’s U.S. Non-Farm Payrolls report showed a dramatic jump in Average Hourly Wages and that’s more important to the Fed. The central bank’s preferred measure of inflation, the PCE, is also at 2.0 percent, so all is good as far as inflation is concerned.

Thursday’s Consumer Price Index is expected to show a monthly increase of 0.3%. Core CPI is expected to have risen 0.2%.

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Lift-Off, Lift-Off, We Have Lift Off

For those of you old enough to remember, those were the words used by NASA back in the day to announce a successful lift-off of a Saturn rocket. Looking at the Monthly November Brent Crude Oil chart this morning, I think we’re getting close to repeating those very same words.

Crude oil prices rallied to their highest levels of this year after a drop in U.S. crude oil inventories and the prospect of the loss of Iranian supply triggered a strong upward price spike.

Monthly November Brent Crude Oil

Furthermore, on Tuesday, the Russian Oil Minister described the current situation as “fragile”. This means there is no room for error. Supply is tight, so deal with it.

What I like about the monthly chart breakout is that this may finally mean the end to the rangebound trade that for several months had made crude oil a boring market to watch and analyze. If we can sustain a rally over the key long-term retracement zone then it could be off to the races with higher markets to follow.

This doesn’t look like a buy stop driven break out either. This could be the real deal.

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