LIVE MARKETS-Two-fer Tuesday: Inflation cools, small business sentiment jumps

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TWO-FER TUESDAY: INFLATION COOLS, SMALL BUSINESS SENTIMENT JUMPS

Investors were treated to the economic equivalent to a double espresso shot on Tuesday, with cooler than expected inflation data and the most optimistic small business sentiment reading in over six years.

In December, prices U.S. businesses get for their goods and services at the figurative factory door increased at a slower rate than analysts expected.

The Labor Department's producer price index (PPI) USPPFD=ECI grew by 0.2% last month, cooler than the 0.3% consensus and half the rate of November's increase.

Year-on-year PPI growth was also lower than estimated - at 3.3% versus 3.4% - but marked an acceleration from the prior month's 3.0% print.

Core PPI, which excludes food, energy and trade services, increased on monthly and annual bases by 0.1% and 3.3%, respectively, the latter notching a cooldown from 3.5% in November.

The report marks the second metric to suggest inflation simmered down a bit last month, on the heels of Friday's employment report, which showed average hourly wages cooled slightly to 3.9% from 4.0%.

On Wednesday, the Labor Department's consumer price index (CPI) is due to provide a third, and crucial, piece to the puzzle.

"Tuesday's PPI print came in below expectations, which ... helps to calm fears that we were on the verge of an inflation acceleration," writes Chris Brigati, chief investment officer at SWBC. "All eyes are now on Wednesday's CPI report, which may be the most important inflation reading in recent memory, as it will fuel the market's Fed-obsessed sentiment."

"A strong inflation number adds to this idea of no cuts in 2025, and potentially even a rate hike," Brigati adds, "while a weak inflation data point may help to calm the market's Fed fears."

Switching gears, the mood among small business owners perked up considerably in the closing weeks of 2024, as visions of tax cuts and deregulation - courtesy of President-elect Donald Trump - danced in their heads.

The National Federation of Independent Business' (NFIB) Business Optimism index USOPIN=ECI surged 3.4 points to 105.1, the highest it's been since October 2018.

Below the headline, survey respondents expecting the economy to improve shot up to a net 52%, the most optimistic level in over four decades. Other forward-looking measures, such as whether the time is right to expand, and future sales expectations, all improved.

But real-time responses are less enthusiastic.

About 35% reported jobs that were hard to fill, and a net negative 13% reported nominal sales have increased in the past three months.

It should be mentioned that the NFIB is a politically active membership organization whose PAC skews heavily Republican, according to The Center for Responsive Politics/opensecrets.org.

"Predictably, NFIB Chief Economist Bill Dunkelberg explained the jump in the overall optimism index to the election result," says Carl Weinberg, chief economist at High Frequency Economics. "That would make them the only people on the planet feeling more certain about the economic agenda at this time."

The graphic below charts the NFIB against the Russell 2000 .RUT, the small cap index it more or less tends to track. The two diverged in November, following the election.

In fact, just this past Friday the RUT confirmed it entered correction on November 25.

(Stephen Culp)

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(Terence Gabriel is a Reuters market analyst. The views expressed are his own)