Stocks, Crude Oil, and the Dollar: Will This Block Fed Rate Cuts?
Stocks, Crude Oil, and the Dollar: Will This Block Fed Rate Cuts?
By:Ilya Spivak
Stocks fell and the US dollar rose as surging crude oil prices spooked the markets. Will this derail Fed rate cuts?
- US CPI inflation data seemed benign, underpinning the Fed’s rate cut logic
- Stocks dipped anyway and the US dollar rose as crude oil prices raced higher
- PPI data is in focus next as input cost risks put traders’ dovish hopes at risk
December’s consumer price index (CPI) data showed that headline inflation held steady at 2.7% year-on-year as expected, unchanged from the four-month low recorded in November. The core CPI rate excluding volatile food and energy prices – a focal point for policymakers – held at 2.6% year-on-year, marking a slight undershoot relative to forecasts.
Under the surface, the numbers showed that slight gains in core goods and services prices alongside that of food were offset by cooling energy costs. The trends supporting the policy path set by the Federal Reserve remained broadly in place: a tariff-driven rise on the goods side looks to be plateauing while disinflation continues in services.
Stock markets stumble, dollar gains despite benign CPI data. What gives?
Baseline monetary policy expectations were left broadly unchanged in the wake of the data. Fed Funds futures still show that traders have discounted two 25-basis-point (bps) rate cuts for 2026, double the forecast maintained by central bank officials since June last year. Traders now expect to see the first move in June and the second in September.
The markets offered up a curious reaction. Stocks briefly popped higher while the US dollar took a step lower as the CPI report crossed the wires. Both moves then promptly reversed after mere hour of digestion. The bellwether S&P 500 is now on course to finish the day in the red, while the greenback has erased nearly all of yesterday's losses.
This seems to suggest that markets were paying enough attention to acknowledge the CPI release but ultimately found their cues elsewhere. A sharp rise in crude oil prices may offer an explanation. With Venezuela in limbo, Iran teetering on the brink of revolution, and the US boarding Russian tankers, China’s oil supplies suddenly seem vulnerable.
PPI data now in focus as crude oil rise threatens Fed inflation hopes
Against this backdrop, the benchmark WTI crude oil contract hit a three-month high. Rising prices filter into headline CPI data without a lag of about one month. If they keep marching higher as Beijing leans on alternative supplies, inflation will get an unwelcome boost.
The spotlight now turns to catch-up producer price index (PPI) data. The incoming release is expected to bring the BLS data series up to November after the disruption amid October’s government shutdown. Headline wholesale inflation is expected to hold steady at 2.7%. The core rate is expected to rise to the same level from 2.6% in September.
Though stale, this data may still prove to be insightful for what it says about the Fed’s rosy assumptions about tariff-linked inflation. PPI figures since April 2025 have revealed a hearty squeeze on wholesalers’ margins, implying that they are eating tariff costs rather than pass them on to consumers.
Such sacrifice – ostensibly undertaken to protect demand – is inherently temporary. Add to this mix a rise in crude oil that makes it even harder for firms to shield retail from increasingly expensive inputs, and the path ahead for CPI and thereby for interest rates looks much less benign than currently expected. That might keep stocks under pressure.
Ilya Spivak, tastylive head of global macro, has over 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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