Increasing geopolitical uncertainty, US PPI in focus

As geopolitical tensions over Ukraine weigh on markets, dollar buyers held back on Tuesday morning, gold is heading to three-month highs, and European markets are expected to edge lower. Traders are keeping an eye on Euro GDP growth and US producer inflation.

Risk-off mood lowered US Treasury Yields

An initial sign of this risk-off mood was a move into US treasuries, which sent yields sharply lower. The decline in yields was quickly reversed after St. Louis Fed President James Bullard reaffirmed his comments last week by suggesting the Federal Reserve should hike rates 50 bps in March and another 25 bps in July.

According to interest rate futures, there is now a 60% chance that the Federal Reserve is planning to raise rates on March 17, up from 20% before the CPI release. Risk assets would likely decline further if the yield curve inverted, causing many to believe that a recession is on the horizon. This has resulted in a flattening of the 10-year minus 2-year yield spread, which is near 0.42%. 

EU data on Tuesday

The economic data calendar is pretty busy on Tuesday, with the highlight being the first estimate for the fourth-quarter Eurozone GDP. December unemployment numbers will also be released as well as the German ZEW economic sentiment report for February.

GDP for EU Q4 is expected to come in at 0.3%, unchanged from the earlier reading from the end of last month.

PPI is expected to come softer

Last month's US PPI numbers offered some hope of a slowdown in inflationary pressure in the US economy by slipping to 9.7% from 9.8%, although PPI ex food and energy edged up to 8.3%. Today's January figures are expected to reinforce that hope, with headline PPI falling to 9.1% from 9.7%, while core prices are expected to fall to 6.3% from 6.9%. If this number comes in slightly lower than expected it may signal that some of the more hawkish rate hike scenarios have lost some traction since PPI tends to be a leading indicator for CPI.