Stocks closed lower yesterday after a warmer-than-expected inflation report.

Yesterday's Producer Price Index (PPI ? wholesale inflation) came in above expectations with the headline number up 0.4% vs. last month's upwardly revised 0.3% (from 0.2%), and views for 0.3%. The y/y rate was up 3.0% vs. last month's upwardly revised 2.6% (from 2.2%), and the consensus for 2.6%. The core rate (ex-food & energy) came in at 0.2%, down a bit from last month's 0.3%, and in line with estimates. The y/y rate was up 3.4% vs. last month's 3.1% and views for 3.2%.

This report came in above expectations vs. the previous day's CPI report (retail inflation), which came in as expected, albeit still a bit higher, although not as much as the PPI.

Nonetheless, the report does not seem to be enough to change expectations for what the Fed does at next week's meeting (12/17-18). The CME's FedWatch tool puts the odds at 96.5% that the Fed cuts rates by 25 basis points next week, which is only down slightly from the previous day's 98.6%.

But if these inflation reports keep coming in above expectations, and rising, it could have an impact on what the Fed does next year.

Regardless, there's still a strong case to be made for lower interest rates even beyond December.

Especially if one were to assume that 100 basis points above inflation is the natural rate (aka the neutral rate) to allow for growth, but keep inflation in check. With core PCE currently at 2.8%, then bringing rates down to 3.8% is where things should be, which is 83 basis points below our current Fed Funds midpoint level of 4.63%. So even after another 25 basis point cut in December, it would still mean interest rates are 58 bps too high.

The next PCE inflation report comes out on 12/20. But that's 2 days after the FOMC announcement on 12/18.

In other news, yesterday's Weekly Jobless Claims rose 17,000 to 242,000 vs. the consensus for a decrease of -5,000 to 220,000. The smoother 4-week moving average, however, came in at 224,250. But that was also up 5,750 vs. last week's 218,500.

Today, the only reports on the docket are Import and Export Prices and the Baker Hughes Rig Count report.

Just one more trading day left in the week. At the moment, only the Nasdaq is up for the week. If they keep it that way, that'll make it 4 up weeks in a row.

After today, there's just 2 weeks and 2 trading days left in the year.

It's been a spectacular year so far for all of the indexes.

And with Q4 being the best quarter of the year, I expect to finish the year on an even stronger note.

Best,