The implied probability for a 50 bps rate cut by the Dec.16 meeting has receded from yesterday's 98% expectation.

The U.S. Department of Labor's seasonally adjusted headline measure of producer price inflation fell more than expected, with a 2.8% month-over-month decrease in October, pushing the annual advance to 5.2%. The core measure of producer price inflation rose 0.4% in the month, resulting in a 4.4% rise year-over-year.

Currency Strategists at Brown Brothers Harriman said sharp declines in fuel costs - the largest in 22 years - will likely revive talk of deflation.

"Inflation expectations are at 2.01%, down from 2.4% in mid-Nov but still well off the 1.51% low posted in September," they wrote. "Still, the data aren't likely to alter the outlook for the FOMC in Dec. We expect a 25 bp cut to 0.75% as do the majority of forecasters."

Economists at Scotia Capital agree that the Fed's focus has shifted from inflation to deflation.

"The big fear now is deflation, which is why we don't think the monetary and fiscal stimulus packages to date will lead to inflation as many have argued," they wrote. "It is also one of the reasons why we believe the Fed can cut rates even further, looking for a 50 bps cut on December 16th, which will bring the target rate down to 0.5%."

By Steve Stecyk, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Sarah Sussman, This email address is being protected from spam bots, you need Javascript enabled to view it

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