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Markets got a pre-CPI treat on Tuesday in the form of a nice PPI reading.

Producer prices rose in December by 0.2%, slightly lower than analysts' expectations of a 0.4% rise. The core Producer Price Index, which excludes food and energy, was in line with expectations and unchanged from November (+0.3%).

The report generally sets the stage well for tomorrow's closely watched Consumer Price Index (CPI) reading, which is scheduled to be published at 8:30 a.m. ET. However, analysts warn investors not to take the muted reading as a sign of future interest rate cuts.

“We have seen stubbornness in inflation over the past few quarters, leading investors to question whether the Fed jumped in with a 100 basis point rate cut in the second half of last year,” said Brett Kenwell, US investment analyst at eToro. “Strong Monthly jobs report A strong ISM report did not help matters, although it points to a strong economic foundation.

As a reminder, analysts are calling for headline CPI to reach 2.9% annually, which represents an increase from November's reading of 2.7% over 12 months. The core CPI is expected to remain unchanged at 3.3% during the 12 months ending in December.

Looking ahead to March, today's PPI slightly increased the odds of a rate cut by 25 basis points. Fed funds futures currently estimate a 21.6% chance of such a cut, up from 19.4% a day ago.

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