Markets digested the shocking US PPI too quickly
|The release of US producer price data briefly shocked local markets. The data came in significantly higher than expected, reviving doubts that the Fed has a clear way to cut rates.
Producer prices rose 0.9% last month after 0.0% the previous month, while annual inflation accelerated from 2.4% to 3.3% against expectations of 0.2% and 2.5%, respectively. The core index, excluding raw materials and energy, grew just as rapidly in July: +0.9% m/m and +3.7% y/y, after 0.0% m/m and 2.6% y/y a month earlier.
In the wake of this data, the futures market has zeroed out the chances of an absurd 50 bps cut in September and gives a 93% probability of a 25-point reduction. The Fed will have to work hard to change this sentiment, which also includes a 43% confidence in three cuts by the end of the year (it was 57% before the PPI release).
Nevertheless, we believe the market's confidence in the Fed's dovish stance is excessive. The jump in producer prices was driven by services, not the impact of tariffs on goods. In addition, the core index shows an impressive acceleration, as in the CPI. This indicates a dangerous strengthening of pro-inflationary trends, despite the relative weakness of the labour market.
The combination of weak labour market data, high core consumer inflation, and shocking PPI figures is turning the markets' attention to how the Fed will interpret the data. Powell, who is scheduled to speak at the influential Jackson Hole symposium at the end of next week, will best convey this.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.