PPI throws tariffs into the punchbowl, but the party isn’t over yet

This market had been running like it stole something — record highs stacked like poker chips, sentiment fat and happy — until Thursday’s PPI print came along and flicked the lights.

The tape didn’t break, but you could feel the mood shift. S&P and Nasdaq barely blinked at -0.1%, Dow slipped a touch more, but the intraday tone went from champagne to club soda. The problem wasn’t just one number — it was the market realizing the tariff tollbooth might be charging sooner than expected. July’s Producer Price Index rose 0.9% versus the 0.2% economists were hoping for, and core PPI clocked its most significant monthly jump since March 2022. For a Fed that’s been coaxed toward aggressive rate cuts by softer CPI and a slowing jobs market, that’s a buzzkill.

Big tech mostly held the fort — Amazon popped +3%, Nvidia, Microsoft, Google, Meta, Broadcom all green. Tesla (-2%) and Apple (fractional red) were the exceptions. Beneath the surface, roughly 400 S&P names bled. Deere got threshed (-6% on earnings), Tapestry swan-dived 14%.

Bonds felt it first. Ten-year yields shot from 4.20% to 4.29% after the print, two-year yields up to 3.74%. Fed funds futures, which had been pricing a September cut as gospel yesterday, now show ~85% odds, with the “three cuts in 2025” crowd walking back to “probably two.” The 50bp September fantasy cut that Bessent mentioned earlier this week? Still technically alive, but with a heartbeat you’d need an ECG to detect — unless the next jobs report faceplants or Powell delivers a more dovish-than-expected speech at Jackson Hole.

The Fed’s problem is simple: CPI says consumer inflation is tame, but PPI says cost pressures — especially on tariff-heavy goods — are building. Up to now, corporates have been swallowing tariffs to protect market share, but that trick has a shelf life. In my book, you can only bankroll Washington’s trade games out of your margins for so long before the shareholders start banging on the door wanting to know why their dividend check just got skinny. If that pass-through starts in earnest, Q3/Q4 earnings will feel it before the consumer does.

Powell’s July FOMC message was “more data on tariffs before committing.” Thursday’s PPI gives the hawks cover to keep September alive, but slow the pace later. The market is already gaming it — maybe a less dovish cut in September, a 25bp trim with a “don’t get used to it” disclaimer.

The dollar, which had been limping, caught a bid. EUR/USD’s run toward 1.1800 got smashed by an ugly Eurozone industrial production print that makes the recent “green shoots” chatter look like frontloading weeds. Instead of a DXY move to 97.50, now we’re talking about a return to the 98.50-handle if US retail sales pop on Friday.

Here’s the August trader’s dilemma: everything is still rowing in the same direction — retail flows, corporate buybacks, CTA positioning, cash-rich households, geopolitics more bark than bite, and a Fed leaning toward easing. In that kind of tape, the real pain trade is still higher. The question is whether we burn the oxygen here at all-time highs, or whether the institutional money finally chases and forces another leg up.

For now, the summer melt-up has met its first real speed bump. But if retail sales come in just right, this car’s still got plenty of gas — and when August smells momentum, September might floor it.