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.