The Producer Price Index (PPI) for July posted a significant decline, providing further evidence of the ongoing disinflationary momentum in the U.S. economy. This development reinforces the argument for the Federal Reserve to soon cut interest rates.
The overall producer basket rose by 2.2% year-over-year, a significant decrease from the previous month’s 2.7%. This figure also came in below economists’ expectations of 2.3%.
Breaking down the monthly figures, the headline PPI for final demand rose by a modest 0.1%, a slowdown from June’s 0.2% increase. This growth was lower than the anticipated 0.2% increase.
Energy prices played a significant role in the overall PPI increase, rising by 1.9%. However, prices for final demand services decreased by 0.2%, marking the largest drop since March 2023. This decline was mainly driven by a 1.3% drop in the index for final demand trade services.
The core PPI, which excludes volatile food, energy, and trade services, remained unchanged month-over-month. This outcome fell below forecasts of 0.2% growth and marked a deceleration from the upwardly revised 0.3% growth in June. On an annual basis, the core PPI stood at 2.4%, down from the previous month’s 3% and below the projected 2.7%.
Before the release of the PPI report, investors assigned a 52% probability to a 50-basis-point rate cut in September, slightly outweighing the 48% chance of a smaller reduction, according to the CME Group’s FedWatch tool. The lower-than-expected PPI reading strengthens the case for a larger rate cut. However, investors will likely give more weight to the critical Consumer Price Index (CPI) report scheduled for release on Wednesday.
The premarket trading activity on Tuesday saw futures for major U.S. equity averages trending upwards, while Treasury yields moved slightly lower across the board.
The broader stock market, as measured by the SPDR S&P 500 ETF Trust (SPY), closed flat on Monday, while the tech-heavy Nasdaq index, tracked by the Invesco QQQ Trust (QQQ), edged up slightly by 0.2%.
