The release of a lower-than-expected Producer Price Index (PPI) report on Tuesday has ignited bullish sentiment in the premarket, with traders amping up their predictions for a more significant interest rate cut by the Federal Reserve next month.
The headline PPI for final demand, which measures changes in prices received by domestic producers, rose a mere 0.1% month-over-month in July. This figure fell short of economists’ expectations of a 0.2% increase and represented a slowdown from the 0.2% rise observed in June. On an annual basis, the PPI climbed 2.2% compared to July 2023, a sharp decline from the 2.7% growth in the previous month and below the anticipated 2.3% increase.
The core PPI, which excludes volatile food, energy, and trade services, showed no change month-over-month. This result also fell short of the anticipated 0.2% increase and represents a deceleration from June’s revised 0.3% growth. Year-over-year, the core PPI increased by 2.4%, down from the prior month’s 3% and below the projected 2.7%.
Before the release of the PPI report, investors had assigned a 52% probability to a 50-basis-point rate cut in September, slightly edging out the 48% chance of a smaller reduction, according to the CME Group’s FedWatch tool.
Following the PPI release, traders boosted their bets on a larger rate cut, with market-implied probabilities climbing to 55%. The premarket saw significant gains across major asset classes: Futures on the S&P 500, tracked by SPY, were up 0.6%. Nasdaq 100 futures, closely followed by QQQ, rallied 0.9%. Russell 2000 futures, tracked by IWM, were 0.8% higher. U.S. Treasury bonds, as monitored through TLT, rose about 0.5%. Gold prices, as replicated by GLD, dipped by 0.1%.
All eyes are now on the Consumer Price Index (CPI) report for July, scheduled for release on Wednesday at 8:30 a.m. ET. Economists anticipate the CPI to rise by 2.9% year-over-year in July, a slight decrease from June’s 3% increase. The Core CPI, which excludes volatile food and energy prices, is projected to rise by 3.2%, also a minor decrease from the previous month’s 3.3%. If the consumer inflation data falls below expectations, it could further strengthen the case for a more substantial Fed rate cut. However, if inflation shows signs of persistence, traders might shift back towards betting on a smaller cut or even the possibility of no cut in September.
