Producer Prices Slow More Than Expected In July, Bolster Fed Rate Cut Wagers

After an unexpected uptick in June, July’s Producer Price Index (PPI) posted a welcome decline Tuesday, reinforcing the broader disinflationary momentum in the U.S. economy and adding weight to the case for imminent rate cuts.

On an annual basis compared to July 2023, the overall producer basket rose by 2.2%, marking a steep reduction from the previous 2.7% and coming in below the expected 2.3%.

July PPI Report: Key Highlights

• In July, the headline PPI for final demand rose by 0.1% month-over-month, decelerating from June’s 0.2% and falling short of economist expectations – as tracked by TradingEconomics – of a 0.2% increase.
• The 2.2% annual surge in the headline number represented a 0.5 percentage point increase from the June print, and came in below estimates of 2.3%.
• Nearly 60% of the increase in the PPI can be attributed to a 1.9% rise in the final demand energy index.
• In contrast, prices for final demand services dropped by 0.2% in July, marking the largest decrease since March 2023, when they also fell by 0.2%. The decline was primarily driven by a 1.3% drop in the index for final demand trade services.
• The core PPI – which tracks prices for final demand less foods, energy, and trade services – posted an unchanged monthly pace, below estimates of 0.2% and decelerating from June’s upwardly revised 0.3% growth.
• On an annual basis, the core PPI came in at 2.4%, down from the previous 3% and below the forecasted 2.7%.

Market Reactions

Prior to the PPI report, Investors assigned a 52% probability of 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.

The lower-than-expected PPI reading strengthens the argument for a larger rate cut, though investors will likely assign a higher weight to the crucial Consumer Price Index (CPI) report set to be released Wednesday.

Futures on major U.S. equity averages traded higher during Tuesday’s premarket trading. Treasury yields inched slightly lower across the board.

On Monday, the broader stock market, as tracked by the SPDR S&P 500 ETF Trust SPY, closed flat, while the tech-heavy Nasdaq index, monitored by the Invesco QQQ Trust QQQ inched up slightly by 0.2%.

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