PPI Data Surprises Markets

STOCK INDEX FUTURES

Stock index futures jumped higher after PPI inflation data showed a 0.1% decline in final demand prices, following increases of 0.7% in July and 0.1% in June.  On a year-over-year basis, the index rose 2.6%. Core PPI, excluding food, energy, and trade services, rose 0.3% in August and 2.8% over the past year, marking the largest annual increase since March 2025. Markets will now eye Thursday’s CPI inflation data for more clues on the inflation front. A lower reading could add to further bets of a series of interest rate cuts from the Fed before year end.

Stocks got a boost yesterday after Oracle said its cloud revenue will jump thanks to the AI boom. Its shares jumped over 30% in premarket trading today despite a quarterly earnings miss amid optimism that the AI infrastructure build-out is picking up pace. On the trade front, Trump has urged the EU to join the US in imposing new 100% tariffs on India and China in an effort to push Russia to participate in talks on the Ukraine war.

INTEREST RATE MARKET FUTURES

Futures are higher across the curve, bouncing higher following today’s PPI inflation data, which showed a decline in final demand prices. On a year-over-year basis, the index rose 2.6%. The monthly decrease was driven by a 0.2% drop in final demand services, particularly a 1.7% decline in trade service margins, with machinery and vehicle wholesaling margins falling 3.9%. However, transportation and warehousing services rose 0.9%, and portfolio management prices increased by 2.0%. Final demand goods edged up 0.1%, led by a 2.3% rise in tobacco product prices, while energy prices fell 0.4%, including a 1.8% drop in utility natural gas. Core PPI, excluding food, energy, and trade services, rose 0.3% in August and 2.8% over the past year, marking the largest annual increase since March 2025. Despite the overall cooling, the continued increases in core PPI inflation will likely catch eyes from members at the Fed as core inflation is likely to remain sticky and has shown persistent price increases in the last several readings.

CPI inflation data out Thursday could temper some rate bets if inflationary figures come in hot. Economists expect inflation to grow into the fall, although it remains to be seen whether or not tariff-induced price inflation will be more of a one-time increase or a consistent increase in prices. Despite the inflation fears, markets continue to price in multiple cuts over the coming months, which could leave the yield curve vulnerable to hotter inflation data.

The $58 billion Treasury auction in three-year notes saw strong demand on Tuesday. The auction fetched a 2.73 bid-to-cover ratio, beating the 2.55 six auction average. Indirect bids at 74.2% were higher than the 62.1% average, though even with the lower-than-average direct bid of 17.4%, dealers were left with a below average take of 8.4%, half the 15.9% average. The auction did underscore waning interest from traditional direct bid investors and reflected the growing demand from money market funds, a dynamic that has been seen at recent auctions. The market is mostly focused on investor interest in the long end and will gauge that at today’s 10-year note and, especially, Thursday’s 30-year bond auctions.

The US economy added 911,000 fewer jobs in the year through March 2025 than initially reported, marking the largest downward revision since at least 2000, according to the BLS’s preliminary benchmark revision. This -0.6% adjustment contrasts with the average absolute revision of 0.2% over the past decade. Most sectors saw downward revisions, notably leisure and hospitality (-176K), professional and business services (-158K), retail trade (-126.2K), and wholesale trade (-110.3K), while transportation and warehousing (+6.6K) and utilities (+3.7K) saw modest upward adjustments. The revision reflects discrepancies between two independent employment measures and suggests the labor market was weaker than previously believed.

The US Treasury market is experiencing a unique supply/demand dynamic shift. Recent government debt auctions have shown a changing profile of who is purchasing government bonds, with demand from traditional investors like central banks and pension funds waning and unlikely to come back. Instead, short-term investors such as money market funds have picked up supply. The new mix of investors is likely to lead to a more volatile market for longer-dated debt, as short-term investors will be more price sensitive than traditional investors, like pension funds, who tended to hold onto their bond investments. Demand from pension funds has dwindled in recent years due to funds switching from defined-benefit schemes, which provide a guaranteed income at retirement, to defined-contribution schemes, which depend on investment performance. Defined-benefit schemes use government bonds, while defined-contribution schemes favor equities. These developments also come at a time when central banks are selling their holdings of government debt (quantitative easing), and governments are increasing spending, driving up bond issuance. This has resulted in investors demanding more term premium on longer-dated debt, while shorter-term debt has remained closer to current interest rate levels, steepening the yield curve. In response, governments have increased short-term debt issuance in order to avoid steeper borrowing costs, which has the potential to reduce liquidity in longer-dated bonds and make them more volatile. The Treasury will auction $39 billion in 10-year notes on Wednesday and $22 billion in 30-year bonds on Thursday. Markets will be eyeing the composition of the auction share for further clues on investor demand.

The spread between the two- and 10-year yields fell to 53.4 bps from 53.8 bps on Tuesday.

CURRENCY FUTURES

The USD index is little changed after PPI inflation data showed a 0.1% decrease for prices in August, further adding to the case for a rate cut in September and beyond. Although markets will still need to digest tomorrow’s CPI inflation data, which could temper some rate cut bets after the September meeting if the reading comes in hotter-than-expected.  Payroll data revisions on Tuesday showed that the labor market added nearly a million fewer jobs than previously estimated from April 2024 to March 2025, suggesting a far weaker labor market than initially suspected. The data was largely shrugged off by markets.

Euro futures are lower US inflation data came in weaker-than-anticipated. French President Emmanuel Macron appointed loyalist and former conservative Sébastien Lecornu as prime minister, defying expectations of a shift to the left. On the central bank front, the European Central Bank is expected to leave interest rates on hold this month and offer little guidance for clues on future moves out of the bank. ECB policymakers have recently said the bank is in a good place and well positioned for any economy moves after it achieved its target of reaching 2% inflation earlier in the summer. Eurozone GDP grew just 0.1% in Q2, slowing from 0.6% in Q1, largely due to a 0.3% contraction in Germany amid US tariffs. The data, alongside rising inflation and falling unemployment, supports expectations that the ECB will hold rates steady.

British pound futures are little changed, propped up by the interest rate outlook, as markets seem it is unlikely the Bank of England will move to cut rates in the near future. Gross domestic product data out of the UK for the month of July remains the main focus of the week ahead of the BoE’s policy meeting next week. A solid GDP reading would add to expectations that the central bank will leave rates on hold, while a weak reading could add to some bets of a rate cut. Money markets are showing a slim chance of even one rate cut out of the bank this year, given inflation in the UK remains well above the bank’s 2% target and the economy has fared relatively well without any signs of a serious weakening. Governor Andrew Bailey told MPs there is “considerably more doubt” about the timing of UK rate cuts. The economy expanded 0.4% in June, and economists are expecting Friday’s figures to show no growth with a reading of 0.0%. Markets will also be watching industrial production and trade data for July, also released on Friday.

Japanese yen futures are lower despite a weak US PPI reading and a solid five-year debt auction. The Japanese five-year government note auction saw solid demand at the first debt auction since the resignation of fiscally conservative Prime Minister Shigeru Ishiba. The auction fetched a bid-to-cover ratio of 3.7, on par with the yearly average and stronger than August’s weak 2.96 bid-to-cover ratio. Recent yield increases, especially in long-dated JGBs, have reflected growing global concerns over fiscal deficits and political instability following Ishiba’s departure after a poor election showing. Investors are focusing on the chance of Ishiba being replaced by an advocate of looser fiscal and monetary policy. On the data front, revised government data showed that GDP grew more than initially measured in the second quarter, with the economy growing 0.5%, a step above the initial 0.3% reading. Private consumption increased 0.4% from the previous quarter, compared with a 0.2% rise in the preliminary reading, while capital expenditure growth was revised to 0.6%, compared with the initial estimate of 1.3%. Markets will continue to monitor the Japanese economy for signs of growth in domestic demand for clues as to when the Bank of Japan will resume its interest rate hike cycle again.

Australian dollar futures are higher, with the AUD hitting its highest level in nearly two months, likely catching support from higher commodity prices. Interest rate cut bets for the Reserve Bank of Australia were scaled back last week when GDP figures showed the economy grew 0.6% during the second quarter. Annual growth came in at 1.8%, beating expectations of 1.6% growth. Domestic demand was the main driver of growth, led by household and government spending. Household spending grew 0.9% in Q2. The increase in household spending could put pressure on prices and limit the number of future rate cuts from the RBA. Money markets are now pricing an 86% chance of a rate cut in November, down from 100% before the data was published. Markets are pricing in no cut from the bank at its September meeting.

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