After the PPI Report, Traders Pare Down Fed Rate Cut Bets on Us Treasuries

U.S. Treasury prices declined Thursday as a stronger-than-anticipated reading on wholesale inflation dampened expectations for a Federal Reserve rate cut next month.

‍

The two-year Treasury yield, which closely reflects changes in Fed policy, erased earlier losses and rose two basis points to 3.69% in morning trading in New York. Meanwhile, the U.S. dollar strengthened against a basket of major currencies as investors recalibrated their outlook on monetary easing.

‍

According to the Bureau of Labor Statistics, the producer price index (PPI) surged 0.9% in July, following a flat reading in June. This marks the largest monthly increase since consumer inflation peaked in mid-2022, signaling renewed cost pressures at the wholesale level.

‍

The unexpected rise suggests that inflationary forces remain present in the economy, adding a layer of complexity to the Fed’s decision-making process heading into its September meeting.

‍

Immediately after the report was released, interest-rate swaps indicated a 90% probability that the Fed will cut rates in September down from 100% just a day earlier when markets had fully priced in an easing move.

‍

This shift underscores how sensitive investor sentiment remains to incoming economic data. A hotter inflation print, even at the production level, raises concerns about whether policymakers can move forward with a rate cut without risking inflation’s resurgence.

‍

The market reaction was swift but measured. The uptick in two-year yields reflects a reassessment of the Fed’s near-term path, while the dollar’s advance signals investors’ belief that monetary policy could stay tighter for longer if inflation remains sticky.

‍

For fixed-income investors, the latest data serves as a reminder that the inflation narrative is still in play. While consumer prices have recently shown signs of moderation, producer prices tell a different story one that could keep the Fed cautious.

‍

With the Fed’s September meeting just weeks away, traders and policymakers alike will be watching upcoming economic reports closely, including retail sales and additional inflation readings. Any signs of persistent price pressures, particularly in services or supply chains, could influence the central bank’s next move.

‍

Thursday’s PPI surprise has trimmed confidence in an imminent rate cut, reinforcing the Fed’s delicate balancing act between supporting growth and ensuring inflation remains under control. For now, markets are betting on a September cut but not with the same conviction they had just 24 hours ago.

‍