The Ppi Report Drops Stocks and Raises Bond Yields

U.S. equities slipped and Treasury yields climbed after a hotter-than-expected inflation report led traders to scale back expectations for a Federal Reserve rate cut next month.

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S&P 500 futures dipped 0.4%, while two-year Treasury yields which are particularly sensitive to Fed policy shifts rose four basis points to 3.71%. The U.S. dollar index strengthened against most major currencies. In money markets, odds of a September rate cut now stand at 90%, down from full pricing just a day earlier.

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Producer prices jumped in July at the fastest pace since 2022, signaling that businesses may be passing along higher costs tied to tariffs.

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The producer price index (PPI) climbed 0.9% from the prior month the sharpest increase since June 2022, when consumer inflation peaked. On a year-over-year basis, PPI rose 3.3%. Service costs surged 1.1%, the biggest monthly gain since March 2022.

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“The stronger-than-expected PPI, combined with relatively soft CPI, suggests businesses have so far absorbed much of the tariff-related costs instead of pushing them to consumers,” noted Clark Geranen of CalBay Investments. “However, companies may soon change course and start passing these costs through.”

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For Chris Zaccarelli at Northlight Asset Management, the spike in wholesale prices shows inflationary pressures remain embedded in the economy, even if consumers haven’t fully felt the pinch.

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“Given how mild the CPI figures were earlier this week, this PPI surprise is not welcome news,” he said. “It’s likely to chip away at the market’s confidence in a guaranteed rate cut next month.”

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Stephen Brown of Capital Economics echoed that concern, pointing out that Chicago Fed President Austan Goolsbee recently highlighted risks of accelerating service costs. “The latest PPI print reinforces that inflation isn’t as tame as some assumed after Tuesday’s CPI data,” added Chris Larkin of E*Trade. “While this doesn’t eliminate the chance of a September cut, the odds are slimmer than they were just a few days ago.”

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Bond Market Reaction and What Comes Next

According to Ian Lyngen at BMO Capital Markets, the initial market response was clearly negative for bonds. “The data was initially bond bearish, but the reaction soon stabilized,” he said, noting that nothing in the report significantly changed the overall economic narrative or the Fed’s policy outlook.

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Looking ahead, Lyngen added, “There isn’t much on the near-term calendar that we expect will alter sentiment in the Treasury market before tomorrow’s retail sales report.”

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Fed Commentary and Rate Expectations

Meanwhile, U.S. Treasury Secretary Scott Bessent sought to clarify remarks he made earlier in the week about the potential for rate cuts. Speaking to Fox Business, Bessent emphasized he wasn’t advocating for multiple cuts but rather referencing models that indicate a “neutral” interest rate would be about 1.5 percentage points lower than current levels.

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“I didn’t tell the Fed what to do,” Bessent said. “My comments simply pointed out what the models suggest that the central bank could enter a series of cuts if conditions warrant.”

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The unexpected surge in producer prices has complicated the Fed’s near-term policy outlook, tempering expectations for an imminent rate cut. While the central bank remains focused on bringing inflation under control, markets are now recalibrating assumptions as evidence mounts that underlying price pressures particularly in services may be more persistent than anticipated.

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With key data still to come, including retail sales figures, investors are likely to stay cautious as they await clearer signals on whether the Fed will move forward with easing next month.

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