#美国6月PPI年率5.5% PPI plunges overnight! The probability of a rate hike for July crashes to 5%, and Wash makes his debut before Congress promising “zero tolerance”

On July 15, the U.S. Bureau of Labor Statistics released June PPI data, which was broadly below market expectations. Following the cooling of CPI that came in hotter-than-expected the day before, further weakness in PPI led traders to unwind their bets on a July rate hike by the Federal Reserve. However, the new Fed chair, Wash, still delivered a “zero tolerance” message during his first appearance before Congress, leaving uncertainty over the subsequent policy path.

PPI falls broadly short of expectations: energy prices are the key driver
Data show that June U.S. PPI rose 5.5% year over year, far below market expectations of 6.2%, with the prior value at 6.0%. On a month-over-month basis, PPI fell 0.3%, versus expectations for flat (0%). For core PPI, June increased 4.7% year over year, below expectations of 5.2%; month over month it rose 0.2%, below expectations of 0.4%.
A sharp drop in oil prices is the core factor behind the PPI cooling beyond expectations. In June PPI, energy costs fell 6.4% month over month, aligning with the CPI data where the energy index fell 5.7% month over month and gasoline prices dropped 9.7%. However, upstream cost pressure has not eased—prices for processed goods, raw materials, and metal categories are still rising.

CPI + PPI both fall: a signal of an inflation turning point?
Previously, the June CPI released on July 14 was also broadly below expectations:
CPI year over year: 3.5%, below expectations of 3.8%, prior 4.2%
CPI month over month: -0.4%, the first month-over-month contraction since April 2020
Core CPI year over year: 2.6%, below expectations of 2.8%
Core CPI month over month: unchanged, the smallest increase since January 2021
Housing inflation continues to cool as well: the June housing index rose only 0.1% month over month, the smallest month-over-month increase since January 2021. Structural divergence remains clear: prices for auto insurance, communications, apparel, and medical care declined, but service prices such as entertainment, household furniture, and personal care stayed resilient.

Rate-hike expectations plunge: July probability only 5%
After the data were released, the market quickly repriced. Current pricing in interest-rate futures and swaps indicates:
July rate-hike probability: down to about 5% (CME data show the probability of holding the rate steady at 88.8%, and a 25bp hike at 11.2%)
September rate-hike probability: about 40% (holding the rate steady 51.2%, a 25bp hike 44%, and a 50bp hike 4.7%)
U.S. stock index futures rose, and Treasury yields fell. Spot gold jumped by nearly $20 in the short term. The rate-hike expectations that had briefly warmed up cooled abruptly again, and the monetary policy path is facing a recalibration.

Wash’s debut before Congress: zero tolerance + AI may not raise inflation
Federal Reserve Chair Kevin Wash completed his first appearance before Congress since taking office. At the half-year monetary policy hearing of the House Financial Services Committee, Wash sent several key signals:
First, “zero tolerance” for inflation. He said that the continued inflation running above its goal for the past five years in itself is a failure of duty, and that the interest-rate tool still remains among the options. “Inflation is a choice, which means monetary policy makers need to choose lower prices.”
Second, the AI boom may not necessarily drive inflation higher. Wash believes that price increases stemming from a surge in artificial intelligence construction may not stimulate inflation; he expects AI to boost productivity and wages. The five working groups he set up will “start from a blank sheet” to review the Fed’s framework.
Third, emphasize independence. Wash said Trump has not tried to influence monetary policy making.
On the same day, William Williams, president of the Federal Reserve Bank of New York, said the current monetary policy stance is “in a favorable position,” and expects total inflation to fall back to around 3.25% by year-end, closer to the target in 2027, and reach 2% in 2028.

Beige Book: moderate expansion for the economy, with oil prices as an uncertainty factor
The Fed’s Beige Book released on the day showed that between late May and June, 11 of the 12 Fed districts recorded slight to moderate growth. Overall prices rose moderately: prices in nine districts rose moderately, and the overall increase was flat or slowed compared with the previous period. Employment rose overall, but in seven districts changes were very small or unchanged. Multiple districts explicitly pointed out that the future trajectory of fuel costs has a high degree of uncertainty.

A look inside PPI components: upstream pressures not gone
Although overall PPI cooled beyond expectations, the structural divergence deserves attention. Within PPI components, transportation and warehousing prices declined somewhat; however, freight rates stayed elevated due to rising fuel costs and a shortage of truck drivers caused by the Trump administration tightening immigration policy. Airline ticket prices and investment portfolio management fees included in the PCE price index rose noticeably, which could support future core inflation.
In addition, the New York Fed’s July manufacturing business outlook index rebounded sharply: new orders and shipments increased, and employment indicators rose to the highest level since December 2022. Although the prices paid by manufacturers index remains elevated, it has already come down from its peak, and firms’ expectations for future prices have declined, suggesting upstream cost pressures may continue to ease.

Market reaction: stocks, bonds, and gold move together
After the PPI data were released, the market responded quickly: U.S. stock index futures rose, Treasury yields fell, and spot gold jumped by nearly $20 in the short term. The U.S. dollar index weakened, while offshore RMB strengthened. Rate-hike expectations, which had briefly warmed earlier, cooled sharply again, and the monetary policy path faces reassessment.
Wu Qiti, head of research at Yuan Daw Information Securities, said the cooling in market rate-hike expectations is reasonable: the probability of another Fed rate hike this year has already fallen significantly, and the chance of an aggressive hike can basically be ruled out. However, he also cautioned that if a black-swan event emerges later—such as a rapid deterioration of the Middle East situation leading to a sharp spike in energy prices and an unexpected rebound in inflation data—the Fed would not rule out restarting a small rate-hike.

The next round of trading: inflation cools vs geopolitical risk
The broadly weak June inflation data temporarily eased the market’s concern about an upcoming rate hike. But the stickiness in core services prices, the structural high level of transportation costs, and energy-price uncertainty driven by renewed escalation in the Middle East conflict suggest the current easing trend may only be temporary. The final decision at the Fed’s July policy meeting, whether geopolitical risks will deliver new shocks to supply chains, and whether subsequent inflation data can continue to show a cooling trend will be key variables in determining where the market goes next. Amid the tug-of-war between “dovish surprises” and “hawkish testimony,” investors need to stay flexible and closely watch every data inflection point.