#USPPIComesInBelowExpectations

US PPI Miss Reinforces Cooling Trend The June U.S. Producer Price Index disappointed once again, registering 5.5% year-over-year for June versus 6.2% estimated. This was a moderation from the prior month’s downwardly revised reading of 6%, and a -0.3% move month-over-month-the steepest drop since April 2020.

A dramatic 12% slide in gasoline prices made up approximately two-thirds of the decline in goods prices.

When coupled with last week’s softer U.S. CPI, the report boosts confidence of widespread disinflation throughout the supply chain. Market reaction Yields and rate hike probabilities were adjusted following the data: A July rate hike probability currently sits at just under 15% and September odds are just over 45%.

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Treasury yields drifted lower as markets price in a more dovish monetary policy stance in the months ahead.

Fed Caveats The Fed is unlikely to claim “mission accomplished” following just one better print, as Fed Chair Warsh recently articulated in reminding the market of the Fed’s “zero tolerance” approach towards inflation, as well as noting that current measures are not a perfect representation of actual price pressures. Scenario Analysis A bullish view relies on both CPI and PPI trends continuing to moderate, signaling a soft landing scenario and potential for rate cuts sooner rather than later. A bearish view assumes price declines for commodities like energy reverse quickly, while stubbornly high service sector prices force the Fed to stay on hold longer.

The base case, however, is that inflation does continue to gradually decline, though the Fed will remain in a wait-and-see approach to gauge more robust data. Takeaway This PPI reading offers more substantive evidence that the rate of inflation is decreasing at the producer level. Although markets should view the report in a positive light, the Fed's rhetoric suggests they remain on guard.

The climb to 2% is likely not a smooth one, however the sequence of soft prints should begin to shift the immediate future to a more positive trajectory.

‍#USInflation #PPI #FedPolicy @Gate_Square