Understanding the forecasts for the US Producer Price Index (PPI) is important. When actual PPI numbers differ from what was expected, it can cause surprising changes in the market. ### Annual and Monthly PPI Forecasts For the annual PPI, forecasts are as follows: – **2.7%** (5%) – **2.6%** (18%) – **2.5%** (64% consensus) – **2.4%** (13%) Monthly PPI expectations are: – **0.4%** (2%) – **0.3%** (42%) – **0.2%** (46% consensus) – **0.1%** (10%) ### Core PPI Forecast Distribution Core PPI forecasts include: – Annually: – **2.9%** (5%) – **2.8%** (25%) – **2.7%** (65% consensus) – **2.6%** (5%) – Monthly: – **0.3%** (27%) – **0.2%** (64% consensus) – **0.1%** (9%) The focus is primarily on the Core figures rather than the headline PPI. The US dollar gained value after a weak US CPI report. Initially stable, the currency saw significant interest an hour after the report’s release, likely due to the unwinding of crowded short US dollar positions. Expectations for a rate cut have changed. Current pricing shows 44 basis points of easing by the end of the year, down from 47 basis points. Depending on the US PPI report today, these expectations may shift. A weak report could raise easing expectations to 50 basis points and reverse recent dollar gains, while strong data might raise concerns about increasing prices in the months ahead. We noted the closely held forecasts, which indicated a strong consensus around a 0.2% monthly core reading. However, the actual May data came in at 0.0% for core PPI, a major surprise. This result was confirmed when the Bureau of Labor Statistics released the numbers on June 13th and could impact the US dollar significantly. ### Market Expectations and Strategy We expect that the 44 basis points of easing priced in after the CPI report will rise significantly. Following the unexpectedly weak producer price data, the CME FedWatch Tool indicates the likelihood of a rate cut by September has surged above 60%. This change suggests that the unwinding of short dollar positions seen yesterday might reverse sharply. With consecutive softer inflation reports, there’s an opportunity in the options markets to position for further dollar weakness. Traders could look into buying call options on currencies like the Euro or British Pound against the US dollar. This approach provides a defined-risk way to profit from a potential trend of renewed disinflation in the U.S. We believe the market might now be entering a phase similar to late 2023, where every weak data point spurs aggressive bets on Fed easing. Traders using interest rate futures and swaps should be ready for a dovish shift across the yield curve. Positioning for lower short-term rates in the upcoming weeks appears wise as the market absorbs the evidence of slowing price pressures. Create your live VT Markets account and start trading now.

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