Annual core wholesale inflation has jumped from 2.6% to 3.7%, with the Trump administration’s tariffs being blamed for this increase. Following the inflation report, Dow Jones futures fell by 200 points. Just before markets opened, Dow Jones futures dropped after the Producer Price Index (PPI) showed inflation growth in the wholesale sector. The core PPI, which excludes food and energy, rose to 3.7% year-on-year, exceeding both the expected 2.9% and June’s 2.6%.

Impact of Tariffs on Wholesale Prices

The tariffs implemented by the Trump administration are starting to affect wholesale prices now that the stockpiles built before the tariffs are running low. Last week, the national tariffs were fully enacted after earlier measures on steel and aluminum. After the PPI release, the Dow Jones Industrial Average futures fell from a slight increase around 44,950 to 44,750, down 0.35%. The headline PPI rose to 3.3% year-on-year, surpassing both the expected 2.5% and June’s 2.4%. Both the core and headline PPI saw a monthly increase of 0.9%. This data suggests that inflationary pressures are rising due to policies affecting market prices. The rise in core wholesale inflation to 3.7% is a serious warning. This suggests that producer costs are increasing faster than expected, which may hurt corporate profit margins soon. We need to monitor if companies can pass these costs onto consumers in the upcoming inflation report.

Market Volatility and Strategic Positions

This situation resembles what we faced in the summer of 2018 during trade disputes from the Trump administration. Historical data shows that the Producer Price Index for final demand rose over 3% year-over-year, leading to sharp market sell-offs and increased uncertainty. During that time, the CBOE Volatility Index (VIX) often surged above 20, indicating trader anxiety over price shocks caused by policies. Given this uncertainty, we anticipate that market volatility will likely rise. We should consider buying call options on the VIX or using long straddles on major index ETFs. These strategies would allow us to benefit from the larger price movements we expect as the market adjusts to this inflation news. The immediate 200-point drop in Dow futures shows a bearish initial market reaction. To take advantage of this, we plan to buy put options on indices like the S&P 500 and the Dow Jones Industrial Average. This offers a defined-risk way to profit if rising costs lead to a broader market decline in the coming weeks. This inflation report will likely push the Federal Reserve toward a more aggressive approach. Online tracking of the Fed funds futures market now indicates that the probability of an interest rate hike at the next meeting has jumped from 25% to over 50% just this morning. We should consider shorting interest rate futures to prepare for a central bank that may need to act sooner than expected. It’s important to remember that these pressures won’t affect all companies the same way. Sectors like industrials and consumer discretionary, which rely heavily on international supply chains, are the most at risk. Therefore, we are looking into establishing bearish positions on specific sector ETFs that are most exposed to these rising wholesale costs. Create your live VT Markets account and start trading now.

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