The US Producer Price Index (PPI) for July showed a surprising increase of 0.9%, well above the expected 0.2%. On a yearly basis, the headline PPI rose by 3.3%, while the core PPI went up to 3.7%. These results stirred some uncertainty because they were influenced by warehousing and transportation—industries that usually don’t rely heavily on labor. The stock market reacted by reversing earlier declines, ending nearly unchanged with variations of just 0.03%.

Rising US Yields

US yields increased across the board as the odds of a September interest rate cut fell to 94%. Previously, there was a 6% chance for a 50 basis point cut, which has now shifted to a similar likelihood of maintaining current rates. The US dollar gained strength against several currencies, making the most significant strides against the AUD and NZD. It also saw notable increases against the EUR, JPY, GBP, CHF, and CAD. St. Louis Fed President mentioned that inflation is above target and noted signs of weakness in the labor market. They expect that the impacts of tariffs might lessen but could still last. Fed President Barkin pointed out improved business sentiment but also remarked on slower hiring. Crude oil futures climbed, gold prices fell, and Bitcoin experienced a sharp decline, while the US Treasury Secretary considered options for acquiring more Bitcoin. The unexpected rise in producer price inflation raises doubts about the likelihood of a September rate cut. This signals a need to consider hedging against high interest rates, possibly by looking at options on Treasury futures if the Federal Reserve delays easing.

Market Indecision

According to live data from the CME FedWatch tool, the chance of a September rate cut has decreased from a certainty to 94%. This situation echoes the market’s ups and downs in 2023, where traders frequently adjusted their expectations based on each Fed meeting. Derivative traders should be ready for increased volatility as we approach the next Fed decision, possibly using options on the VIX or major indices. The US dollar is significantly strengthening, especially against the Australian and New Zealand dollars, a typical reaction to rising US yields. We see continued dollar strength as a straightforward trade, suggesting call options on dollar-tracking ETFs like UUP. The weakness in commodity currencies hints at growing concerns about global growth. With the stock market recovering from losses to finish the day flat, investors are clearly divided. The tug-of-war between inflation worries and hopes for a soft landing presents opportunities for options strategies that profit if the S&P 500 remains in a specific price range. Meanwhile, holding protective puts on index ETFs like SPY is a wise move in case inflation data triggers a market drop. The upcoming meeting between Presidents Trump and Putin is a significant unknown, particularly for energy markets. Today’s rise in crude oil to over $63 a barrel reflects some of this geopolitical tension. We’re considering call options on oil ETFs to speculate on potential supply disruptions from the discussions. Bitcoin’s sudden drop was shocking, but news from the Treasury Secretary about possibly acquiring more Bitcoin shifts the landscape. This hints that any downturn could be temporary and viewed by the government as a chance to accumulate strategically. For us, buying long-dated call options on Bitcoin ETFs seems like an attractive way to position for a possible rebound. Create your live VT Markets account and start trading now.

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