Pantheon Macroeconomics has reviewed the Consumer Price Index (CPI) and the Producer Price Index (PPI) data. They have updated their core Personal Consumption Expenditures (PCE) prediction to 0.26%, increasing from the previous 0.23% after the latest CPI figures were released. This change will raise the year-on-year core PCE estimate to 2.9%, up from the previous month’s 2.8%.

Core PCE Inflation Predictions

With the latest inflation data, we expect core PCE inflation for July to reach 0.26%. This increases the year-over-year figure to 2.9%, which is a setback from last month’s 2.8%. It indicates that the decline in inflation we experienced in 2024 is facing challenges. This persistent inflation makes it harder for the Federal Reserve to decide on future rate cuts in 2025. While the market anticipated a gradual easing cycle, this data suggests an extended “higher for longer” interest rate environment. We need to adjust our expectations for a more cautious, data-reliant Fed for the rest of the year. For derivative traders, this situation requires quick adjustments to interest rate futures. The likelihood of a rate cut by the December 2025 meeting, which was around 65% on the CME’s FedWatch Tool, is expected to drop below 50%. Traders should reconsider or hedge positions that depend on a rapid easing.

Market Volatility Expectations

We anticipate increased market volatility as this uncertainty is factored in. The VIX, previously stable near 14, is likely to rise towards its historical average of 18. This suggests it might be wise to buy protections, like index put options, or to use strategies that benefit from larger price movements. This outlook also strengthens the U.S. dollar, as higher interest rate expectations boost its attractiveness. We can expect the 2-year Treasury yield, which is very responsive to Fed policy, to rise as a result. Traders might consider long dollar call options or short positions in Treasury note futures to take advantage of this shift. This scenario reminds us of the period from 2022 to 2023 when unexpectedly persistent inflation led the Fed to act more decisively than markets had expected. These events highlighted how quickly market sentiment can change based on a single piece of data. The current data serves as a reminder that the battle against inflation is far from over. Create your live VT Markets account and start trading now.

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