In July, the US Producer Price Index (PPI) rose by 3.3% compared to last year. This was higher than the expected 2.5%. Month-on-month, the PPI went up by 0.9%, surpassing the 0.2% estimate. Excluding food and energy, the PPI also increased by 0.9%, again above the forecast of 0.2%. Year-on-year, PPI excluding these categories reached 3.7%, compared to the 2.9% estimate. Additionally, PPI excluding food, energy, and trade rose by 0.6% month-on-month and 2.8% year-on-year. Final demand services saw a 1.1% increase, bouncing back from a 0.1% decline in June. Final demand goods rose by 0.7%, while trade services improved by 2.0%, after a previous drop of 0.3%.

Federal Reserve Interest Rate Expectations

Interest rate expectations from the Federal Reserve have changed. There is now a projection of 58 basis points in rate cuts before the year’s end, with a 93% chance of a 25 basis point cut in September. In the financial markets, the yields have changed: the 2-year debt yield rose to 3.713%, the 10-year to 4.248%, and the 30-year yield decreased slightly to 4.827%. US stocks fell, with the Dow down 167 points, the S&P down 30.08 points, and the Nasdaq down 129 points. Today’s PPI numbers surprised everyone, showing a much larger increase than anticipated. This rise in business costs creates uncertainty about the Federal Reserve’s next moves. We believe this uncertainty will lead to more market volatility in the coming weeks. Traders should think about protecting themselves against a market downturn. With producer costs rising quickly, corporate profits could take a hit. Some companies are already giving cautious guidance for the future. Buying put options on indexes like the S&P 500 (SPY) or the Nasdaq 100 (QQQ) may be a smart strategy.

Rate Cut and Dollar Strength

The likelihood of a rate cut in September has declined but remains significant. We can use interest rate derivatives like SOFR futures to bet that the Fed will not cut rates as aggressively as the market previously expected for the remainder of 2025. The CME FedWatch Tool shows this shift, indicating a drop from the near-certain cuts we saw last week. This situation also suggests a stronger U.S. dollar. If the Fed is less likely to cut rates due to persistent inflation, the dollar becomes a more attractive option. The U.S. Dollar Index (DXY) has already risen to over 104.5, a multi-week high, and trading options on currency ETFs can take advantage of this trend. We should also monitor the bond market, particularly the yield curve. The two-year yield has increased more than the ten-year yield, indicating concern about near-term policy. Historically, when unexpected inflation reports surfaced, like those in 2022, the Cboe Volatility Index (VIX) often jumped above 25, signaling increased fear. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now