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This week is packed with inflation data for investors to digest, starting with the U.S. government’s release of the Producer Price Index (PPI) report for July on Tuesday, followed by the highly anticipated Consumer Price Index (CPI) on Wednesday.
As economists expect producer prices cooling in July, the PPI could provide early signs of easing price pressures in the economy, offering potential optimism to markets ahead of the CPI report.
Currently, investors assign a 48% chance of a 50-basis-point rate cut in September, slightly lower than the 52% probabilities assigned to a smaller interest rate reduction by the Federal Reserve, as CME Group FedWatch tool shows Monday.
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Recent data from the Institute for Supply Management (ISM) Prices Index for the manufacturing sector showed a reading of 52.9% in July, up from 52.1% in June. This indicates that raw material prices increased in July for the seventh consecutive month after eight months of declines.
Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, noted that 23% of companies reported higher prices in July, compared to 20% in June.
Chris Williamson, chief business economist at S&P Global Market Intelligence, highlighted that in the manufacturing sector, “input cost inflation cooled for a second month after having risen to a 13-month high in May.” However, he also indicated that service providers saw a further sharp rise in input costs, driven by higher wage and transportation expenses.
The latest PPI report for June, published on July 12, showed a slightly hotter-than-expected outcome. The headline PPI for final demand increased by 0.2% month-over-month, up from the flat reading in May and exceeding economists' expectations of a 0.1% increase.
The core PPI rose at a 0.4% monthly pace, up from May's 0.3% growth and outpacing estimates of 0.2%.
The June PPI report was released after a sharper-than-expected drop in the June CPI inflation gauge, leading to the following market reactions on July 12:
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