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A lower-than-expected producer inflation report sparked bullish sentiment in Tuesday’s premarket trading, as traders increased their bets on a larger Federal Reserve interest rate cut next month.
In July, the headline Producer Price Index (PPI) for final demand edged up by 0.1% month-over-month, slowing from June’s 0.2% increase and missing economists’ expectations of a 0.2% rise, according to TradingEconomics.
On an annual basis, the PPI climbed by 2.2% compared to July 2023, down sharply from 2.7% in the previous month and below the anticipated 2.3%.
The core PPI, which excludes food, energy, and trade services, remained flat month-over-month, falling short of the expected 0.2% increase and decelerating from June’s revised 0.3% growth. Annually, the core PPI increased by 2.4%, down from the previous 3% and below the forecasted 2.7%.
Before the release of the PPI report, investors had assigned a 52% probability of a 50-basis-point rate cut in September, slightly outweighing the 48% chance of a smaller reduction, according to the CME Group’s FedWatch tool.
Following the PPI release, traders slightly increased their bets on a larger rate cut, with market-implied probabilities rising to 55%.
During Tuesday’s premarket trading, the following moves were observed across major asset classes:
Attention now shifts to July’s Consumer Price Index (CPI) report, scheduled for release on Wednesday at 8:30 a.m. ET.
Economists expect the CPI to rise by 2.9% year-over-year in July, down slightly from June’s 3% increase. The Core CPI, which excludes volatile food and energy prices, is anticipated to rise by 3.2%, also a minor decrease from the previous 3.3%.
If the consumer inflation data comes in below expectations, it could further strengthen the case for a more substantial Fed rate cut. Conversely, if inflation shows signs of persistence, traders may shift back toward betting on a smaller cut or even the possibility of no cut in September.
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Image created using artificial intelligence via Midjourney.