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The producer inflation data released on Thursday unexpectedly had a noticeable, albeit limited, impact on financial markets. However, the shock was neither deep nor long-lasting. Let's try to understand why.
According to the published Producer Price Index (PPI) report, the annual figure unexpectedly rose to 3.3% versus the forecast of 2.5%. The monthly reading also increased sharply from 0.0% in June to 0.9% in July. The core readings of this indicator also rose significantly.
Markets reacted to this news with reduced demand for U.S. stocks, support for the dollar and the oil market, while cryptocurrency prices rolled back again. So what exactly happened, and why is there already a reverse reaction today?
Yes, yesterday's market behavior was unexpected, primarily because the numbers themselves came as a big surprise. In my view, speculators priced in the news, and that was it — although the Western business press quickly began discussing the possibility that the Federal Reserve might refrain from cutting rates in September. The reasoning was that rising company costs due to the tariff reshuffling initiated by Donald Trump could lead businesses to pass these transactional costs on to consumers, potentially triggering renewed growth in consumer inflation.
Frankly, such statements sound odd. When has the American manufacturer ever genuinely cared about the consumer? Never. The only real brake has been falling demand, which instead leads to lower inflation. Looking back, there is a certain historical parallel — in 2018, during Trump's first presidential term, PPI in July jumped to 3.4%, the highest level before the pandemic. At that time, consumer inflation was at 2.9%, the key interest rate stood at 2%, and the unemployment rate was 4%. However, the U.S. economy then was in a somewhat different situation. There were no large-scale global conflicts yet, though tensions were brewing. American hegemony still confidently dominated the world. The Fed could follow its own monetary policy models.
Of course, history has no exact parallels, but there are similarities between then and now. That year, the Fed could still raise rates through the end of the year, reaching a total of 2.5%. Then came the pandemic — and that's another story. Now, however, it cannot do that, because the economy truly needs stimulus from lower interest rates, even at the cost of a possible short-term rise in inflation. The production engine in the U.S. must be restarted, which is extremely, even improbably, difficult.
It is worth noting that in recent decades, as U.S. businesses actively moved production abroad, little real manufacturing has remained within the country. Yes, defense and military enterprises stayed, but they cannot ensure economic growth and a large number of jobs. Other manufacturers — of footwear, clothing, smartphones, and so on — successfully relocated to Mexico or Asia. Under such trends, the structure of the national economy shifted from industrial to service-based. Against this backdrop, the PPI factor has largely lost its influence on markets. Participants reacted primarily to consumer inflation (CPI). This, in my opinion, makes yesterday's market reaction quite strange — and today's reversal perfectly logical. Such movement is purely speculative and nothing more.
As for the September rate cut, for Trump it has not only an economic but also a geopolitical dimension, as his goal is to revive real manufacturing in America, not just relabel products made in Asia.
An important signal for markets today is the change in U.S. Treasury yields, which, after rising yesterday, are moving down again. Federal funds futures are once again showing a 93.1% probability of a September rate cut, after swinging from 98% in the morning yesterday to 90% in the evening. Everything indicates that expectations of a cut next month remain in place.
So, what can we expect today in the markets?
I believe the U.S. stock market will resume its upward movement — futures on the main indices are already rising. The dollar will be under pressure, and cryptocurrencies will likely gain again.
Overall, I expect a moderately positive sentiment to persist, potentially boosted if the summit in Alaska between Trump and Vladimir Putin yields a positive outcome.
The cryptocurrency is showing a local upward reversal on the back of renewed expectations for a September Fed rate cut. On this wave, the cryptocurrency may rise to 123,908.00 against the dollar. A level for buying after breaking above the 119,724.00 resistance could be 119,943.62.
The pair is rising as the dollar weakens due to renewed high expectations of a Fed rate cut. Yesterday's positive UK economic data also support it. On this wave, the pair may first rise to 1.3590 and then to 1.3630. A buying level could be 1.3560.
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