U.S. Stocks and Bonds Surged! PPI Sets the Stage—How CPI Deliver Today?

Following releasing the latest U.S. Producer Price Index (PPI) data, which reinforced expectations that the Federal Reserve might proceed with an interest rate cut in September, the U.S. stock and bond markets saw significant gains on Tuesday. This optimistic trend comes just hours ahead of the highly anticipated July Consumer Price Index (CPI) report, which is set to be released on Wednesday morning. The earlier PPI data set a positive tone for the financial markets. The data revealed that July's PPI increased by 0.1% month-over-month, down from June's 0.2%, and the annual PPI growth slowed to 2.2%, the smallest year-over-year increase since March. #CPI #Stock #Investment #stockmarket

Excluding food and energy, core PPI remained flat from the previous month and rose by 2.4% compared to last year.

Chris Larkin, a strategist at Morgan Stanley's E*Trade, noted that markets seeking stability have found further evidence of cooling inflation. Stock market investors looking to rebound from this year’s most considerable correction could welcome the lower-than-expected PPI data.

Recently, the easing of price pressures in the U.S. has bolstered Federal Reserve officials' confidence in potentially cutting interest rates. They have also shifted focus back to the labor market, which is showing more signs of slowing down.

On Tuesday, Atlanta Fed President Raphael Bostic expressed increased confidence in the Fed's ability to bring inflation back to its 2% target, thanks to recent economic data. However, he emphasized the need to see more data before fully supporting a rate cut, potentially by the end of this year.

The financial markets’ performance on Tuesday reflected this optimism. The stock and bond markets had a strong day, with tech-heavy Nasdaq surging 2.4% on the back of gains in Nvidia and other tech giants. The S&P 500 also rose by 1.7%, while the Dow Jones Industrial Average climbed approximately 409 points, a gain of 1%.

The VIX index, often called the "fear gauge" of the U.S. stock market, has dropped back to around 18—returning to the low levels seen before last Friday's non-farm payrolls report.

In the bond market, yields on U.S. Treasuries fell across all maturities on Tuesday as bond prices, which move inversely to yields, rose. The 2-year Treasury yield fell by 8.1 basis points to 3.942%, the 5-year yield dropped by seven basis points to 3.678%, the 10-year yield decreased by 5.7 basis points to 3.849%, and the 30-year yield declined by 3.8 basis points to 4.163%.

The mild PPI data has undoubtedly raised expectations among investors for Wednesday morning’s CPI report.

Managing Director of Equity Trading at Wedbush Securities, Michael James, commented that the core PPI data further demonstrates the Fed's effectiveness in controlling inflation, making a rate cut more likely. The July CPI data, to be released on Wednesday morning, will be closely watched, as any data point could significantly impact the market due to the heightened sensitivity.

Ian Lyngen of BMO Capital Markets observed that Tuesday's data showed no hesitation from the Fed regarding a rate cut next month. He pointed out that Wednesday’s updated CPI data is closely tied to recent policy expectations.

According to a survey by 22V Research, 52% of investors expect Wednesday’s CPI to trigger a "risk-on" sentiment, leading to a chase for riskier assets. However, a high percentage of respondents still believe a recession is looming.

The CME’s FedWatch Tool shows that traders currently see about a 52% chance of a 50-basis point rate cut by the Fed in September and a 48% chance of a 25-basis point cut, a slight shift from an even 50/50 split the previous day.

At the same time, traders currently still expect the Federal Reserve to cut interest rates by at least 100 basis points this year.

For Wednesday morning's CPI data, economists expect a 0.2% month-over-month increase in the U.S. July CPI, up from the previous month's 0.1% decline. The year-over-year CPI is expected to hold steady at 3.0%. Core CPI, excluding energy and food prices, is projected to rise by 0.2% month-over-month and 3.2% year-over-year.