Participants Pause After PPI Pops

WHERE WE STAND – PPI pointed to Pretty Punchy Inflation stateside yesterday, with prices at the factory gate having risen 0.9% MoM, and 3.3% YoY last month, both topping the forecast range by some margin.

On one hand, this is clearly worrying, and a reminder that inflationary risks remain tilted firmly to the upside, especially considering that PPI excludes exports, hence doesn’t directly account for any tariff impact. On the other hand, though, the components of the PPI print which feed into the PCE metric – which is, of course, the Fed’s preferred inflation gauge – were soft-ish, so I suppose it’s not all bad news.

In any case, the PPI figures did make markets ponder the possibility of a September Fed cut once more. Having gone ‘all in’ on such an idea after CPI on Tuesday, and even pricing a tiny chance of a jumbo 50bp move, the USD OIS curve repriced hawkishly after yesterday’s release, now implying around a 9-in-10 chance that the FOMC do indeed pull the trigger next month. In my mind, this remains far too high, though as noted yesterday we’re unlikely to get any explicit pushback on that prospect until Fed Chair Powell speaks at Jackson Hole next week.

I guess, in some ways, what panned out in markets yesterday – some softness in stocks, a chunky sell-off at the front-end of the Treasury curve, and USD demand vs. all peers – could be seen as a bit of a preview of how things could pan out next Friday, albeit probably in a much more violent manner, if J-Pow does indeed lean against market pricing for September, or at least seeks to preserve as much policy flexibility as possible, with a month still to run until the next FOMC confab.

Until we hear from the main man next week, though, my overall biases remain pretty much unchanged. Namely, viewing the path of least resistance as still leading higher for stocks, powered by solid earnings growth, a calmer tone on the trade front, and the cushion that a dovish policy outlook provides against potential softness in the underlying economy. Elsewhere, I remain a dollar bear, as the Trump Admin’s attacks on Fed independence show no sign of slowing down, by extension meaning that my bias also remains towards a steeper Treasury curve, and to being long of gold too.

Before moving on to today, though, just a quick word on yesterday’s Q2 UK GDP stats. Yes, the economy grew by a better-than-expected 0.3% QoQ in the three months to June, not that such an anaemic pace of growth is really worth celebrating, mind. That growth, however, came for the ‘wrong’ reasons – total business investment fell 4.0% QoQ (!!!!), while government spending rose 1.2% QoQ over the same period. The only reason the economy expanded at all was due to the Government spending like a drunken sailor, despite this ever-deepening ‘black hole’ that we keep hearing so much about.

There is, then, little to like about the data, and scant sign of businesses having any confidence whatsoever in the outlook for UK Plc. Given the Chancellor’s apparent inability to deliver the necessary spending cuts to ‘balance the books’, and considering that we’re now at the stage where further tax increases would be counter-productive, a fiscal reckoning surely can’t be too far away. I’d certainly not want to be touching long-end gilts with a 10ft bargepole for the foreseeable future.

LOOK AHEAD – Geopolitics is set to dominate today, with President Trump due to meet President Putin in Alaska, to discuss a potential deal to end the war in Ukraine.

That meeting, though, isn’t set to begin until 8:30pm London time, meaning things will likely conclude a long while after the market closes for the week, with a press conference set to be held once talks wrap up. Hence, there is the potential for significant gapping risk when markets get back up and running for the week on Sunday night, though positions will probably be squared up, especially in crude benchmarks, during the day today, to mitigate that risk somewhat.

Besides that, a few US datapoints are due. Headline retail sales are set to have risen 0.6% MoM in July, unchanged from the pace seen a month prior, while the control group metric, which feeds into the GDP basket, is seen rising 0.4% MoM, just 0.1pp slower than the pace notched in June. The latest US industrial production figures, as well as the UMich consumer sentiment survey, are also due.

Once that data is out of the way, I think a cold beverage in the sun is an apt way to finish off the week – geopolitical shenanigans can wait until Monday!