Strong PPI and Tariff Risks Reduce Chances of Aggressive Fed Easing

On Thursday, US stock indices closed mixed: the S&P 500 rose 0.09%, the Dow Jones slipped 0.02%, and the Nasdaq 100 ended flat. September futures on the S&P 500 and Nasdaq fell 0.08% and 0.24%, respectively.

Morning selling pressure came after an unexpectedly strong July Producer Price Index (PPI), which pushed the 10-year Treasury yield up 5 bps to 4.287%. Headline PPI rose 0.9% m/m and 3.3% y/y (forecast: +0.2% and +2.5%), while core PPI also surged 0.9% m/m and 3.7% y/y (forecast: +0.2% and +3.0%).

Economists noted that businesses are passing tariff-related costs to consumers faster than expected, which could slow the Fed’s rate-cut trajectory. Following the report, markets priced out the possibility of a 50 bp cut in September, assigning a 93% probability to a smaller 25 bp move. This remains far above the 40% chance before the weak August 1 jobs report and the in-line CPI print earlier this week.

Cautious remarks from Fed officials reinforced the tone. San Francisco Fed President Mary Daly said she doesn’t see the need for an aggressive cut, while St. Louis Fed President Alberto Musalem called a 50 bp move “unsupported” by current conditions.

Treasury Secretary Scott Bessent sought to soften the impact of his prior comments that rates were “too restrictive” and should be lowered by 150–175 bps. In a Fox Business interview, he stressed he wasn’t directing Fed policy, but pointing out that some models show the neutral rate is lower.

President Donald Trump extended a 90-day tariff truce with China but confirmed a 100% tariff on semiconductor imports, with exemptions for companies building in the US. He also doubled tariffs on Indian imports to 50% due to Russian oil purchases and announced upcoming pharmaceutical tariffs. Bloomberg Economics estimates the average US tariff rate could rise to 15.2%, up from 2.3% in 2024.

Weekly jobless claims fell by 3,000 to 224,000, while continuing claims dropped by 15,000 to 1.953 million, showing labor market resilience.

Markets await Friday’s retail sales (+0.6% m/m expected), industrial production, and the University of Michigan consumer sentiment index (62 forecast). The Trump–Putin summit, starting at 3:30 pm ET, could also move markets.

Q2 earnings season remains strong: S&P 500 earnings are on track to rise 9.1% y/y, with 82% of companies beating estimates.

Notable movers:

Europe’s Euro Stoxx 50 rose 0.86%. In Asia, the Shanghai Composite fell 0.46% after hitting a 3.75-year high, while Japan’s Nikkei 225 dropped 1.45% from Wednesday’s record.

European bond yields climbed: German bund +3.2 bps to 2.712%, UK gilt +5.1 bps to 4.641%. The ECB’s September rate cut probability is just 7%.