In the stock market, it appears that all is calm, all is quiet: S&P 500 futures are flat this morning, premarket, and the index itself closed up marginally yesterday, near to its all-time high.
The real drama is in the bond market. Both the two-year Treasury and the 10-year Treasury saw their yields spike up yesterday after the producer price index (PPI) report came in much higher than expected. Tariff-driven inflation may not yet have shown up in prices paid by consumers, but it looks like it has now arrived at companies and manufacturers.
The feeling on Wall Street is that this implies higher inflation is coming down the pipeline. Companies won’t be able to eat higher tariff prices forever. Sooner or later they’ll have to charge their customers. “Supply chains have become longer and more complex—trade taxes progress down supply chains over months, not days,” UBS warned this morning.
All of a sudden, the U.S. Federal Reserve interest rate cut that everyone thought was guaranteed in September no longer looks locked in, as keeping interest rates high is the Fed’s main weapon to fight inflation.
“U.S. producer prices surged 0.9% m/m in July, far exceeding expectations of 0.2% and marking the largest monthly gain since June 2022. On an annual basis, PPI rose 3.3%, up from 2.4% in June, while core PPI jumped to 3.7% from 2.6%. The data shattered forecasts across the board, underscoring the inflationary impact of recent tariff policy and justifying Fed caution regarding rate cuts,” George Vessey of Convera told clients this morning.
