Bond Yields Rise as Traders Pare Fed Bets on PPI

Cam Dawson, CIO at NewEdge Wealth, talks resilience in equities and the pain trade as we get jobless claims and PPI.

A stronger-than-anticipated inflation reading spurred a rise in bond yields and the dollar, with traders trimming bets the Federal Reserve will cut interest rates next month.

Treasury two-year yields climbed four basis points to 3.72%. Money markets showed a 90% chance the Fed will reduce rates in September after fully pricing in the move a day earlier. Following a blistering surge to all-time highs, the S&P 500 was little changed. While the index’s move was mild thanks to gains in most big techs, about 400 shares dropped.

US wholesale inflation accelerated in July by the most in three years, suggesting companies are passing along higher import costs related to tariffs. The producer price index increased 0.9% from a month earlier and 3.3% from a year ago. Services costs jumped 1.1% last month.

The firm wholesale inflation may give some policymakers pause that price pressures are rearing back up again. Earlier this week, consumer price data pointed to a milder pass-through in July, and the labor market now shifting to a lower gear.

To Chris Zaccarelli at Northlight Asset Management, the spike in PPI shows inflation is coursing through the economy, even if it hasn’t been felt by consumers yet.

“Given how benign the CPI numbers were on Tuesday, this is a most unwelcome surprise to the upside and is likely to unwind some of the optimism of a ‘guaranteed’ rate cut next month,” he said.

“The fact that PPI was stronger-than-expected and CPI has been relatively soft suggests that businesses are eating much of the tariff costs instead of passing them onto the consumer,” said Clark Geranen at CalBay Investments.

With input costs rising, this could impact earnings for companies in the third and fourth quarters, according to Fawad Razaqzada at City Index and FOREX.com. Yet, the downside was limited, suggesting that investors are not too concerned just yet.

“It is likely that the Fed will see through the rise as the one-time increase and their concerns about the jobs market may make them more open to the idea of resuming rate cuts from September,” he said.

The more concerning development for the central bank, as Chicago Fed President Austan Goolsbee noted this week, are signs that services prices might be accelerating, according to Stephen Brown at Capital Economics.

“This doesn’t slam the door on a September rate cut, but based on the market’s initial reaction, the opening may be a little smaller than it was a couple of days ago,” said Chris Larkin at E*Trade from Morgan Stanley.

Funds parked at a major Federal Reserve facility dropped to the lowest level in more than four years as the Treasury Department issues more short-dated debt to finance the growing deficit, luring cash away from a key source of market liquidity.

Some 14 participants on Thursday put a combined $28.8 billion at the Fed’s overnight reverse repurchase agreement facility, known as the RRP, which is used by banks, government-sponsored enterprises and money-market mutual funds to earn interest on cash lent to the central bank. It’s the lowest since April 2021, according to New York Fed data. The number of bidders was also the smallest since that period.

Usage of the facility, a measure of excess liquidity in funding markets, has been trending lower as Treasury continues issuing billions of dollars of T-bills in order to replenish its cash balance following last month’s increase in the debt ceiling. Balances have dropped from $214 billion on the last day of July, with Citigroup strategists Jason Williams and Alejandra Vazquez Plata estimating use could approach zero by the end of August.

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