Soft PPI Fuels Rate-Cutting Outlook

Rates drop following another weak inflation print. After lower than expected CPI fueled bets for earlier Fed rate cuts yesterday, today’s PPI data continued the momentum. The policy-sensitive 2-year yield dropped to an intraday low of 3.87% and ultimately closed 4 bps lower on the day at 3.91%. Fed Funds futures now have a 25 bp rate cut priced in as 91% likely by the end of September’s FOMC meeting versus just 66% before the CPI and PPI prints. Meanwhile, the long end of the curve fell 6-8 bps, where the larger decline was driven by strong demand at a $22B auction of 30-year Treasurys. 10-year and 30-year yields closed at 4.36% and 4.84%, respectively.

PPI remains muted in May. May PPI data released today landed below expectations across most measurements. On a monthly basis, headline and core PPI were 0.1%, below estimates of a 0.2% and 0.3% advance, respectively. On a yearly basis, headline PPI was in-line with expectations at 2.6%, however core PPI landed at 3.0%, below expectations of a 3.1% advance. Although the results were below expectations, PPI increased across most measurements vs. April’s figures, partly driven by producer margin expansion. Still, the results were broadly viewed as a sign that the initial impacts of tariffs aren’t being fully passed along to consumers, similar to the takeaway from yesterday’s below-forecast CPI results. In addition, components of PPI that flow directly into PCE, namely airfares, portfolio management fees and healthcare costs, saw prices fall or increase only slightly, offering an early sign that PCE inflation may be similarly tame.

Unilateral tariffs return to the forefront. President Trump told reporters today that the US will set levies on trading partners in around two weeks, reviving threats that he originally made last month. Trump added, “At a certain point, we’re just going to send letters out. And I think you understand that, saying this is the deal, you can take it or leave it.” He originally made the tariff threats after emphasizing that there was not enough time for the US to negotiate with the “150 countries that want to make a deal,” and that the countries who received unilateral tariffs could appeal them. Trump’s comments come amid significant progress made in negotiations with China and Mexico, where deals could be finalized before the end of the week.