US Producer Prices Rise, ECB Cuts Policy Rates Again

Rates inch higher as producer inflation remains elevated in August. Swap rates traded within a ~10bp range today as PPI data spurred a volatile session. Despite the volatility, rates closed nearly unchanged as most of the rate/yield curve rose 2bps. Combined with yesterday’s slightly elevated CPI, this week’s inflation data increased the futures implied probability of a 25bp cut by the Fed (versus 50bps) at next week’s FOMC meeting. Meanwhile, equities rallied today with the NASDAQ (+1.00%) leading major indices.

Producer Price Index (PPI) was higher than expected in August while July figures were revised lower. Producer prices grew at a faster rate than expected on a monthly (MoM) basis in August. Core MoM PPI notably rose from -0.2% deflation in July to +0.3% while headline PPI climbed to 0.2% from 0.0%. Both were 0.1% higher than their respective forecasts. Year-over-year figures were in-line with forecasts as core PPI was 2.4% while headline was 1.7%. Meanwhile, all core and headline July figures were revised lower.

European Central Bank (ECB) cuts rates by 25bps. The ECB cut interest rates by 25bps today to 3.5%, their second move of the year. The decision was largely expected by markets, and most attention was geared toward ECB President Lagarde’s outlook for future meetings. Lagarde was slightly hawkish as she stated that the ECB would “remain data-dependent… a declining path is not pre-determined.” Futures now have ~39bps of additional rate cuts priced in through 2024 while a move in October is seen as ~50% likely.