Today's release of the Producer Price Index (PPI) for July has provided a glimmer of hope for a soft landing in the U.S. economy. The PPI data came in below expectations, with a month-over-month increase of 0.1%, compared to the estimated 0.2%. Year-over-year, the PPI rose by 2.2%, also below the 2.3% estimate and down from the previous 2.6%. The core PPI, which excludes volatile food and energy prices, increased by 2.4% year-over-year, falling short of the 2.6% estimate and the previous 3%.
This moderate slowdown in producer prices could serve as a useful reference for the Consumer Price Index (CPI) data set to be released tomorrow. The CPI is estimated to rise by 0.2% month-over-month and 3% year-over-year. Should the CPI data also come in below expectations, it would further bolster the case for the Federal Reserve to consider rate cuts in its upcoming September meeting.
Following the release of the PPI data, index futures responded positively. The S&P 500 futures jumped by 0.65%, while the Nasdaq 100 futures surged by 1%. This positive market reaction indicates investor optimism that lower-than-expected inflation data could lead to a more dovish stance from the Federal Reserve.
The FedWatch tool now shows an almost even probability of a 50 basis points or 25 basis points cut in September, with a slightly greater chance of 53% for a 25 basis points cut. The lower-than-expected PPI data suggests that the Fed might be more willing to adopt a rate cut, as the moderate slowdown in inflation points to a less aggressive cooling of the economy.
This data release comes on the heels of a tumultuous week for global stocks. The Bank of Japan's unexpected rate hike, Warren Buffett's decision to halve his holdings in Apple, and a rise in the U.S. unemployment rate to its highest level in nearly three years all contributed to market volatility. The disappointing nonfarm payrolls report last week further added to concerns about the health of the economy.
However, the moderate slowdown indicated by today's PPI data suggests that the economy is not cooling down too quickly, raising hopes for a soft landing. A soft landing refers to a scenario where the economy slows down just enough to curb inflation without slipping into a recession. This outcome would be ideal for both the Federal Reserve and investors, as it would allow for a more gradual adjustment in monetary policy.