Cooling of the inflation chain and employment revision: Dual pressures before the Fed’s interest rate meeting
2025-09-10 21:49:03
The U.S. Producer Price Index (PPI) for August, released on Wednesday (September 10th), fell to 2.6% year-on-year, down from 3.3% in July and the market expectation of 3.3%. The core PPI fell to 2.8% year-on-year, with a surprising monthly decline of -0.1%. This data, released the day before Thursday's CPI, provides evidence of the first impact of inflation upstream. On the employment front, recent employment data has been soft; the BLS's preliminary benchmark for the US non-farm payroll report was revised to -911,000, indicating a cooling in labor supply and demand.
Regarding interest rates, the market has fully priced in a rate cut at the Federal Reserve's September 16-17 meeting, with the current probability of a 25bp cut at 88.2% and a 50bp cut at 11.8%. Powell's previous remarks at Jackson Hole emphasized that "policy is already in a restrictive zone, and shifting risk balances may prompt adjustments."
1) PPI: The year-on-year reading of 2.6% was significantly weaker than expected, with the core index falling back to 2.8% and a monthly reading of -0.1%. This combination suggests a temporary decline in upstream price pressures. Marginal weakening in the energy and durable goods sectors alleviated concerns about "sticky inflation."
2) Forecasting Implications for CPI: Historically, the PPI's directionality often precedes the CPI by one tick, but the transmission elasticity and lag are affected by the stickiness of service prices and wages. The current weakening of the PPI will lead the market to further lower its assumptions about the distribution of future inflation before the CPI is released.
3) Integration with the Policy Framework: Under the "data-dependent" narrative, slowing inflation and cooling employment lower the threshold for rate cuts. However, given that the inflation target remains at a symmetrical 2%, the threshold for a single 50bp cut remains high. While PPI alone is not enough to alter the full-year trajectory, it does reinforce the baseline of a "cut first, then wait and see" approach.
At Jackson Hole, Powell emphasized that policy remains within a restrictive range, and shifting risk balances may require adjustments. Furthermore, supply-side shocks and uncertainty in labor supply make the path forward more dependent on real-time data. The overall tone is cautious, not aggressively dovish: While not committing to a specific pace, it leaves room for an earlier start and smaller steps. In light of this PPI reading, the market's interpretation of a "25bp start, followed by further discussion based on consistency between CPI and employment" approach is likely to prevail.
US Dollar Index: Weaker PPI weakens expectations of higher nominal yields for longer, putting the US dollar under short-term pressure. Markets will focus on whether tomorrow's CPI confirms the combination of "cooling commodity prices and easing service viscosity." If so, the dollar's potential for a rebound will be limited.
Gold: Weaker inflation reduces the risk of rising real interest rates, and coupled with its sensitivity to geopolitical uncertainty, gold is finding support on dips in the short term. However, if CPI doesn't weaken simultaneously, gold's upward resilience will be limited.
U.S. Treasury yields: The medium and long end are more sensitive to "nominal growth + inflation expectations", and the curve tends to steepen slightly in a bull market after the weakening of PPI; the marginal probability of a 50bp interest rate cut is not high, which is conducive to limiting excessive downward exploration of the long end.
Institutional investors are more concerned about the consistency of the "PPI → CPI → interest rate meeting" chain and the impact of labor force revisions on the output gap. In terms of probability, a 25bp rate cut remains the baseline, with only a marginal defense against a 50bp rate cut. Retail investor sentiment is more influenced by immediate fluctuations in exchange rates and gold. Precious metals investors have a strong intuition that a rate cut is bullish, but they underprice the risk of a lower-than-expected rate cut magnitude and path. The distribution of CME interest rate futures and FedWatch (25bp: 88.2%, 50bp: 11.8%) clearly reflects this structural divergence: the path and pace of the competition are more important than the direction itself.
1) The core variable is still tomorrow's CPI: If core services fall simultaneously, inflation will be anchored back to the target range, verifying the "first reduction and then wait and see" path; if CPI and wage stickiness rise instead of falling, the easing of PPI this time will be discounted.
2) Communication during the interest rate meeting week: The dot plot and the wording of the statement will determine whether there will be a second interest rate cut this year. If the path is shallow, the pressure for the US dollar to rebound will remain.
3) Risk List: Uncertainty from geopolitical events, repeated tariff policies and supply shocks, and the "rearview mirror risk" brought about by data revisions may all change curve pricing and exchange rate rhythm in the short term.
Regarding interest rates, the market has fully priced in a rate cut at the Federal Reserve's September 16-17 meeting, with the current probability of a 25bp cut at 88.2% and a 50bp cut at 11.8%. Powell's previous remarks at Jackson Hole emphasized that "policy is already in a restrictive zone, and shifting risk balances may prompt adjustments."
Data presentation and interpretation
1) PPI: The year-on-year reading of 2.6% was significantly weaker than expected, with the core index falling back to 2.8% and a monthly reading of -0.1%. This combination suggests a temporary decline in upstream price pressures. Marginal weakening in the energy and durable goods sectors alleviated concerns about "sticky inflation."
2) Forecasting Implications for CPI: Historically, the PPI's directionality often precedes the CPI by one tick, but the transmission elasticity and lag are affected by the stickiness of service prices and wages. The current weakening of the PPI will lead the market to further lower its assumptions about the distribution of future inflation before the CPI is released.
3) Integration with the Policy Framework: Under the "data-dependent" narrative, slowing inflation and cooling employment lower the threshold for rate cuts. However, given that the inflation target remains at a symmetrical 2%, the threshold for a single 50bp cut remains high. While PPI alone is not enough to alter the full-year trajectory, it does reinforce the baseline of a "cut first, then wait and see" approach.
Review and Positioning of Powell's Speech Key Points
At Jackson Hole, Powell emphasized that policy remains within a restrictive range, and shifting risk balances may require adjustments. Furthermore, supply-side shocks and uncertainty in labor supply make the path forward more dependent on real-time data. The overall tone is cautious, not aggressively dovish: While not committing to a specific pace, it leaves room for an earlier start and smaller steps. In light of this PPI reading, the market's interpretation of a "25bp start, followed by further discussion based on consistency between CPI and employment" approach is likely to prevail.
Immediate market reaction
US Dollar Index: Weaker PPI weakens expectations of higher nominal yields for longer, putting the US dollar under short-term pressure. Markets will focus on whether tomorrow's CPI confirms the combination of "cooling commodity prices and easing service viscosity." If so, the dollar's potential for a rebound will be limited.
Gold: Weaker inflation reduces the risk of rising real interest rates, and coupled with its sensitivity to geopolitical uncertainty, gold is finding support on dips in the short term. However, if CPI doesn't weaken simultaneously, gold's upward resilience will be limited.
U.S. Treasury yields: The medium and long end are more sensitive to "nominal growth + inflation expectations", and the curve tends to steepen slightly in a bull market after the weakening of PPI; the marginal probability of a 50bp interest rate cut is not high, which is conducive to limiting excessive downward exploration of the long end.
Differences between institutional and retail perspectives
Institutional investors are more concerned about the consistency of the "PPI → CPI → interest rate meeting" chain and the impact of labor force revisions on the output gap. In terms of probability, a 25bp rate cut remains the baseline, with only a marginal defense against a 50bp rate cut. Retail investor sentiment is more influenced by immediate fluctuations in exchange rates and gold. Precious metals investors have a strong intuition that a rate cut is bullish, but they underprice the risk of a lower-than-expected rate cut magnitude and path. The distribution of CME interest rate futures and FedWatch (25bp: 88.2%, 50bp: 11.8%) clearly reflects this structural divergence: the path and pace of the competition are more important than the direction itself.
Key points and risks in the future market
1) The core variable is still tomorrow's CPI: If core services fall simultaneously, inflation will be anchored back to the target range, verifying the "first reduction and then wait and see" path; if CPI and wage stickiness rise instead of falling, the easing of PPI this time will be discounted.
2) Communication during the interest rate meeting week: The dot plot and the wording of the statement will determine whether there will be a second interest rate cut this year. If the path is shallow, the pressure for the US dollar to rebound will remain.
3) Risk List: Uncertainty from geopolitical events, repeated tariff policies and supply shocks, and the "rearview mirror risk" brought about by data revisions may all change curve pricing and exchange rate rhythm in the short term.
- Risk Warning and Disclaimer
- The market involves risk, and trading may not be suitable for all investors. This article is for reference only and does not constitute personal investment advice, nor does it take into account certain users’ specific investment objectives, financial situation, or other needs. Any investment decisions made based on this information are at your own risk.
