14.08.25 - US rate cut ahead?

The July consumer price index came in largely benign. Headline inflation rose 2.7% year-over-year, slightly below the estimate of 2.8%. On a monthly basis, CPI advanced 0.2%, in line with expectations.

The more closely watched Core CPI (ex food and energy) surprised to the upside. At 3.1% annually, it was 0.1 percentage points above forecasts and marked the highest level since February — just before President Trump’s tariffs began in April.

Investors are now focusing on the producer prices (PPI) released this afternoon.

Markets: Cheering the better figures

• US equities trading at fresh all-time highs

• US yields initially ticked higher, but have since moved lower

• US dollar weakened on the release

My View: Investors are focusing on the softer headline figure while downplaying the rise in core inflation. Markets are already pricing in a 25 bps cut in September, with some even speculating on 50 bps. Such a move would be less a sign of strength than of economic weakness.
At this stage, the Fed’s next step is difficult to predict, not least due to mounting political pressure. Aside from the recent correction in job data, the broader US economy still shows resilience, while price dynamics are tilting upward.

I remain cautious in the near term. The inflationary impact of tariffs has not yet filtered through to consumer prices. Producer prices may be the first to capture this pressure, which makes today’s PPI release a key figure to watch.

For equities, the question is what can drive markets higher from here. With valuations stretched and optimism largely priced in, there are almost no positive catalysts left to surprise on the upside.

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