Insights 
VT 
Producer inflation in the US saw a notable increase in July, rising at a faster pace than anticipated. The Producer Price Index (PPI) for final demand grew by 3.3% yearly, surpassing the expected 2.5%.
This surge followed a 2.4% rise in June. At the same time, the core PPI climbed to 3.7% annually, up from June’s 2.6%.
Monthly Producer Price Changes
On a monthly scale, both the PPI and core PPI rose by 0.9%. As a result, the US Dollar Index remained in positive territory, marked at 98.04, up by 0.25% on the day.
This hotter-than-expected producer inflation report changes our immediate outlook. We must now position for a more aggressive Federal Reserve, as this data challenges the narrative that inflation was fully under control. The market’s hope for interest rate cuts in late 2025 or early 2026 is now seriously in doubt.
We are buying put options on major stock indices like the S&P 500 for the coming weeks. The CBOE Volatility Index (VIX), which had been trading in a low range around 14 for most of July, is a key target for us as we anticipate a rise in market uncertainty. This situation is reminiscent of the choppy markets we experienced in 2022 when similar inflation surprises led to sharp equity drawdowns.
Bond Market Response
In the bond market, we are shorting 2-year Treasury futures, as short-term yields will likely climb further on expectations of Fed tightening. The CME FedWatch Tool shows that the probability of a rate hike at the September FOMC meeting has jumped from 15% yesterday to over 45% this morning. This rapid repricing suggests bond prices, especially at the front end of the curve, have more room to fall.
The strength in the US Dollar Index gives us a clear signal to increase long positions against other major currencies. A hawkish Fed makes the dollar more attractive, a pattern we saw play out during the aggressive hiking cycle that began back in 2022. We are particularly focused on shorting the euro and the yen, as their respective central banks are not expected to match the Fed’s renewed resolve.
All of our attention now shifts to the upcoming Consumer Price Index (CPI) data. If the CPI report confirms this re-acceleration in prices, it will cement the case for the Fed to maintain a restrictive policy for longer. We will use options to protect our portfolios against a significant market drop should that data also come in hot.
