The US Producer Price Index (PPI) data expected today will refocus attention on inflation. Companies are drawing down inventories and trying to preserve margins, suggesting potential inflation on the horizon.
Oil prices remain low and may continue to decrease if OPEC adds more barrels, potentially offsetting some input cost pressures. The consensus for the August PPI report is a 3.3% year-on-year rise, or 3.5% when excluding food and energy.
Key Insights Into Inflation Trends
This report may offer insights into upcoming inflation trends before the Consumer Price Index (CPI) reading tomorrow. Additionally, the US economic calendar includes weekly oil inventory data at 10:30 am ET and a 10-year Treasury auction at 1 pm ET.
Inflation is becoming the market’s main focus again. All eyes are on today’s Producer Price Index and especially tomorrow’s Consumer Price Index reading. Any significant surprise in these numbers will likely move markets for weeks.
We are currently pricing in over a 90% probability that the Fed will hold rates steady at their meeting later this month, according to the CME FedWatch Tool. A hot inflation print, say above the 3.2% consensus for tomorrow’s CPI, could dramatically shift those odds towards a hike. This makes short-term interest rate futures a key place to watch for activity.
Market Volatility And Trading Strategies
For equity traders, this raises the chance of increased volatility. Higher-than-expected inflation could hurt stock valuations, reminding us of the difficult market during the 2022-2023 rate-hiking cycle. We could see traders buying protection through options on the S&P 500 or looking at VIX futures, which are currently sitting near yearly lows around 14.
The situation is complicated by conflicting economic signals we’ve been seeing. Just last week, the August jobs report showed a slowdown with only 150,000 new jobs, but pipeline inflation from tariffs could still be a threat. Lower oil prices, with WTI crude holding below $70 a barrel, might provide some relief on the headline inflation number.
Given the uncertainty, options strategies that profit from a large price move in either direction could be considered. For example, setting up straddles on major indices or Treasury futures ahead of the CPI release is a way to position for a bigger-than-expected reaction. This allows a trader to capitalize on the volatility itself without betting on a specific direction.
