The US PPI data for July revealed a rise of 0.9%, surpassing expectations of 0.2%. Year-on-year, headline PPI increased by 3.3%, while the core PPI rose to 3.7%.
These figures caused some uncertainty due to contributions from warehousing and transportation, traditionally seen as less labour-intensive areas. The market reacted as earlier stock market declines reversed, ending almost unchanged with variations of only 0.03%.
Rising US Yields
US yields rose across the yield curve as the expectation for a September interest rate cut reduced to 94%. Previously, there was a 6% chance of a 50 basis point cut, now replaced by a similar chance of no policy change.
The US dollar strengthened against several currencies, showing the largest gains against the AUD and NZD. Other notable increases were against the EUR, JPY, GBP, CHF, and CAD.
St. Louis Fed President noted inflation is above target, with weakening signs in the labour market emerging. They anticipate that tariff impacts may reduce but could stay persistent. Fed President Barkin observed improved business sentiment while noting subdued hiring.
Crude oil futures rose, gold prices fell, and Bitcoin dropped sharply, with US Treasury Secretary exploring options for acquiring more Bitcoin.
The surprisingly high producer price inflation number challenges the market’s certainty about a September rate cut. We see this as a clear signal to consider hedges against persistently high interest rates. This means looking at options on Treasury futures to protect against yields moving even higher if the Federal Reserve is forced to delay easing.
Market Indecision
Looking at the live data from the CME FedWatch tool today, the probability of a September rate cut has already dipped from a sure thing to 94%. This reminds us of the market whiplash we saw back in 2023 when traders constantly had to re-price Fed intentions meeting by meeting. Derivative traders should consider positioning for increased volatility in the run-up to the next Fed decision, possibly through options on the VIX or major indices.
The US dollar is strengthening significantly, particularly against the Australian and New Zealand dollars, which is a classic response to higher US yields. We believe positioning for continued dollar strength through call options on dollar-tracking ETFs like UUP is a straightforward trade. The weakness in commodity currencies suggests the market is also getting nervous about global growth.
With the stock market erasing its losses to end the day flat, there is clear indecision among investors. This tug-of-war between inflation fears and hopes for a soft landing creates an opportunity for options strategies that profit if the S&P 500 stays within a specific price range. At the same time, holding some protective puts on index ETFs like SPY is a prudent hedge in case inflation data forces a market downturn.
The upcoming meeting between President Trump and President Putin is a major wildcard, especially for energy markets. The rise in crude oil today to over $63 a barrel reflects some of this geopolitical tension. We are looking at call options on oil ETFs to speculate on any potential supply disruptions that could arise from the talks.
Bitcoin’s sharp drop was jarring, but the late-day news from the Treasury Secretary about potentially acquiring more bitcoin changes the dynamic completely. This suggests any weakness could be short-lived and viewed by the government as a strategic accumulation opportunity. For us, this makes buying long-dated call options on bitcoin ETFs an attractive way to position for a significant rebound.
