Hotter-Than-Expected PPI Data Heightens Concerns About the Fed’s Rate Strategy

On Thursday, the Bureau of Labor Statistics announced the headline consumer price index held steady at 0.2% month-on-month in July, broadly in line with expectations. Yearly, the reading increased by 3.2%. In June, it had fallen to 3%. Core inflation – excluding the food and energy segments – exhibited easing signals, up by 0.2% in July resulting in an annual rate of 4.7%, down from June's 4.8%. Nonetheless, it is more than twice higher than the Federal Reserve's target figure. 

Moreover, the producer price index (PPI), which tracks the average change in prices that businesses pay to suppliers, was higher than expected on a headline and core basis, reversing a 12-month cooling trend. On a monthly basis, it increased 0.3% in July, seasonally adjusted. On an unadjusted basis, the index for final demand advanced 0.8% over the year. The index for final demand less foods, energy, and trade services moved up 0.2% in July. For the 12 months ended in July, prices for final demand less foods, energy, and trade services advanced 2.7%.  

Coupled with the headline rise in the CPI, the hotter-than-expected PPI data has tempered investors’ optimism and pushed Treasury yields higher. The yield on the 10-year Treasury surged to 4.15% from 4.04% (+11 basis points for the week).

The Dow Jones Industrial Average gained 0.62% while the Nasdaq Composite fell 1.90% and the S&P 500 edged down 0.31%. In Europe, stock indexes closed lower. German industrial production fell 1.5% in June, hit by a slowdown in global demand. The DAX lost 0.75%, the MSCI EMU slid 0.37% and the FTSE slipped 0.53%. In Asia, Japan’s Nikkei was up 0.87% while the Shanghai Composite plunged 3.01%. China's imports saw a steeper-than-anticipated yearly decrease of 12.4% in July, compared to the 5% projected downturn. Concurrently, exports experienced a 14.5% contraction, surpassing the expected decline of 12.5% and last month's setback of 12.4%. Furthermore, concerns are escalating about China's heavily indebted real estate sector after a significant player, Country Garden, has suspended trading on several of its mainland bonds.

The energy sector extends its winning streak with a fifth week of gains  

Oil prices recorded a seventh week of consecutive growth (WTI crude oil just above $83/bbl, marking a 0.45% uptick), although US inflation data and worries about the Chinese economy led to a trim in these gains. China is the second-largest oil consumer and leading importer globally. However, OPEC retained its bright forecast for world oil demand and confirmed that its production had seen considerable cuts during July, chiefly due to reductions by Saudi Arabia and Russia. 

U.S. natural gas futures also helped the energy sector extend its growth streak into its fifth week (+3.54%, best performing sector throughout the week), with a gain of 8.1% despite a dip just below $2.8/MMBtu from a 5-month peak above $2.9 on Wednesday. Natural gas ETFs exhibited double-digit returns in the wake of this recovery.

Health care was the week’s second winner (+2.46%) as the Eli Lilly (LLY) shares experienced a 17.53% surge, achieving record-breaking levels and making LLY the highest-performing stock in the S&P 500 Pharmaceuticals index this year with nearly $500bn market capitalization.

By contrast, tech stocks took a hit (S&P IT index down 2.87%) after US President Joe Biden signed an executive order on Wednesday restricting and regulating American high-tech investments in China, particularly targeting sectors like semiconductors, microelectronics, quantum information technologies and artificial intelligence systems. This development negatively affected stocks such as Nvidia (NVDA). It lost 8.56% across the week and dipped over 14% from its highest value in 52 weeks, challenging its $1 trillion valuation - despite reports of major Chinese internet companies planning to invest significantly in Nvidia's AI chips confronted with potentially stricter U.S. regulations.

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