Tariff Impact Fading? U.S. PPI Unexpectedly Turns Negative, Treasury Prices Jump

TradingKey - After a series of data—including ADP and nonfarm payrolls—supported the Federal Reserve’s likely rate cut next week, another piece of evidence has emerged: U.S. inflation is cooling faster than expected. The August Producer Price Index (PPI) unexpectedly turned negative month-over-month and came in well below forecasts, suggesting that the cost pressure from tariffs on businesses is not as strong as economists anticipated.

Data released on September 10 showed:

• August PPI MoM: -0.1%, a sharp reversal from +0.9% in July and below the +0.3% forecast
• PPI YoY: 2.6%, down from 3.3% in July and significantly below the 3.3% consensus
• Services costs fell by 0.20%

The cooling inflation further strengthens the case for the Fed to launch its first rate cut of 2025 at next week’s monetary policy meeting. Whether supported by recent weak job data or Chair Jerome Powell’s dovish pivot, a September rate cut is now highly certain.

Following the PPI report, Treasury yields fell:

• 2-year yield dropped 4 bps to 3.52% (sensitive to policy rate expectations)
• 10-year yield declined 2 bps to 4.07%

After this report, investors will focus on the August CPI report to be released tomorrow. The consensus expectation on Wall Street is that the year-on-year growth rate of the CPI in August will be 2.9%, slightly higher than 2.7% in July.

Goldman Sachs forecasts that core CPI MoM could rise 0.36%, slightly above the 0.30% consensus, warning that tariff impacts on communications, household goods, and entertainment may be larger than expected. However, with easing pressures in housing and labor costs, underlying trend inflation may continue to cool.

Morgan Stanley noted that CPI inflation swap pricing suggests an 2.91% YoY increase, slightly above the 2.90% consensus, indicating a small risk of an upside surprise.

Overall, however, most analysts believe the outcome of both reports will have limited impact on the expected September rate cut.