Unexpected rebound in US June PPI overturns the "rate cut boost" from CPI?

According to Zhitong Finance, the US PPI in June rose slightly higher than expected, as the increase in service provider profit margins offset the impact of consecutive months of declining commodity costs. Data released by the US Bureau of Labor Statistics on Friday showed that the year-on-year growth rate of US PPI in June was 2.6%, the highest since March 2023, with an expected value of 2.3% and a previous value of 2.2%. The month-on-month growth rate of PPI in June was 0.2%, with an expected value of 0.1% and a previous value of -0.2%.

The PPI report shows that service costs rose by 0.6%, with almost all of the increases related to a 1.9% increase in profit margins for wholesalers and retailers. At the same time, last month's PPI data was significantly revised upwards. The year-on-year and month-on-month growth rates of PPI in May were both revised upwards by 0.2 percentage points, and the core PPI was revised upwards by 0.3 percentage points.

However, commodity costs fell. The index of final goods demand decreased by 0.5%. The cost of processed products for intermediate demand dropped by 0.2%, marking the third consecutive decline in the past four months.

Categories used in the PPI report to calculate the Fed's preferred inflation gauge (PCE price index) had mixed results. Airline ticket prices rose by 1.1%, while prices for investment portfolio management services rose by 1%. Prices in the healthcare industry increased more moderately, with medical care costs rising by 0.2% and outpatient hospital costs rising by 0.1%. The PCE price index for June will be released later this month.

Before the PPI report was released, the US CPI for June, announced on Thursday, fell by 0.1% month-on-month, marking the first decline since the outbreak of the pandemic. The core CPI for June increased by 0.1%, the smallest increase since August 2021, with market expectations of a 0.2% increase. Following the CPI report, market expectations for the Fed to start cutting interest rates in September received a boost.

After the unexpected rise in PPI, analysts believe that the slight optimism brought by the CPI data may be dampened, as the overall PPI and PPI excluding food and energy exceeded expectations. In addition, the significant upward revision of previous PPI data in this release has increased the margin of error for the year-on-year indicators. Statisticians need to carefully study the details and outline the components of PCE inflation, but at first glance, the changes in PCE, as the Fed's preferred inflation gauge, may not be as friendly as implied by yesterday's CPI data After excluding food, energy, and trade, inflation indicators with smaller volatility remained unchanged. Compared to a year ago, the index slowed to 3.1%. Paul Ashworth, Chief North American Analyst at Capital Economics, stated in a report: "The sub-item data in the June PPI used to calculate the PCE is significantly lower than expected, suggesting that the May PCE growth rate may also be revised downwards, although by a small margin."

Following the release of the PPI data, U.S. bond yields rose on Friday, but did not change the overall expectation that the Fed may cut interest rates at the September meeting. The yield on the 10-year U.S. Treasury rose by 3.5 basis points to 4.227%, higher than the pre-data release level of 4.204%. After the data release, the yield on the 2-year U.S. Treasury slightly increased to 4.510%. Prior to the report, it was at 4.495%. Spot gold fell by $7 in the short term, dropping to $2396.09 per ounce. The U.S. Dollar Index (DXY) rose by 14 points in the short term, currently at 104.38