US July PPI Flat, Fed Hike Odds Drop to 35-40%, Core Pressures Persist

Flat July PPI and falling CPI reduce September rate hike probability to 35-40%. However, rising core PPI, high Treasury yields, and yen arbitrage risks sustain long-term funding cost pressures.

Woofun AI data shows that the U.S. July Producer Price Index remained flat, with annual growth falling to 4.7%, while recent Consumer Price Index declines signal easing production-side inflation driven by lower energy costs. Consequently, market expectations for a Federal Reserve rate increase in September have retreated from approximately 50% to a range of 35% to 40%. Despite this, core final demand PPI, excluding food, energy, and trade services, increased by 0.4% month-over-month, indicating that underlying price pressures remain intact.

Initial unemployment claims rose to 209,000, suggesting cooling labor market conditions.

However, structural financing challenges persist, as evidenced by the auction of $25 billion in 30-year U.S. Treasury bonds at a yield of 5.216%, the highest issuance yield since 2001. With elevated fiscal deficits and reduced Federal Reserve purchasing, longer-term bonds require higher term premiums to absorb supply, implying that U.S. economic funding costs may not decline rapidly despite short-term inflation improvements.

Additionally, the dollar-yen pair approached 160 following Bank of Japan intervention, prompting some traders to resume yen carry trades. The persistent interest rate differential between the U.S. and Japan maintains the yen's attractiveness for low-cost financing, creating potential for heightened exchange rate and leverage volatility if the BOJ implements further rate hikes or interventions.