Inflation chain cooling and employment revision: the double pressure before the Federal Reserve's interest rate

On Wednesday (September 10), the US producer price index (PPI) in August fell to 2.6% year-on-year, lower than the 3.3% in July and the 3.3% expected by the market; the core PPI fell to 2.8% year-on-year, and the monthly rate was unexpectedly -0.1%. The data was released the day before the CPI on Thursday, which became the first evidence of the "upstream" of the inflation chain. On the employment side, the recently released employment data is soft; the BLS's preliminary benchmark for US non-farm workers was revised to - 911,000, indicating that labor supply and demand are cooling.

At the interest rate level, the market has fully factored in the interest rate cut of the Federal Reserve's September 16-17 meeting. The current probability of a rate cut for 25bp is 88.2%, and 50bp is 11.8%. However, Powell's previous statement in Jackson Hole emphasized that "policy is already in a restrictive area, and changes in the balance of risks may prompt us to adjust our position".

Data representation and interpretation

1) PPI: The reading of 2.6% year-on-year was significantly weaker than expected, the core 2.8% fell synchronously, and the monthly reading was -0.1%. The combination shows that the upstream price pressure has eased in stages. The marginal weakening of the energy and durable goods chain has eased concerns about "inflation stickiness".

2) Forward-looking significance for CPI: In history, the direction of PPI has often been one beat ahead of CPI, but the transmission and time lag are affected by the stickiness of service prices and wages. This PPI weakening will guide the market to further lower the distribution assumption of future inflation before the release of CPI.

3) Interfacing with the policy framework: Under the "data-dependent" formulation, the slowdown in inflation and the cooling in employment make the threshold for the path of interest rate reduction lower, but the threshold of a single 50bp is still high, considering that the inflation target is still symmetric at 2%. The PPI itself is not enough to change the full-year path, but it is enough to strengthen the "drop first and then wait and see" baseline.

Review and Positioning of Powell's Speech Points

In Jackson Hole, Mr. Powell emphasised that policy is in a restrictive range, and changes in the balance of risks may require an adjustment of stance; at the same time, supply-side shocks and uncertainty in labour supply make the path more dependent on real-time data. The overall tone is cautious and non-aggressive dovish: no commitment to rhythm, but leave room for the logic of "starting earlier and taking smaller steps". Combined with this PPI, the market's interpretation of "starting at 25bp, and then depending on the coherence of CPI and employment" will prevail.

Immediate market reaction

Dollar Index: Weaker PPI weakens nominal yield expectations of "longer and higher", and the dollar is under pressure in the short term. The market will pay attention to whether the CPI tomorrow verifies the combination of "commodity cooling + service stickiness easing". If confirmed, the dollar's rebound space is limited.

Gold: Weaker inflation reduces the upside risk of real interest rates, compounded by sensitivity to geopolitical uncertainties, gold is supported by short-term bargain buying. But if CPI does not weaken simultaneously, gold's upward elasticity will be suppressed.

US bond yields: The medium and long end is more sensitive to "nominal growth + inflation expectations", and the curve tends to be slightly steeper after the PPI weakens; the marginal probability of a 50bp interest rate cut is not high, which is conducive to restricting the long end from excessive downward exploration.

The differences between institutional and retail perspectives

The institutional side is more concerned about the impact of the chain consistency of "PPI → CPI → Parliament" and labor revisions on the output gap; the probability is still based on a 25bp interest rate cut, and only marginal defense is carried out on 50bp. Retail sentiment is more affected by the immediate fluctuations of exchange rate and gold. Precious metals have a strong intuition of "interest rate cuts are bullish", but the risk pricing of "interest rate cuts and paths are not as expected" is insufficient. The distribution of CME interest rate futures and FedWatch (25bp: 88.2%, 50bp: 11.8%) clearly reflects this structural divergence: the game between path and rhythm is greater than the direction itself.

The key to the market outlook and risks

1) The core variable is still tomorrow's CPI: if core services fall simultaneously, inflation will be anchored to the target range again, verifying the path of "first falling and then waiting"; if CPI and wage viscosity do not fall but rise, the easing of PPI will be discounted.

2) Communication during the interest rate week: The dot plot and the wording of the statement will determine whether to cut interest rates for the second time this year. If the path is shallow, the pressure on the dollar to rebound remains.

3) Risk list: Uncertainty about geopolitical events, repetition of tariff policies and supply shocks, and "rearview mirror risks" caused by data revisions may all change the curve pricing and exchange rate rhythm in the short term.