Markets Dip as PPI Inflation Comes in Hotter Than Expected – Russell 2000 Lags

Wholesale prices surged unexpectedly in July, raising concerns that inflation remains a significant threat to the U.S. economy and triggering a sell-off in the markets, with the NASDAQ experiencing a notable dip pre-market, down 0.42%. The SPY ETF is also down 0.4%, whilst the DIA has fared best of the three, down 0.36% in the pre-market leading into the open.

The Russell 2000 ETF (IWM), containing companies more exposed to high interest rates is notably worse off, down 1.25%.

The Producer Price Index (PPI), a measure of final demand goods and services prices, jumped 0.9% for the month, significantly exceeding the Dow Jones estimate of 0.2%. This marks the largest monthly increase since June 2022.

Core PPI, excluding volatile food and energy prices, also exceeded expectations, rising 0.9% against a forecast of 0.3%. When food, energy, and trade services are excluded, the index climbed 0.6%, the most substantial gain since March 2022. The unexpected strength in producer prices suggests that inflationary pressures are proving more stubborn than anticipated.

On an annualized basis, the headline PPI increased by 3.3%, the largest 12-month move since February. This figure is well above the Federal Reserve’s 2% inflation target, potentially complicating the central bank’s efforts to manage monetary policy and maintain economic stability. The hotter-than-expected PPI data may prompt the Federal Reserve to maintain its hawkish stance on interest rates.

Services inflation was a major driver of the overall increase, rising 1.1% in July, the largest gain since March 2022. Trade services margins increased by 2%, amid ongoing developments related to tariff implementations. A significant portion (30%) of the increase in services stemmed from a 3.8% rise in machinery and equipment wholesaling, further contributing to the inflationary pressure.

The market reaction to the PPI data was swift, with each of the major indices pulling back in extended hour sas markets reassessed the outlook for interest rates and economic growth. The prospect of continued high interest rates, aimed at curbing inflation, raises concerns about the potential impact on corporate earnings and overall economic activity. This is especially true for growth-oriented tech companies heavily represented in the NASDAQ.

The strong PPI numbers have increased uncertainty about the future path of monetary policy, even if markets are continuing to price in a cut for September. It is the possibility of a third cut at the end of the year which has narrowed off the back of today's print.