NEW YORK — The Producer Price Index for June rose 0.5 percent month-over-month, well above the 0.2 percent consensus forecast. Core PPI, excluding food and energy, gained 0.4 percent, double the 0.2 percent expectation. The inflation surprise sent the two-year Treasury yield up seven basis points to 4.98 percent as markets repriced short-term rate expectations.
The 10-year Treasury yield climbed four basis points to 4.45 percent, flattening the 2s10s curve to 53 basis points. Intermediate goods led the supply-side pressure, posting a 0.9 percent monthly gain. With input costs rising at that pace, duration risk remains elevated for fixed-income portfolios and the disinflation case grows harder to defend.
Fed funds futures now price a 35 percent probability of a rate cut by September 2026, down sharply from 60 percent the prior morning. former Federal Reserve Chair Jerome Powell has said the Fed will take a data-dependent approach to policy and requires sustained progress toward the 2 percent target before adjusting rates. This print does not provide that progress.
Goods prices drove much of the monthly increase, rising 0.8 percent, led by energy and processed materials. Services costs gained 0.3 percent, signaling broad-based pressure across sectors. The dollar index strengthened 0.3 percent to 106.1 as higher U.S. yields attracted capital inflows.
Equity markets retreated after the inflation print, with the S&P 500 dropping 0.1 percent to 7,499 and the Nasdaq falling 0.6 percent to 25,691. Companies with high operating leverage face margin compression if they cannot pass rising input costs to consumers. Persistent producer-level inflation reinforces a higher-for-longer rate outlook and raises the prospect of further spread widening in corporate credit as funding costs climb.
