PPI Offers no Relief to Yields

MACRO FRAME

October’s PPI showed relief from September’s energy-driven surge, but persistent increases in underlying goods and services prices keep further Fed tightening in focus as markets navigate higher yields and uncertainty across the AI sector.

STOCK INDEX FUTURES

Equity index futures rose overnight. Investors continue to assess Nvidia’s leadership transition against a less supportive interest-rate backdrop. Nvidia remained central to technology sentiment after Jensen Huang’s departure and CFO Colette Kress stepping into the leadership role. Shares fell 4.3% Thursday, with investors assessing the implications for strategy, customer relationships and the broader AI ecosystem. Tuesday’s earnings release will be an important opportunity for management to address those questions. A management transition does not weaken immediate demand for Nvidia’s chips, but the uncertainty affects confidence across the broader AI ecosystem. CoreWeave’s strong results earlier in the week provided evidence of continued infrastructure demand, but did not eliminate concerns about financing costs and investment returns.

October’s PPI showed producer prices rose 0.3%, slowing sharply from September’s 1.4% increase, but the measure excluding food, energy, and trade services advanced 0.5% for a second consecutive month. Headline producer inflation increased to 6.5% year over year, its highest since November 2022.

CURRENCIES

US DOLLAR: The USD index held near 103.165, near its highest level since April 2025, as Fed tightening expectations support the currency. October’s PPI report reinforces interest-rate support for the dollar by sustaining hawkish Fed pricing. The dollar’s strong move upwards as of recent reflects economic data that has shifted the debate from whether the Fed raises rates in December toward how much further rates will move in 2027. Markets predominantly expect a quarter-point December hike, while retaining a smaller probability of a half-point move

EURO: The euro is little changed at $1.1055. Expectations for a sustained Fed tightening cycle continued to weigh on the currency, while Europe’s energy exposure leaves it vulnerable to renewed Middle East disruption. ECB Chief Economist Philip Lane indicated that a December increase would be prudent unless the data changed meaningfully. The key question is therefore the policy path beyond that meeting. Lower energy prices could ease European inflation pressure, while resilient US growth and persistent underlying inflation could sustain Fed tightening. French fiscal concerns and limited progress toward a Russia–Ukraine agreement provided additional headwinds. Markets assign roughly a 82% probability to a December hike and are fully priced for a rate hike in February. The ECB’s hawkish hold and forward guidance has all but guaranteed a rate hike at the bank’s meeting in December. The euro’s upside, however, is likely to be contained by the prospect that December’s rate hike will be followed by a pause.

BRITISH POUND: Sterling is little changed at $1.3232. Resilient UK growth and expectations for another Bank of England hike have limited further downside to the dollar; markets are assigning approximately an 85% probability to a December increase. The pound remained firmer against the euro near 83.55 pence, highlighting that its resilience across currency pairs. Next Friday’s UK inflation report will help determine whether domestic rate expectations can continue to offset the dollar’s yield advantage. With markets already anticipating nearly four quarter-point increases next year, sterling remains sensitive to any guidance that tempers those expectations. While the UK economy has shown resilience, the bank will likely remain cautious against future rate hikes to avoid slowing its fragile growth backdrop.

JAPANESE YEN: The yen is little changed at 159.89 yen per dollar, rising US yields outweighed expectations for additional Bank of Japan tightening. Intervention risk remains elevated following renewed warnings from Japanese authorities. The smaller-than-anticipated US contribution to the summer operation may encourage traders to test the yen, but it does not eliminate the possibility of substantial Japanese action. The pace and disorderliness of depreciation remain important alongside the exchange-rate level.

AUSTRALIAN DOLLAR: The Aussie is down 0.26% to $0.6789, a 10-month low. Broad dollar strength and renewed technology-sector weakness weighed on the growth-sensitive currency. The combination of softer Australian activity indicators and expectations for further US tightening continues to offer downside pressures. Consumer confidence fell to a four-year low, while business conditions remained negative following five RBA hikes this year. The domestic data points to signs that rate hikes from the RBA are working and could set up conditions for inflation to begin to moderate. Markets expect that Australian rates have peaked, with a quarter-point cut fully priced by the end of 2027.

TREASURY FUTURES

Yields moved higher across the curve in a steepening move. The two-year yield is trading at 4.86%, reflecting a 31 bps increase since the start of the week. October’s PPI showed a sharp moderation in headline monthly inflation but persistent pressure beneath the surface. The index excluding food, energy and trade services rose 0.5% for a second month, although its annual rate edged down to 4.9% from 5.0%. Goods excluding food and energy increased 0.5%, accounting for more than 60% of the monthly goods-price advance, and food prices rose 1.3%. Final-demand services rose 0.2%, down from 1.0% in September, with transportation and warehousing increasing 2.0%. A 3.9% rise in truck-freight prices accounted for more than 80% of the overall services increase.  This leaves a less reassuring picture and following the CPI data suggests that higher freight costs are beginning to be felt in broader consumer prices. Williams, Hammack and Daly have all indicated that further tightening is likely necessary, while Hammack explicitly favored smaller, more frequent increases and Daly emphasized that higher market yields are already helping restrain activity. Markets are priced for 63 bps of tightening by March and 87 bps by year-end.

Business surveys remain useful tests of whether activity is slowing enough to challenge the higher-rate outlook. October’s manufacturing PMI strengthened to 55.5, while services moderated to 54.5 but continued to indicate expansion. Those readings provide little evidence of any downturn that would strengthen the case for a sustained growth-led Treasury rally. New orders, employment and prices-paid components will be particularly important in subsequent releases.

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