Traders are dialing back expectations for a Federal Reserve rate cut next month after US wholesale inflation surged at the fastest pace in three years. The July Producer Price Index delivered an upside surprise, suggesting tariff driven import costs are being passed through to consumers  a warning shot for those banking on aggressive policy easing.
The move marks a sharp reversal from earlier in the week, when softer consumer price data and dovish remarks from Treasury Secretary Scott Bessent had markets fully pricing a quarter point September cut, with some wagers even stretching to 50 basis points. That conviction has now eased, with the probability of a September reduction slipping to around 90%, and investors rethinking the depth of any easing cycle amid persistent inflation risks. The PPI beat halted a Treasury rally and underscored the challenge for policymakers seeking to balance slowing growth against sticky price pressures.
Bessentâs earlier comments that rates could fall as much as 150 basis points over time still hang over the market narrative, but the latest data has tempered near term optimism. Traders are now positioning more cautiously, awaiting further confirmation from upcoming inflation releases and Fed communication before committing to fresh directional bets.
On the geopolitical front, Russian President Vladimir Putin has publicly praised US President Donald Trumpâs diplomatic push to end the war in Ukraine, signaling openness to deeper economic ties and the prospect of a new arms control pact. Markets are bracing for the high stakes Trump Putin summit, seen as a potential inflection point for both geopolitics and energy markets. European assets are holding a cautiously constructive tone, with investors weighing the potential for de-escalation against the risk of heightened volatility if talks falter.
Trading Takeaway:Â The inflation shock injects two way risk into Fed expectations. A softer tone from upcoming data could re-anchor aggressive cut bets, while further upside surprises would harden the Fedâs resolve and support the dollar. In FX, USD resilience may be tested against G10 peers sensitive to shifts in US yields, while geopolitical headlines could spark sharp moves in oil and European equities.
Disclaimer: This report is for informational purposes only. It does not constitute investment advice or represent the official views of any central bank or regulatory body.