Bitunix Analyst: PPI Cools the Hike Pressure — But Core Prices and Long-Bond Supply Still Cap Rate Downside

August 14th. In the United States, the July PPI monthly rate unexpectedly remained flat, with the annual growth rate dropping to 4.7%. Coupled with the cooling of CPI announced the previous day, indicating that the retreat in energy prices is easing inflationary pressures on the production side. Market expectations for a September rate hike by the Federal Reserve have also dropped from around 50% to about 35% to 40%. However, the core final demand PPI, which excludes food, energy, and trade services, increased by 0.4% month-on-month, showing that underlying price pressures have not completely dissipated. Initial jobless claims rose to 209,000, reflecting some signs of cooling in the labor market.

What is truly worth noting is that the cooling of inflation has not simultaneously addressed the U.S.'s long-term financing issue. The U.S. 30-year Treasury bond auction saw a bid-to-cover ratio resulting in a yield of 5.216%, marking the highest issuance yield since 2001. In an environment of high fiscal deficits, increased Treasury supply, and the Federal Reserve no longer being the primary buyer, long-dated U.S. bonds require a higher term premium to absorb supply. This implies that the cost of capital in the U.S. economy may not rapidly decrease alongside the short-term inflation cooling.

Meanwhile, after Japan's intervention in the yen, the USD/JPY rate once again approached 160. Some arbitrage traders took advantage of the yen's rebound post-intervention to re-establish funding trades. As long as the U.S.-Japan interest rate differential persists, the attractiveness of the yen as a low-cost funding currency is unlikely to diminish. If the Bank of Japan raises rates or intervenes again, it may lead to higher exchange rate and leverage fluctuations.

Overall, while the July inflation data does provide the Federal Reserve with more observation room, this does not mean that financial conditions will quickly loosen. While short-term rate pressures decrease, factors such as the U.S. fiscal deficit, long-term bond supply, energy prices, and yen arbitrage could still impact asset pricing through long-term yields and global cost of funds. For the market, what truly matters next is not a singular inflation data point, but whether the cooling of inflation can be sustained and if long-term funding costs can simultaneously decline.