U.S. PPI rekindles inflation nerves; Fed hike odds jump to 74% as yields climb

Fresh U.S. inflation signals rattled markets after the August Producer Price Index (PPI) report. Data released on September 10 showed headline PPI rising 0.4% month over month and 5.4% year over year. Core PPI, which excludes food and energy, increased 0.2% on the month, below the 0.3% consensus. Even with the softer core reading, rate expectations moved the other way. The market-implied probability of a Federal Reserve hike next week rose to 74% from 62.1% the prior day. Investors remain focused on sticky price pressures and the risk that borrowing costs keep rising. Energy was the standout. Diesel prices surged 24.1% month over month in August, helping push overall energy prices up 4.2%. Transportation and warehousing services rose 2.3%. Diesel accounted for more than one-third of the increase in final-demand goods prices, highlighting how fuel costs can ripple through production, logistics and distribution. Upstream pressures also intensified. Prices for intermediate processed goods climbed 1.8% month over month and 11.5% year over year, while unprocessed intermediate goods rose 1.1% on the month and 12.8% year over year. The figures suggest energy-driven shocks are moving through the supply chain and could add to consumer inflation in coming months. Oil prices have been rising since the outbreak of the conflict in Iran. WTI crude has retested the $100 level, while Brent reached its highest level in nearly four months. Stephen Brown, Chief North American Economist at Capital Economics, said several components that feed directly into the Fed's preferred inflation gauge, the Personal Consumption Expenditures Price Index (PCE) — including fuel, air transportation, legal services and hospital prices — were "quite strong" in August. Chris Rupkey, Chief Economist at Fwdbonds, said the PPI report does not ease inflation concerns and keeps the spotlight on risks that matter to Fed officials focused on rising prices. Treasuries sold off after the release. The 2-year yield jumped 15 basis points to 4.58%, the highest level since 2024. The 10-year yield rose 7 basis points to 4.91%, nearing the 5% threshold and marking the highest level since October 2023. Wall Street strategists often view a sustained move above 5% on the 10-year as a pressure point for equities. Tom di Galoma, Managing Director at Mischler Financial Group, said: "If it breaks above 4.95%, I think it will reach 5%." Attention also turned to the Treasury's long-term bond repurchase program. On Thursday, U.S. Treasury Secretary Bessent carried out the first expanded long-term buyback, with a stated cap of up to $6 billion in 10- to 20-year Treasuries. The Treasury bought back $5.187 billion, leaving part of the announced ceiling unused, even as investors submitted $10.5 billion in offers. The decision to be selective disappointed some participants. It was only the third time out of 53 long-term buyback operations since the program was relaunched in 2024 that the Treasury did not use the full maximum. Molly Brooks, strategist at TD Securities, said the outcome showed tougher selection than usual and suggested that meeting expectations for full-size buybacks aimed at lowering long-term rates could require accepting less attractive bids going forward. Market participants also questioned the effectiveness of the operation. Against a roughly $32 trillion Treasury market, a $6 billion buyback is modest. Padhraic Garvey, Head of Global Rates and Debt Strategy at ING, said the market had expected a size as large as $10 billion, calling the announced amount "merely an appetizer." Jim Barnes, Head of Fixed Income at Bryn Mawr Trust, said the episode could reinforce worries that deficits and outstanding debt are larger than previously assumed if the Treasury appears focused on capping yields. For investors, the concern is a two-front cost squeeze: higher fuel prices and higher interest rates. Rising energy and financing expenses can pressure margins, while higher bond yields can raise the required return on stocks, weighing on valuations. High-valuation growth names, heavily leveraged companies, and transport and consumer businesses with limited pricing power may be most exposed. Still, higher yields do not automatically translate into an equity crash. In a May note, HSBC strategist Max Kettner said the speed of rate moves and the strength of earnings shape market resilience. Gradual increases give markets time to adjust; abrupt jumps are more likely to trigger selling. In fixed income, higher yields improve prospective returns for new buyers, but existing long-duration holdings can continue to lose value if yields rise further. Higher rates are not the same as short-term safety. The next checkpoints for markets: whether CPI shows clearer cooling, whether oil prices stabilize, and whether corporate profits can hold up. If energy pressures ease, expectations for further hikes could recede and sentiment may improve. If price increases keep spreading, investors may face higher financing costs and thinner margins. Twitter: BitPush Telegram community: BitPush TG subscription Disclaimer: All articles by BiTui represent the authors' opinions only and do not constitute investment advice. Related News: MetaMask goes solo: Consensys spins off its most profitable product Stole 4,100 BTC, spent millions in one night: 22-year-old "yellow-haired thief" arrested Burned $15 million in 88 hours; OpenAI accused of "stealing" a 200-year-old mathematical breakthrough Wang Chun lashes out, ZEC doubles: Can privacy coins still catch up? Another one! OpenAI agent "jailbroken" a German website, silently altering data tens of thousands of times for months