Freedom Broker: faster PPI growth will increase pressure on U.S. stocks

Faster producer inflation in the U.S. could push Treasury yields higher and increase pressure on rate-sensitive segments of the equity market, Freedom Broker analysts believe. The most negative scenario would be a simultaneous rise in PPI while the labor market remains strong.

The market is awaiting producer inflation data

The key event for the Sept. 10 session will be the release of the U.S. Producer Price Index for August. PPI (Producer Price Index) reflects changes in the prices at which U.S. producers sell goods and services. The indicator helps assess inflationary pressure at an early stage: rising business costs may eventually feed through to consumer prices.

PPI dynamics are factored in by investors when assessing the Federal Reserve’s future policy. Higher producer inflation may strengthen the case for an interest-rate hike, while slower price growth would reduce the need for additional tightening. Consensus forecasts call for headline PPI to rise 0,4% month over month after being flat in July. The core measure is expected by the market to increase 0,3% after a 0,2% rise the prior month.

Freedom Broker’s forecast is slightly below consensus. Analysts expect headline PPI to rise 0,36% and the core index by 0,24%. The measure excluding food, energy, and trade services, in their estimate, will increase 0,23%. The main contribution to the headline index may come from higher fuel prices. At the same time, the forecasts for the core measures do not imply a meaningful acceleration in prices across a broad range of goods and services.

An acceleration to 0,4% would be a negative signal

According to Freedom Broker, core measures rising by around 0,2% could support stocks by pushing Treasury yields lower. If the figures accelerate to 0,4% or exceed that level, investors may increase expectations of monetary-policy tightening ahead of the consumer inflation release.

Certain PPI components are used to calculate the PCE personal consumption expenditures deflator, so the structure of the report may prove more important than the headline reading. A more informative guide for the Federal Reserve’s September decision, however, will remain August CPI, which is expected to be released on Sept. 11.

After a strong jobs report and another rise in energy prices, the probability of a Fed rate hike at the September meeting is once again estimated at about 60%.

The U.S. market remains under pressure

Trading on Sept. 9 ended with declines in the major indices. The S&P 500 lost 0,48%, the Nasdaq 100 — 0,29%, the Dow Jones — 0,77%, and the Russell 2000 — 1,32%. Broad-market weakness was more pronounced than the S&P 500’s move: the number of declining components exceeded the number of advancers by more than four times, and the equal-weighted RSP fund fell 0,96%.

Industrials fell the most — down 1,51% — and producers of cyclical consumer goods dropped 1,34%. The only sector to finish the day higher was energy, up 0,83%.

Large-cap growth companies slipped 0,35% and proved more resilient than value stocks, which lost 0,60%. The most notable pressure was on small caps and rate-sensitive industries.

The balance of risks remains neutral

Futures on the main U.S. indices showed near-flat mixed performance ahead of the session open. Freedom Broker assesses the balance of risks as neutral but expects higher volatility after the macroeconomic data release.

Key support for the S&P 500 is in the 7580–7620 range, with resistance in the 7700–7720 area. A break of either zone could be grounds for revisiting the current risk balance.

After the PPI release, the main focus will be the reaction of Treasury yields. A decline could support equities, while further increases would add pressure on the segments most sensitive to financing costs.

This is not an individual investment recommendation.