The latest Producer Price Index (PPI) data has revealed stronger-than-expected inflationary pressures, signaling that rising costs in the energy sector are now spreading to the broader economy. This development, combined with projections for a 0.32% month-over-month increase in the core Personal Consumption Expenditures (PCE) price index for September, has intensified market expectations for another interest rate hike by the Federal Reserve before the end of the year.
According to the CME FedWatch tool, the probability of at least one more rate hike this year has surpassed 90%. Economists, including Patrick Harker, former President and CEO of the Federal Reserve Bank of Philadelphia, and Nathan Sheets, Global Chief Economist at Citigroup, suggest that the Fed could act as early as this month. Harker stated, 'The numbers just cry out for them taking action. I think October should be on the table,' while Sheets noted, 'That the October meeting is live. I don't think the reality of the upcoming midterms will take that off the table.'
Despite the rising expectations for rate hikes, which typically push up short-term interest rates and drive benchmark 10-year US Treasury yields higher, overnight markets experienced a reverse movement. The 10-year Treasury yield dropped to 5.04%, its lowest level in three weeks, before settling at 5.09%. Analysts attribute this to growing concerns over financing risks for AI-related firms, leading investors to reassess the impact of elevated interest rates on economic growth and corporate debt servicing capacity.
Torsten Slok, Partner and Chief Economist at Apollo Global Management, highlighted the significant dependency of GDP data on AI, suggesting that a slowdown in the AI trade could lead to slower growth. Additionally, the widening gap between PPI and Consumer Price Index (CPI) growth rates, currently at 2.6 percentage points, indicates that production costs are rising faster than consumer prices. Industry observers warn that if corporations cannot pass these cost pressures down to consumers, it could pose risks to corporate earnings, particularly in energy-intensive and transport-related sectors.