If strong:
Thursday’s stronger-than-expected PPI shows that inflation data remains volatile and that the inflationary effects from tariffs that many were worried about may be starting to show up in the data. Thursday’s strong PPI adds confusion to the inflation picture, especially after Wednesday’s softer-than-expected CPI. It may take a few more months of inflation data to get a better handle on how tariffs are impacting inflation across the economy. We believe Thursday’s data is likely to keep the Federal Reserve on hold in the near term when it comes to any movements on interest rates.
If weak:
Thursday’s weaker-than-expected PPI shows that we are continuing to make progress on inflation moving back near the Federal Reserve’s 2% target, even as we face continued uncertainty over tariffs. The PPI data follows Wednesday’s soft CPI data and may be showing us that the inflation picture is normalizing, which would be good news for consumers and the Federal Reserve. If we continue to see tame inflation data, it may keep the prospect of Federal Reserve rate cuts on the table for the second half of 2025.
Broader comments:
There continues to be positive developments on trade negotiations with China, which may be why the stock market has been recovering from its April lows and is moving ever closer to its all-time record highs from February. The economy has been more resilient than many expected, with softening inflation, a strong labor market, and its capacity to adapt to tariff uncertainty. The ability of the economy to adapt may be one reason why the stock market has been able to rebound in relatively short order from its April lows.
While stocks have rebounded and are approaching the record levels seen in February, investors may soon be wondering what could push stocks beyond that threshold. The next catalyst for markets may be a trade deal with China, the extension of the 2017 tax cuts, and the prospect of Federal Reserve rate cuts as inflation continues to soften.
