Stock markets steadied after US producer price index (PPI) data revealed a smaller-than-expected increase in wholesale inflation, renewing speculation over upcoming Federal Reserve interest rate cuts. Treasury bonds gained as yields fell across the curve, gold prices rallied, and the US dollar weakened against major currencies.
The May PPI rose just 0.1%, below the median forecast of 0.2%. Core wholesale inflation—excluding food and energy—fell to 3% year-on-year, the lowest since August 2024. The headline inflation rate nudged up slightly to 2.6% from 2.5% in April, matching economists’ expectations.
The modest monthly rise mainly stemmed from a rebound in trade services prices, indicating wholesalers passed higher input costs onto consumers by rebuilding margins. This pattern supports the benign consumer price index (CPI) data released yesterday, reinforcing the idea that inflation pressures remain contained.
In April, wholesalers absorbed input cost increases linked to tariffs by shrinking margins, which masked true inflationary pressure and made CPI figures appear deceptively stable. May’s data suggest both PPI and CPI reflect a more accurate, subdued inflation trend despite renewed cost pass-through—fueling hopes the Fed may be able to cut rates sooner than expected.
Market expectations for Federal Reserve policy, as reflected in benchmark Fed Funds futures, realigned with the Fed’s baseline projection of 50 basis points (bps) in rate cuts this year and next. Earlier this week, markets priced in slightly fewer cuts, shifting more easing to 2026 after a delayed start in 2025.
Attention now turns to US consumer confidence data from the University of Michigan, anticipated to show a modest rebound following a three-year low in April and a flat reading in May. Last month’s mixed sentiment stemmed from deep pessimism about current conditions offset by slightly improved future expectations.
If May’s consumer confidence data reflect continued moderation alongside easing one-year inflation expectations—which historically move opposite the headline sentiment index since COVID-19—this may further encourage the Fed to accelerate easing. In this scenario, the dollar could continue to weaken while gold and Treasury bonds gain.
Stock market reactions will likely depend on the outlook for consumption, the largest driver of US GDP growth. First-quarter consumer spending was worryingly weak, contributing the smallest boost to output in nearly two years. Leading indicators, such as rising jobless claims averaging a two-year high, signal potential softness ahead.
