Ahmad Assiri
US equities have pushed to record highs, extending earlier in the week moderate gains, reflecting a market that is leaning into the prospect of a more supportive monetary backdrop despite lingering pockets of price pressure.
Today, attention turns to the US Producer Price Index PPI, expected to accelerate to 2.5% y/y from 2.3% previously. As an early-stage gauge of price pressures in production before they reach the consumer, PPI can signal potential pipeline inflation. A stronger-than-expected print could hint at upward pressure on future CPI readings, narrowing the Fed’s scope to cut rates, while a softer figure would reinforce the dovish narrative currently driving markets and could prompt a further pricing of the easing path.
Markets also drew impetus from the political front as US Treasury Secretary Scott Bessent made an unusually direct call for a 50 bps rate cut at the next FOMC meeting, an intervention in monetary policy but being normalised somewhat. This coincided with reports of high profile candidates being floated to succeed Jerome Powell when his term ends, including senior figures from BlackRock and Jefferies as well as previously named contenders such as Kevin Warsh. While this adds an element of uncertainty to the policy outlook, it also signals the start of a more formal succession process, moving away from the political threats seen in the past few months.
Leadership speculation matters as a change at the top could reintroduce a Fed’s new agenda to balance inflation and growth, potentially opening the door to more growth-friendly policies even in the face of moderate inflation. Markets, ever forward-looking, are already gaming out scenarios ranging from a faster pace of rate cuts, potentially up to 100 bps within a year, to revisiting the medium-term inflation target.
Gold has been a clear beneficiary of this mix, supported by a softer dollar, investor hedging against the twin forces of possible monetary easing and lingering price pressures, and the unwinding of last week’s Swiss gold tariff headlines. The metal has reclaimed its 50 day moving average, an area previously flagged as a key positioning zone.
Sentiment will not be shaped by CPI and PPI alone, as tomorrow’s US retail sales data holds special weight at this juncture. Beyond being a proxy for consumer activity, it serves as a mirror to consumer sentiment. The forecast range indicates 0.5% m/m, which could temper the current 93% market pricing for a 25 bps September cut and force a rethink of how far the Fed is willing to go on easing.
The broader picture reveals a market driven by the trajectory of US monetary policy which is now closer to a dovish turn, the political and institutional dynamics that could reshape Fed leadership and economic priorities, and the conflicting inflation signals where headline measures are easing but core components remain more resilient than policymakers might prefer.
Sentiment will not hinge on CPI and PPI alone, as Friday’s US retail sales release carries influence at this stage in the cycle. Beyond serving as a gauge of consumer activity, it is a direct read on household confidence, the backbone of the US economy. A stronger outcome could challenge the market’s conviction, currently price a 93% probability of a 25 bps September cut, while a softer print would strengthen the dovish narrative already in motion.
Stepping back, the market remains tethered to three powerful forces: the trajectory of US monetary policy, now on the cusp of a pivot toward looser conditions. Second, the political and institutional currents that will shape Fed leadership and introduce new agendas, and third, the divergence between softening headline inflation and the stickier core measures that remain uncomfortably firm. Against this backdrop, investors are treading a fine line between optimism to some degree and preparedness for a weaker labour market.
Assiri is Research Strategist at Pepperstone
