Bonds Higher on Soft PPI Reading

STOCK INDEX FUTURES

Stock index futures are higher after PPI inflation data came in below expectations, with headline PPI inflation showing no increase in June. Markets now await industrial production data due later this morning. Goldman Sachs profits surged in the second quarter as the bank credited a boost in dealmaking and trading activity for the 22% jump in earnings. Investment banking fees jumped 26% due largely to advising companies on mergers, while trading revenue grew by 36%. The earnings beat echoes a similar story to JPMorgan Chase, who also beat second-quarter earnings, crediting a boost in revenue from M&A and equity underwriting. Nvidia said it plans to resume sales of its H20 AI chip in China after securing Washington’s assurances that shipments would get approved. The move is a sharp reversal from the Trump administration’s earlier stance, which restricted exports of Nvidia’s advanced chips.

President Trump said on Tuesday that the United States had struck a trade deal with Indonesia. Meanwhile, EU trade chief Maroš Šefčovič is heading to Washington for talks. Mexico’s President Claudia Sheinbaum said that she believed Mexico and the US were close to finalizing an agreement on security and trade and expected it to be signed before the August 1 deadline when the new tariffs are set to take effect.

Data from FactSet published July 3 showed analysts are coming into second-quarter earnings season expecting 5% earnings growth for the S&P 500. Should this forecast come through, it will mark the slowest pace of profit growth since the fourth quarter of 2023. Second quarter earnings include President Trump’s “Liberation Day” tariff announcement, which seeded uncertainty in the market preceding a historic rally. Looking forward, in the third quarter, analysts are expecting earnings will grow 7.3% over last year. Full-year profit growth is expected to clock in at 9%, according to FactSet data.

Other data on economic activity includes June retail sales data on Thursday. The University of Michigan’s July preliminary consumer survey on Friday will give a more up-to-date snapshot of consumer sentiment.

CURRENCY FUTURES

The USD index is lower after PPI inflation data showed a smaller-than-expected footprint on prices. The Labor Department reported that the producer price index, which tracks inflation before it hits consumers, was unchanged last month from May and up 2.3% from a year earlier. Both measures came in below what economists had expected.

Euro futures are little changed following US inflation data and EU export data. EU exports to the US fell for the second straight month in May after a first-quarter surge but remained higher than a year earlier. Exports to the U.S. from the European Union edged down to 46.2 billion euros, or around $53.6 billion, in May from 47.6 billion euros a month earlier, statistics agency Eurostat said Wednesday. Overall exports fell 0.8%, with the EU’s overall trade surplus rising to 13.4 billion euros. The EU extended its pause on retaliatory measures to US tariffs until early August and continues to push for negotiations. The final estimate of eurozone inflation for June is due on Thursday. Provisional data showed annual inflation crept up to the European Central Bank’s target of 2.0% last month.

British pound futures are higher, as new data showed inflation in the UK rose above expectations. The annual rate of inflation ticked up to 3.6% in June, up from 3.4% in May. The unexpected increase sends worries of persistent inflation fears in the UK, as the Bank of England’s rate decision next month will have to balance out a weakening labor market and rising inflation. Annual inflation was unchanged on the month in the important services sector, a key focus for policymakers. The headline rate was notably pushed higher by the rising cost of motor fuels, a result of a spike in crude-oil prices following a flare-up in the conflict between Israel and Iran last month. That effect will likely reverse in July’s inflation numbers. Jobs data is due Thursday, and markets will watch for signs of weak employment growth and wage growth. Recent data has shown the economy contracted again by 0.1% in May. UK money markets are pricing a 78% chance of a 25 basis-point rate reduction in August. Investors still remain concerned over the outlook for the UK economy, in light of weak economic data and tighter fiscal conditions after a landmark welfare benefits bill strained the government’s finances.

Japanese yen futures are higher on dollar weakness, despite pressure from the upcoming election on Sunday and fiscal concerns mounting on the yen. The yield on the 20-year Japanese government bond surged to its highest since 2000, and 30-year yields neared an all-time high hit on May 21, as concerns grew that an upcoming election there could pave the way for increased fiscal spending. There is lots of speculation that the ruling coalition will lose its majority in the Upper House and the new ruling party will increase fiscal stimulus and create tax cuts. Data due Friday is expected to show that inflation continues to rise. Core consumer prices, excluding fresh food, are forecast to have increased 3.4% in June from a year earlier, compared to a 3.7% rise in May. Despite stronger inflation, uncertainty over the trade picture with the US means the Bank of Japan is unlikely to rush into an interest-rate hike. Trade data due Thursday may show a further slowdown in exports in June, after a 1.7% fall in May from a year earlier. On Friday, the BoJ is scheduled to conduct outright purchases in four sectors of the Japanese government bond market.

Australian dollar futures are higher as the dollar weakened following a weaker-than-expected PPI inflation reading. The Westpac-Melbourne Institute Consumer Sentiment Index rose by 0.6% month-over-month to 93.1 in July, a third straight monthly gain, signaling a small improvement in consumer outlook. Markets now turn their attention to Australian employment and inflation data due Thursday for signs of relief in prices as markets expect the Reserve Bank of Australia to cut interest rates in August, data dependent. The labor market in Australia has remained resilient over the past year, although worries of a slowdown have appeared in some forward-looking indicators. Median forecasts of an increase of 20,000 new jobs after a rare dip in May, with the jobless rate holding at 4.1%, where it has been for much of the past year. The unemployment rate has been sitting between 3.9% and 4.2% since late 2023, a surprising stretch of resilience in the face of a slowdown in the overall economy.

INTEREST RATE MARKET FUTURES

Futures are higher across the curve as PPI data showed no change in June. Core prices also did not change, while annualized PPI inflation ticked down to 2.3% from 2.7%, while core inflation fell to 2.6% from 3.2% a month earlier. Final demand goods prices rose 0.3%, the largest increase since February, with the jump in sector prices attributed to core goods, which are more sensitive to tariffs. Prices for final demand services fell 0.1%, offsetting the increase in final demand goods, resulting in overall inflation being unchanged. Despite the cooler-than-expected reading, the data shows that tariff-sensitive sectors are beginning to feel price pressures, likely as a result of tariffs. The rise in final demand goods prices suggests that producers are facing higher costs on tariff-sensitive goods, which could lead to higher consumer prices in the future as businesses pass those costs along the supply chain.

CPI inflation in June rose 0.3% in June after rising 0.1% in May. Inflation ticked up to 2.7% on an annualized basis. Core CPI inflation rose 0.2% in June, below expectations of a 0.3% rise, while core prices ticked higher from 2.8% to 2.9% on an annualized basis. Shelter/housing inflation rose 0.2% and was the primary factor in the increase in inflation. Energy prices rose 0.9% as the gasoline index rose 1.0% over the month, although the energy index decreased 0.8% on an annualized basis. Food prices also contributed to the uptick, rising 0.3%. The readings reinforce comments out of the Fed that prices would increase into the summer.

A key risk to the economy is the impact inflation will have on consumer spending and the extent to which firms will pass on tariffs to consumers. If firms and companies cannot absorb the tariff costs and pass them onto consumers, that could be a significant factor in driving an economic slowdown.

Treasury Secretary Scott Bessent said that the Treasury does not plan to increase the auction sizes of the longer-dated debt at current interest rates, which could provide support for longer-term debt prices. That will leave the Treasury more dependent on short-term Treasury bill issuance to finance its operations. The Treasury is expected to ramp up net T-bill issuance in order to replenish its cash balance closer to $850 billion by the end of the quarter. More than $1 trillion in short-term T-bills are expected to hit the market over the next one and a half years following the increase of the debt ceiling. However, money market funds will remain steadfast buyers, providing ample demand for the short-term debt. Money market funds have a record $7.4 trillion in assets as of July 1 and plan to take on more supply. Estimates of new Treasury issuance over the next 18 months are between $900 billion and $1.6 trillion, higher than initial projections before the debt ceiling was raised.

Economic adviser Kevin Hassett remarked that President Trump “can fire” Fed Chair Jerome Powell “if there’s cause,” stirring fresh speculation around the central bank’s independence. Meanwhile, US Treasury Secretary Scott Bessent, in an interview on Tuesday, said that a “formal process” is already starting to identify a potential successor to Federal Reserve Chairman Jerome Powell.

The 10-year Treasury yield is 4.47%, and the 30-year yield is 5.02%. The spread between the two- and 10-year yields rose to 52 bps from 50 bps on Tuesday.

Interested in more futures markets?  Explore our Market Dashboards here.