May PPI Surges

MACRO FRAME

Global equity markets continue to remain focused on US-Iran peace negotiations and a potential reopening of the Strait. Core inflation offers a reassuring print that energy-linked inflation has yet to make its way into broader price pressures.

STOCK INDEX FUTURES

Equity index futures were modestly higher overnight, recovering slightly from yesterday’s selloff as traders await Friday’s SpaceX IPO. Equity markets seem little fazed by the overnight strikes between the US and Iran; oil prices were little changed. Producer Price data for May showed that prices rose +1.1% MoM (seasonally adjusted), matching April’s +1.1% and accelerating from March’s +0.7%. On a 12-month basis, PPI jumped +6.5% YoY, the largest annual gain since November 2022’s +7.4%. The core reading rose +0.8% MoM, the biggest single-month move since March 2022, and +5.1% YoY to mark the hottest 12-month print since October 2022’s +5.5%.

Equities remain broadly supported by a persistent “buy the dip” mindset and powerful earnings upgrades, particularly in semiconductors where AI‑driven demand has pushed profit expectations sharply higher, but recent weakness has highlighted how narrowly this rally is concentrated in a handful of crowded AI and tech names. At the same time, index gains rest increasingly on optimistic earnings assumptions, one‑off mega‑cap gains, and policy‑related tax tailwinds, leaving markets historically expensive on long‑term metrics and vulnerable if growth, cash‑flow conversion, or tech capex discipline disappoint, especially with performance dispersion near COVID‑era and dot‑com extremes and the S&P 500’s advance since late February almost entirely driven by AI stocks.

Watch point: While May’s softer core CPI print reduces the urgency for additional Fed tightening and should be welcomed by equities, core inflation remains above target, suggesting policy will stay restrictive and reinforcing the case for selectively adding some defensive positioning alongside exposure to the ongoing tech‑led momentum.

CURRENCIES

US DOLLAR: The USD index is up 0.23% to 100.17 following today’s producer price data. The geopolitical overhang remains over the dollar following the flare up in strikes between the US and Iran in recent days. Signs of a breakdown in negotiations and a resumption of fighting between the countries are likely to be dollar positive, with increased demand for dollar liquidity. However, news of progress on negotiations will pressure the dollar. While Wednesday’s inflation data saw a strong headline surge, the core print likely offers enough ammunition for policymakers at the Fed to delay a move upwards in rates, at least until underlying inflationary readings begin moving higher. However, the strong move upwards in producer prices marks a worrying signal for members at the Fed. Traders will need to refer to upcoming PMI surveys for signals on if firms are passing the rise in costs onto consumers. Money markets are now fully priced for a hike by December.

Watch point: Demand for dollar liquidity remains heightened amid the flare up in hostilities, while May’s jobs report has provided the greenback with stronger support, potentially sustaining a break above into a higher range.

EURO: The euro is little changed at $1.1538 as attention centers around European Central Bank President Chistine Lagarde’s post policy decision comments. The ECB hiked its deposit rate by 25 bps to 2.25% this morning, its first rate increase since September 2023. Comments from Lagarde and other policymakers that second-round effects are of major concern are likely to bolster the euro and reinforce expectations of additional rate hikes from the ECB this year. We expect commentary from the ECB to reflect language that they remain well positioned in an environment of heightened uncertainty. Money markets one more rate hike from the central bank this year, coming in September, and have pushed expectations for a third hike to July of 2027, a significant repricing that earlier tightening expectations may have been overzealous.

A potential limiting factor for policy tightening, would be the easing in services inflation in the most recent data. Still, the ECB maintains the scope to tighten policy without worrying about impacts to economic growth, though the extent to which policy tightening is necessary may be limited to just June’s hike if the Strait is reopened within the month and if services inflation does not pick up. For the euro, broader risk sentiment will continue to determine price direction, while the interest rate differential against the dollar remains unfavorable given the recent shift in Fed expectations.

BRITISH POUND: Sterling is little changed at $1.3361. Aside from US-Iran developments, markets are looking ahead to UK GDP data on Friday. Recent PMI data has been revised upwards, which could reflect that the drop in sentiment over the economy may be overstated. Still, economic factors were a challenge ahead of the outbreak in hostilities between the US and Iran. Money markets have priced a rate hike out to September, while a second rate is ultimately favored in 2026.

JAPANESE YEN: The yen is little changed at 160.53 yen per dollar. Intervention risk remains front of mind for traders as the currency remains above the 160 level. Bank of Japan Governor Ueda was hospitalized on Wednesday and will miss next week’s policy meeting. The BoJ may feel pressure to hike, but with policy rates still deeply negative in real terms, incremental moves are unlikely to deliver a durable yen rebound or materially change Japan’s still-fragile exit from deflation. Instead, markets are increasingly focused on the broader policy mix: rising long yields alongside a weak currency highlight concerns over Japan’s heavy debt load, while political support for a weaker yen, equity benefits from FX depreciation, and reluctance to tackle the debt overhang suggest any sustained yen strength will require more than rate hikes alone. With a June rate hike pretty much fully priced in, yen weakness is likely to persist even despite a move upwards.

Any further depreciation in the yen is likely to be met with warnings from Japanese officials and raises the risk of official intervention. Traders are likely not willing to challenge official buying from the Bank of Japan or Japanese Treasury, though not excited to take up bullish positions either. The market sees a total of 44 bps of tightening by year-end.

AUSTRALIAN DOLLAR: The Aussie is 0.24% lower at $0.6987, breaking its 0.70 support level as the recent flare ups between the US and Iran kept risk-sentiment lower and as an unwinding of hawkish RBA expectation offer less support. The NAB recently called off their expectation of another rate hike from the Reserve Bank of Australia, saying they expect a slowdown in the economy to limit price growth. Meanwhile, a mix of softer economic data has led markets to pare back expectations of another rise in the RBA’s policy rate. Still, demand is largely outpacing supply, labor conditions remain tight, leaving the inflation bias pointed upwards. The RBA has broadly signaled that it is in a wait-and-see mode following three rate hikes earlier this year and as a result markets are no longer any hikes by the end of the year. However, the trimmed mean measure of inflation sits at an annual pace of 3.4%, which is likely to reinforce a tightening bias from the RBA.

TREASURY FUTURES

Yields are mixed across the curve, higher at the front end and lower at the long end in response to this morning’s developments and the geopolitical news overnight. Friday’s May nonfarm payrolls has removed labor market fragility from the Fed’s calculus, while today’s inflation data has reinforced a hawkish-leaning hold, but removed any immediate urgency to move rates higher. May’s headline PPI rose +1.1% MoM, with the 12-month rate climbing to +6.5% YoY, the largest annual gain since November 2022. Core PPI advanced +0.8% MoM, its biggest single-month move since March 2022, and +5.1% YoY. The goods component was the primary driver, surging +2.8% MoM, led by a +10.7% jump in energy prices and a +23.4% spike in gasoline. Services, by contrast, rose a more contained +0.3% MoM, with softening trade margins suggesting the retail and wholesale channel is absorbing rather than fully transmitting upstream costs. Markets price near-certainty on a June hold, but expectations of a hike later in the year remain unchanged from Friday. For now, price pressures have proven relatively transitory without presenting a durable second-round impulse. If core CPI prints above 3.0% annualized in coming readings, that argument becomes hard to sustain, particularly given that intermediate-stage pipeline pressures remain intense, with processed goods up +13.3% YoY and unprocessed goods up +22.2% YoY, the hottest upstream readings since 2022. The Treasury market has already begun pricing this scenario with the 2-year yield above 4.1% and the 10-year above 4.5%. Substantial curve flattening has been consistent with market sentiment repricing the front end for hikes rather than cuts.

Watch point: The path to tightening has become more evident though Wednesday’s inflation data offers relief for concerns of immediate policy tightening. Traders will look for evidence that price pressures have become more broad based as a gauge on policy expectations.

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