The probability of a rate cut in September remains above 90%, but it did recede after the federal government said July wholesale prices rose faster than Wall Street expected. Weekly jobless claims data suggest the labor market remains stable. And earnings continue to generally support the long-term trend despite seasonal headwinds.
In between Tuesday’s cool Consumer Price Index (CPI) print and Thursday’s warm Producer Price Index (PPI) reading was Treasury Secretary Scott Bessent, who on Wednesday called for a 50 basis point cut (0.50%) at the next Fed meeting.
Federal funds rate futures pricing now reflects a 0.0% probability that Jerome Powell & Co. will make such a move, down from 5.7% Thursday. The odds-on favorite is a 25 basis point cut, at 92.6% as of August 14.
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The Federal Open Market Committee doesn’t meet in August, but members and other economic, financial and political luminaries will gather next week for the Jackson Hole Economic Symposium.
PPI report comes in hotter than expected
As for today’s PPI report, data from the Bureau of Labor Statistics showed that wholesale inflation surged 0.9% from June to July – the largest monthly increase since June 2022. Year over year, headline PPI rose 3.3%.
“Thursday’s PPI was much stronger than expected and suggests that tariffs are causing inflation,” writes CalBay Investments Chief Market Strategist Clark Gernanen. And this, he notes, “adds lots of complexity to the Federal Reserve’s potential rate cut plans this fall.”
As Geranen explains, the PPI was stronger than expected, while July CPI was softer than expected, which suggests “businesses are eating much of the tariff costs instead of passing them onto the consumer.”
It’s reasonable to expect, based on the basic axiom that nobody goes into business to lose money, that businesses will eventually pass higher costs on to consumers.
Investors, traders and speculators are on hold for affirmation of their expectations that the Fed will move, and soon.
“Jerome Powell’s Jackson Hole commentary is so important,” Geranen notes, “because the stock market has been gaining steam in recent weeks on expectations of a September rate cut.”
Seasonality could create headwinds for stocks
At the same time, we’re in the weakest stretch of the year for stocks.
According to Yardeni Research, the S&P 500 has an average return of 0.6% in August, going back to 1928, one of the lowest of the year. This is followed by September’s average return of -1.1% – the worst monthly performance – and October’s 0.5% gain.
A late rally almost carried all three indexes into positive territory after a session-long struggle. The tech-heavy Nasdaq Composite was down 1.8 points to 21,711. The broad-based S&P 500 had inched up two points to 6,468. But the blue-chip Dow Jones Industrial Average was off 11 points at 44,911.
A renaissance for industrial stocks
The AI Revolution has, if anything, had a salutary effect on old-school industrial stocks such as Deere (DE).
Indeed, Deere is well-known for its agricultural and forestry connections. But the machinery and equipment used in those endeavors are as relevant to intense infrastructure and construction efforts that support the AI build-out.
So why was DE stock down 6.8%, making it one of the biggest movers on Thursday? Well, through Wednesday, it was up a neat 22.0% vs 10.8% for the S&P 500 – and 16.4% for the Industrial Select Sector SPDR Fund (XLI).
DE has been a leader among leaders. But expectations were high heading into its fiscal third-quarter print – which “heightened the risk of underperformance,” says CFRA Research analyst Jonathan Sakraida.
And while Deere reported higher-than-expected earnings of $4.75 per share and revenue of $10.4 billion, management now expects net income for the full fiscal year to be $5 billion at the midpoint – down from a previous forecast of $5.15 billion.
“We attribute DE’s narrowed full-year earnings guidance to ongoing tariff cost pressures and persistent weakness in agriculture fundamentals,” Sakraida notes.
The analyst believes “margin performance was a key factor in the revised outlook, as DE faced limitations in pushing pricing amid the continued agricultural market downturn.”
He also points out that tariff uncertainty and lower commodity prices “have made farmers increasingly cautious in spending decisions and more hesitant to accept higher machinery prices.”