Morning Brew August 15 2025

Huge Event Risk Over the Weekend

The US Producer Price Index (PPI), typically underemphasized, surprised significantly by coming in much higher than expected. This has changed the rate expectations once again. Yesterday morning, the market anticipated a 92% chance of a 25 basis points rate cut in September and an 8% chance for a 50 basis points cut. Today, the 92% remains for the 25 basis points cut, but the 8% have shifted to anticipating no change.

John commented on the implications in his latest FX Update:

Ripping Hot US PPI – A Plot Twist or Red Herring?

The unexpected spike in the US PPI is distracting from the ongoing tariff and US dollar narrative. Meanwhile, the Japanese Yen caught the attention of FX traders after US Treasury yields collapsed yesterday, which supported it. Bessent added her thoughts on potential Bank of Japan interest rate hikes.

Breaking: Ripping Hot PPI Upside Surprise…Driven by Services?!

Just ahead of publishing, the US released the July PPI numbers, which were unexpectedly strong both in headline terms and at the core. It's worth noting that PPI reflects prices for US-produced goods. Although some imported commodity components could be involved, most of the increase stemmed from a significant spike in service categories, particularly “portfolio management.” It’s unlikely that the market’s reaction to the PPI will have a lasting impact—any sustained effect will likely be due to other factors.

Following the PPI release, US yields rose to 3.90% for 1-year and 4.27% for 10-year Treasuries, the US Dollar strengthened, and equities lost momentum. US indexes ended the day mostly flat at high levels, with the S&P 500 trading at a price-to-earnings ratio of 23 based on forward estimates—a nearly 40% premium above its 20-year average. Noteworthy stocks included Intel, which saw shares rise 7.4% on news of a possible government stake, and Deere, which fell 7% due to weak earnings.

US senators called for an investigation into Meta following a Reuters report on an internal policy document that allowed the company’s chatbots to engage children in conversations that are romantic or sensual.

Overnight, Chinese data disappointed with retail sales and industrial output both coming in lower than expected, at 0.9% and 0.2%, respectively. In contrast, Japanese GDP exceeded expectations.

Today, there is significant event risk: US retail sales and the University of Michigan's consumer sentiment index will reveal the state of the US consumer's mindset and financial situation. Possibly more significant is the US-Russia Summit in Alaska. While tabloid reports suggest stocks may trade volatilily due to potential decisions from the summit, it's slated to start at 21:30 CET, meaning any outcomes will be released after most markets have closed.

With high valuations and substantial event risk, trading could be volatile: if optimism prevails, a fear of missing out (FOMO) buying spree could push stocks to all-time highs. Conversely, profit-taking could lead to a decline in risk sentiment.

Trump stated his main goal is to prepare for a three-way summit, but anything seems possible. The worst outcome would be an escalation of tensions between the two strong-headed leaders—Trump has a history of favoring Putin, even expressing more trust in him than US intelligence agencies.

Most affected sectors might include:

• Russian Stocks: Potentially impacted by discussions on ceasefires or reduced sanctions.
• Infrastructure: Ukraine may require substantial investments following a ceasefire.
• Energy: Sanctions could shift, affecting the energy sector.
• Defense: A ceasefire might negatively impact defense companies.

Consider your risk exposure going into the weekend, especially with low a relatively low volatility making it somewhat inexpensive to insure against adverse market movements. Think about using options to protect yourself.

Good luck and trade safely.