On September 11th, the European Central Bank's rate decision came in as widely anticipated, with a 25-basis-point increase lifting the deposit facility rate, main refinancing operations rate, and marginal lending facility rate to 2.5%, 2.65%, and 2.9%, respectively. ECB President Christine Lagarde stated during the press conference that inflation is projected to remain well above the target level for an extended period. This underscores that persistently high inflation remains the core driver behind the ECB's second rate hike of the year.
Given the policy linkage between the ECB and the Federal Reserve, with the Fed set to announce its September rate decision next Thursday, the ECB's move suggests a higher likelihood that the Fed will follow suit with a 25-basis-point hike. According to the CME Fed Watch tool, the probability of a September rate increase now stands at over 70%, with the odds for an October hike reaching 57%. Prior to the ECB's decision, the likelihood of a September move was only marginally above 50%.
Additional data released yesterday showed the US August Producer Price Index (PPI) year-on-year at 5.4%, surpassing both the forecast of 5.3% and the previous reading of 4.8%. This indicates that prices at the production level are still rising faster than expected. As a leading indicator for the Consumer Price Index (CPI), the uptick in PPI has intensified market concerns over persistently high US inflation.
Chart 1 overlays the trajectories of the US PPI and CPI year-on-year rates, revealing a high degree of correlation between the two indicators. Both bottomed out in June 2023 before embarking on a rebound that lasted over three years. By May 2026, there were initial signs of a pullback in both metrics, coinciding with a sharp decline in international crude oil prices at the time, leading some market observers to anticipate easing inflationary pressures on both the production and consumption fronts. However, the escalation of the US-Iran conflict in September drove Brent and WTI crude prices above the $100 per barrel threshold, disrupting the narrative of falling inflation. While August CPI data has not yet been released, the PPI figures strongly suggest a high probability of a significant upward surprise.
Containing inflation and ensuring full employment are the Fed's dual mandates. With the unemployment rate currently at a low 4.1%, the central bank retains ample policy room to raise rates to mitigate inflation risks. Kevin Warsh, speaking at the Jackson Hole symposium, explicitly stated that not only is a trend decline in inflation necessary, but it must also return to the 2% target level. Based on this assessment, following a September hike, the Fed may implement an additional rate increase later this year.
Over the past week, both the ten-year Treasury yield and the US dollar index have surged, with the former peaking at 4.978% and the latter reaching 99.129 points. The synchronized rise in Treasury yields and the dollar is a healthy and stable signal, implying that the dollar's strength is driven by sustained bullish factors rather than short-term stimuli. It is worth noting that the US Treasury is committed to repurchasing a significant volume of bonds, particularly long-duration issues, which could push prices higher and subsequently lower yields. If Treasury intervention proves substantial, it may interrupt the upward momentum in yields fueled by Fed rate-hike expectations, thereby exerting downward pressure on the dollar index.
Risk Warning and Disclaimer: Markets involve risk; investment requires caution. The above content reflects the analyst's personal views only and does not constitute any investment advice. This report should not be relied upon as the sole basis for investment decisions. Analyst opinions may change over time without prior notice.