Good morning Traders and Quants! U.S. equities closed higher Wednesday, with the S&P 500 and Nasdaq notching fresh intraday records as slower-than-expected producer price inflation gave investors added confidence in the Fed’s easing path. Technology and utilities led sector gains, while consumer discretionary and staples lagged. Bond yields moved lower, with the 10-year Treasury ending at 4.05%. Overseas, Asia continued to set records with Japan, Hong Kong, and Korea all closing at new highs, while Europe was little changed. Oil pushed higher on geopolitical tensions tied to Israel’s strike in Qatar, while the dollar firmed against major peers.

The August PPI report provided an upside surprise for markets, showing headline inflation easing to 2.6% y/y versus expectations of 3.3%. Core PPI slipped to 2.8% y/y, also well under forecast, with margins in wholesale trade contributing heavily to the decline. On a monthly basis, both headline and core PPI came in negative, only the second time since March 2024. Futures markets responded by boosting expectations for deeper cuts: the probability of a 50bps move next week rose from 7% to nearly 10%. Traders now see three Fed cuts by year-end as more likely, with implied rates drifting lower out to 2026.

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Markets head into Thursday braced for the August CPI report, the last major input before next week’s Fed meeting. Consensus is for headline inflation to rise to 2.9% y/y, but traders will be watching the core print just as closely. A downside surprise supports the disinflation story that began with yesterday’s PPI miss and accelerate bets for deeper rate cuts, while a hot CPI risks forcing the bond market to reprice. Bloomberg notes that expectations for three cuts by year-end are now at risk if CPI overshoots, with longer-dated Treasury yields particularly sensitive. Hedge funds have also built the largest short positions on the VIX in three years, a sign of confidence in calm markets but also a setup for volatility if today’s data shocks.

Beyond the inflation focus, positioning is shaped by broader macro cross-currents. Rising debt burdens across the G7 are back on the radar, with Reuters warning that fiscal pressures could amplify bond-market swings if inflation proves sticky. At the same time, the dollar has stabilized after its recent pullback, weighing on gold, which edged lower overnight. Equity futures remain supported by AI enthusiasm and Oracle’s surge, but market tone is cautious—today’s CPI will dictate whether record highs extend into a true breakout or consolidate into a pause.

Geopolitical risks remained elevated as Israel’s airstrike on Hamas leaders in Qatar strained Gulf relations and prompted a heated call between President Trump and Prime Minister Netanyahu. Regional allies voiced unease at Israel’s escalation, warning it could undercut hard-won normalization efforts. Yet oil markets continued to shrug off the supply risk, with gains contained to modest percentages. Analysts see inventories and global demand dynamics as stronger anchors on pricing than headlines alone.

In Europe, the debate is shifting from fiscal stress back toward recovery, with early signs that activity is stabilizing after months of weakness. Meanwhile, Mexico announced new import tariffs to protect domestic industry, adding to the global patchwork of trade barriers. In Asia, China’s economy remains a focal point: Beijing is mulling relief for local governments saddled with over $1 trillion in debt, while its resilience in trade flows continues to defy U.S. tariff pressure. Together, these developments underscore a multipolar economic environment where geopolitical and fiscal tensions create cross-currents, but investors remain anchored to core data and central bank policy.

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Domestic headlines were dominated by the shock news of conservative activist Charlie Kirk’s death following a shooting, an event that immediately reverberated through political circles. The White House and congressional leaders issued statements of condolence, while markets largely looked past the tragedy to focus on economic data. Still, the incident highlighted the fragility of America’s political climate heading into a contentious election season.

On Capitol Hill, Senate Republicans blocked Democrats’ latest push to release Epstein-related files, continuing the partisan gridlock around transparency debates. Meanwhile, Trump’s administration remains active on economic levers: tax policy is back in the spotlight with renewed attention on exemptions for service workers’ tips. Combined with ongoing tariff measures and Fed pressure, the political backdrop is reinforcing how economic management and campaign maneuvering are colliding. With the Fed decision just a week away, these crosswinds are feeding into a market environment where policy risk remains elevated.

Markets are extending gains on softer PPI, but the real test comes today with CPI. A downside surprise could cement deeper Fed cuts, while a hot print risks puncturing the rally and forcing repricing across bonds and equities. Geopolitical headlines are intensifying, from Israel’s strike in Qatar to China’s fiscal maneuvers, yet price action shows investors remain disciplined and data-driven. For now, the path of least resistance remains higher: rate cuts are coming, earnings are holding, and liquidity is ample, but today’s inflation read will dictate whether momentum continues or stalls.