Bond markets rallied Thursday after fresh data showed wholesale inflation cooled more than expected in June, pushing Treasury yields lower and further reducing the already slim odds that the Federal Reserve will raise interest rates later this month.
The Producer Price Index (PPI), which measures what businesses receive for their goods and services, fell 0.3% in June compared to May. Economists had forecast no change. The surprise decline follows a softer-than-expected Consumer Price Index (CPI) report a day earlier, reinforcing the narrative that inflation pressures are easing across the economy.
The yield on the benchmark 10-year Treasury note dropped to 4.545%, down from recent highs. Shorter-term yields, which are more sensitive to Federal Reserve policy expectations, also fell. According to derivatives markets tracked by CME Group, the probability that the Fed will raise its benchmark rate at its late-July meeting tumbled to roughly 10%, down from about 20% just a week ago.
What the PPI Data Tells Us
The Producer Price Index tracks the prices factories, farms and other producers receive for their output. It is often seen as an early indicator of where consumer inflation is headed, because when producers pay less for raw materials or energy, those savings can eventually flow through to shoppers.
June's 0.3% decline was broad-based. Energy prices fell sharply, and food prices also dropped. Excluding volatile food and energy categories, so-called core PPI was flat for the month. That is a marked improvement from earlier this year, when producer prices were rising at a pace that worried both bond investors and Fed officials.
The data arrives just days after the June CPI report showed consumer prices rose at their slowest annual pace in over two years. Together, the two reports suggest that the inflation spike that began in 2021 is finally receding, even if it remains above the Fed's 2% target.
Market Reaction and What It Means for Investors
Falling Treasury yields are generally good news for stock investors, because lower yields reduce the appeal of safe-haven bonds and make borrowing cheaper for companies. The S&P 500 and Nasdaq both rose on the inflation news, though gains were tempered by lingering concerns about global trade and energy prices.
For everyday investors, the key takeaway is that the bond market is now pricing in a very low probability of further rate hikes this year. That is a sharp reversal from earlier in 2025, when markets feared the Fed might need to raise rates several more times to contain stubborn inflation.
Lower yields also mean lower borrowing costs for anyone with a variable-rate loan or a mortgage tied to short-term rates. However, the Fed has not yet signaled it is ready to cut rates. Chair Jerome Powell has repeatedly said the central bank needs to see a sustained period of cooling inflation before it will consider easing policy.
Investors will now turn their attention to the Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation gauge, due later this month. A soft PCE reading could further cement expectations that the Fed is done raising rates for now.
Broader Economic Context
The cooling inflation data comes against a backdrop of mixed economic signals. Consumer spending has remained resilient, according to recent reports from big banks, even as oil prices have edged higher on Middle East tensions. The labor market remains tight, with unemployment near historic lows.
Some economists warn that the path back to 2% inflation could still be bumpy. Energy prices remain volatile, and services inflation—things like rent and healthcare—has been slower to cool than goods prices. But for now, the trend is moving in the right direction for the Fed and for investors.
The Bank of Canada recently held its key interest rate at 2.25%, citing sticky oil inflation, a reminder that central banks around the world are still grappling with price pressures. In the U.S., the New York Fed's John Williams has projected inflation will cool to around 3.25% by year-end, assuming energy prices ease.
For bond investors, the drop in yields offers a reprieve after a volatile few months. The 10-year yield had climbed above 4.7% in April as inflation fears flared. Now, with two consecutive inflation reports coming in cooler than expected, the bond market is signaling that the worst of the rate-hike cycle may be behind us.
As always, investors should remember that markets can shift quickly. The Fed has stressed that its decisions will be data-dependent, meaning any surprise uptick in inflation could quickly revive rate-hike expectations. But for this week at least, the inflation news is giving markets a reason to cheer.
