The US Bureau of Labor Statistics released August Producer Price Index data. PPI rose 5.4% year-on-year, beating market estimates of 5.3%. Core PPI increased 4.6% year-on-year, also above forecasts. After the release, market trading fully priced in the possibility of a Federal Reserve rate hike in October. Long-end US treasury yields climbed and US tech stocks faced downward pressure.

PPI serves as a leading inflation gauge that tracks price changes of goods and services at the upstream production stage. The hotter-than-expected reading shows US upstream industrial prices remain resilient, and inflation cools slower than previously optimistic market forecasts. Rebounding service costs and energy prices are the two major drivers pushing PPI higher. Fed officials repeatedly stated further monetary tightening remains an option until inflation falls to the 2% target.

Visible cross-market reactions followed: the US Dollar Index strengthened in the short run, and rising US treasury yields weighed on global risk assets. Risk-off sentiment among global cross-border capital rose slightly, amplifying capital outflow pressure in emerging markets. Domestically, the prolonged high-interest-rate environment overseas may create volatility for the RMB exchange rate and northbound capital inflows. China’s monetary policy will stay focused on domestic priorities, prioritizing domestic economic stability and sufficient liquidity. Investors will closely watch US CPI releases, Fed official speeches and non-farm payroll reports.