Diesel Drives PPI Up by One-Third, Why Rate Cuts Are Further Away

TL;DR · The U.S. Bureau of Labor Statistics reported on September 10 that the Producer Price Index (PPI) rose 0.4% month-on-month and 5.4% year-on-year in August, with diesel prices increasing by 24.1% in a single month, contributing over one-third to the overall increase. · Following the data release, the market raised the probability of a 25 basis point rate hike by the Federal Reserve in September from 62% to about 70%, with the 30-year Treasury yield reaching 5.34%—5.37%, the highest since 2007; Treasury Secretary Bessent stated that the bond market is in a "very good state," while his mentor Druckenmiller claimed that borrowing costs remain low and rate cuts are unnecessary. · Related assets: long-term U.S. Treasury yields, U.S. dollar index, WTI crude oil and diesel, tech stocks sensitive to AI capital expenditures, cryptocurrencies.

The U.S. Producer Price Index (PPI) for August was released on September 10, showing a 24.1% increase in diesel prices, which alone accounted for more than one-third of the overall increase. Within minutes of the data release, the futures market pushed the probability of a 25 basis point rate hike by the Federal Reserve in September from 62% to about 70%, with the 30-year Treasury yield exceeding 5.34%, marking the highest level since 2007.

On the same day, U.S. Treasury Secretary Scott Bessent commented that the bond market is in a "very good state" following lower-than-expected demand for Treasury repurchases.

His mentor, Stanley Druckenmiller, founder of Duquesne Capital, stated at a closed-door meeting at Piper Sandler that borrowing costs are "still a bit low," calling officials who say policy is already restrictive "absurd," and asserting that rate cuts are "unnecessary."

The contrasting signals from the mentor and mentee point to the most pressing concern for investors: whether this round of inflation driven by energy will prompt the Federal Reserve to adopt a hawkish stance in September.

Diesel's Impact on Overall Prices and Core Buffer

The most important takeaway from this PPI report is that it provides two directions for overall and core inflation.

The PPI measures the prices at which businesses sell goods and services, serving as an upstream indicator of consumer inflation. The overall measure includes food and energy, which can be easily influenced by oil prices; the core measure excludes these two categories to examine more fundamental price pressures.

In August, the overall PPI rose 0.4% month-on-month and 5.4% year-on-year, with the energy component increasing by 4.2% and diesel by 24.1%. The Bureau of Labor Statistics clearly stated that diesel alone contributed to more than one-third of the overall increase.

The core PPI rose only 0.2% month-on-month, below the market expectation of 0.3%, and 4.6% year-on-year; when excluding trade services, the broader measure was 0.3% and 4.7%.

Geopolitical tensions have pushed WTI crude oil close to or above $100 per barrel, with diesel crack spreads reaching high levels, concentrating production costs on the goods side.

The Federal Reserve is primarily focused on the PCE (Personal Consumption Expenditures Price Index) on the consumer side, with the PPI serving as its upstream leading indicator. The moderate core reading indicates that the transmission chain has not yet accelerated comprehensively, but the speed at which energy spreads to logistics and chemicals may be faster, which is why the market does not consider it mere noise.

Yields Hit New Highs Since 2007, What Is the Market Trading?

After the data release, the CME FedWatch tool showed that the probability of a 25 basis point rate hike in September rose from 62% to about 70%.

The reaction was not limited to interest rate futures. The U.S. dollar index rose 0.4% during the session, U.S. stock futures declined, and yields rose across the board, with the 30-year yield reaching a high of 5.34%—5.37%, the highest since 2007.

The long end of the curve is particularly noteworthy. The curve is "bear steep," indicating that investors not only believe the Federal Reserve will maintain high rates but also demand more compensation for holding long-term Treasuries.

Treasury repurchases could have alleviated this pressure. This involves the Treasury buying back its previously issued old debt to lower long-term rates and smooth financing costs; the demand for the operation on September 10 was below expectations, indicating that the market is unwilling to part with old debt at the prices the Treasury desires.

Bessent later downplayed this issue, emphasizing that recent auction demand has been strong and that the U.S. is performing relatively better.

The Divergence Between Mentor and Mentee Points to Two Policy Logics

Bessent's reassurances and Druckenmiller's warnings emerged almost simultaneously, highlighting the difficulty of policy coordination.

Druckenmiller's judgment carries positional backing. He has reduced Duquesne's AI-related investments to 20% of what they were six months ago, citing that this construction cycle is entering its late stage and poses a risk of profit bubbles.

This also serves as an independent risk signal: if borrowing costs remain at current or even higher levels, the discount rate for companies on long-term projects will rise, potentially delaying some AI capital expenditures.

Bessent's position is different. As the Treasury Secretary responsible for bond market operations, he needs to smooth the costs of Treasury issuance, and downplaying yield pressures aligns with this function.

High Rates First Impact AI Capital Expenditures and Fiscal Interest

AI capital expenditures have been a significant support for U.S. stocks and economic growth over the past two years. The higher the interest rates, the lower the present value of these long-cycle projects, which will change the marginal ranking of investments.

Druckenmiller's reduction in holdings is based on this perspective. It does not imply that the AI cycle has ended but signals a constraint: the slope of capital expenditures is beginning to be constrained by macro financing conditions.

The fiscal side is more direct. The 30-year yield is at its highest level since 2007, raising the cost of newly issued debt; with the debt scale already large, interest expenses will crowd out other budgetary space.

CPI Determines Whether This Round of Repricing Is Overshooting or Turning

The logic behind this round of repricing is clear: the energy-driven pull on overall prices is real, and the moderate core only provides a buffer without eliminating pipeline pressures.

What remains truly undecided is the transmission of energy to the consumer side. The CPI to be released on September 11 will directly test this: if the shock remains only on the production side and the core continues to be moderate, the Federal Reserve will still have room to maintain its current path; if service prices rise again, the hawkish signals in September will be further strengthened.

Druckenmiller's position adjustment adds credibility to this round of repricing, while Bessent's statements seem more like short-term communication. The energy shock has not yet transmitted to the consumer side, and geopolitical situations could reverse at any time; whether this round of reassessment is a temporary overshoot or a trend reversal will soon have its first answer.