Yesterday’s CPI report continues to filter its way through markets. June Consumer Prices were lower than forecast in all categories, notably with Monthly Core CPI (excludes food and energy) advancing 0.1%, its slowest pace since January 2021.
MoM CPI was -0.1% (below 0.1% estimate and lowest since May ’20), YoY was 3.0% (below 3.1% estimate and lowest since June ‘23) and Core YoY was 3.3% (below 3.4% estimate and lowest since April ‘21).
The continued downtrend in consumer prices combined with recent signs of a cooling labor market fueled bets for an accelerated timeline and increased number of Fed rate cuts. The implied overnight rate at the FOMC’s September meeting is 5.074% with a 95.5% probability of a quarter-point cut. By the Fed’s December meeting the implied rate drops to 4.708% with a 85.6% probable quarter-point cut. And the FOMC’s January rate policy meeting is coming into play with a 72.5% chance of another 25 basis-point cut.
U.S. Treasury yields have dropped considerably in all tenors since the CPI data surprise. The 10-year yield reached a 4.166% low yesterday matching the low from March 13th of this year. The dollar has followed yields lower (lower interest rates reduce incentive to hold dollars). The dollar index is -0.25% today and -1.59% during July.
The Bank of Japan intervened yesterday, spending $22 billion to prop up the yen. The intervention was timed with release of the U.S. CPI data, adding an extra measure of FX volatility to an already volatile session. The intervention/data triggered stop-losses, driving USD/JPY down by 2.63% at the low.
